• Central Bank of Bahrain Volume 1—Conventional Banks

    • Part A

       

      Table of Contents
       Module TitleModule
      Code
      Date last
      changed
      Current Version PDFFuture Version PDFEffective Date
      IntroductionUsers' GuideUGApr 20PDF Version  
      High Level StandardsLicensing RequirementsLROct 22PDF Version  
      Principles of BusinessPBJan 11PDF Version  
      High-level ControlsHCJan 24PDF Version  
      Auditors and Accounting StandardsAUOct 22PDF Version  
      General RequirementsGRSep 24PDF Version  
      Business StandardsBusiness and Market ConductBCJan 24PDF Version  
      Capital AdequacyCA    
      CA Table of Contents--Jan 23PDF Version  
      Part 1: Definition of Capital Jan 23PDF Version  
      Part 2: Credit Risk Jan 23PDF Version  
      Part 3: Other Risks Oct 22PDF Version  
      Credit Risk ManagementCMApr 23PDF Version  
      Operational Risk ManagementOMApr 23PDF Version  
      Financial CrimeFCJan 24PDF Version  
      Prudential Consolidation and Deduction Requirements
      [was deleted in January 2015]
      PCDJan 15   
      Training and CompetencyTCApr 17PDF Version  
      Internal Capital Adequacy Assessment ProcessICApr 22PDF Version  
      Stress TestingSTJan 22PDF Version  
      Domestic Systemically Important BanksDSJan 22PDF Version  
      Reputational Risk ManagementRRJuly 18PDF Version  
      Liquidity Risk ManagementLMJan 22PDF Version  
      Digital Financial AdviceDAApr 19PDF Version  
      Reporting RequirementsCBB Reporting RequirementsBRSep 24PDF Version  
      Public Disclosure RequirementsPDSep 24PDF Version  
      Enforcement & RedressCompensationCPOct 14PDF Version  
      EnforcementENOct 22PDF Version  

       

      • Introduction

        • UG UG Users' Guide

          • UG-A UG-A Introduction

            • UG-A.1 UG-A.1 Purpose

              • Executive Summary

                • UG-A.1.1

                  The Central Bank of Bahrain ("the CBB"), in its capacity as the regulatory and supervisory authority for all financial institutions in Bahrain, issues regulatory instruments that licensees and other specified persons are legally obliged to comply with. These regulatory instruments are contained in the CBB Rulebook. Much of the Rulebook's substantive content was previously issued by the Bahrain Monetary Agency ('the BMA'), and was carried forward when the CBB replaced the BMA in September 2006.

                  October 07

                • UG-A.1.2

                  The Rulebook is divided into 7 Volumes, covering different areas of financial services activity. These Volumes are being progressively issued. Volumes 1 and 2, covering conventional bank licensees and Islamic bank licensees respectively, were issued in July 2004 and January 2005; Volume 3, covering insurance licensees, was issued in April 2005. Volume 4 was issued in April 2006. Volume 5 (covering specialised licensees), and Volume 6 (capital markets), are being issued progressively. Volume 7 on collective investment undertakings (CIUs) was issued in May 2012.

                  Amended: April 2013
                  Amended: July 2012
                  Amended: October 2011
                  Amended: April 2011
                  October 2007

                • UG-A.1.3

                  This Users' Guide provides guidance on (i) the status and application of the Rulebook, with specific reference to Volume 1 (Conventional Banks); (ii) the structure and design of the Rulebook; and (iii) its maintenance and version control.

                  October 07

                • UG-A.1.4

                  Volume 1 (Conventional Banks) covers Conventional Bank Licensees. It contains prudential requirements (such as rules on minimum capital and risk management). Collectively, these requirements are aimed at ensuring the safety and soundness of CBB-licensed conventional banks and providing an appropriate level of protection to the clients of such banks.

                  October 07

              • Legal Basis

                • UG-A.1.5

                  This Module contains the CBB's Directive (as amended from time to time) regarding the User's Guide for Volume 1, of the CBB Rulebook, and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to all conventional bank licensees (including their approved persons).

                  Amended: January 2011
                  October 07

                • UG-A.1.6

                  For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                  October 07

            • UG-A.2 UG-A.2 Module History

              • UG-A.2.1

                This Module was first issued in July 2004 by the BMA together with the rest of Volume 1 (Conventional Banks). Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

                October 07

              • UG-A.2.2

                When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

                October 07

              • UG-A.2.3

                A list of recent changes made to this Module are detailed in the table below:

                Module Ref. Change Date Description of Changes
                UG-2.3 &UG-3.1 4/2006 Revised dating and update system.
                UG-A.1 10/2007 Updated to reflect new CBB Law; various references changed and new Rule A-1.6 introduced categorising this Module as a Directive.
                UG-A.2 10/2007 Module History table updated to reflect other 01/2007 changes.
                UG-1.1.2 10/2007 Explanation of powers under CBB Law in UG-1.1 and new Rules UG-1.2.6 and UG-1.2.7 to reflect the CBB Law; other material reordered as a consequence.
                UG-A.1.5 01/2011 Clarified legal basis and converted as a rule to be consistent with other parts of the CBB Rulebook.
                UG-1.3.2, UG-1.4.1 01/2011 Underlined defined term.
                UG-2.1.2 01/2011 Updated to reflect structure of Volume 5.
                UG-A.1.2 04/2011 Updated to reflect issue date of Volumes 5 and 6.
                UG-A.1.2 10/2011 Minor correction to reflect proper Glossary term.
                UG-A.1.2, UG-1.2.2, UG-1.2.8, UG-2.1.1, UG-2.1.3 and UG-2.2.2 07/2012 Various minor corrections to reflect structure of Rulebook, including issuance of Volume 7.
                UG-3.2 and Annex 01/2013 Amended as CBB Rulebook only now available on CBB Website.
                UG-A.1.2, UG-2.1.2 and UG-2.1.3 04/2013 Minor corrections.
                UG-1.3.4 10/2016 Added section to clarify reference to 'he' 'his' 'she' and 'her'.
                UG-3.2.2 04/2020 Amended Paragraph.

          • UG-1 UG-1 Rulebook Status and Application

            • UG-1.1 UG-1.1 Legal Basis

              • General

                • UG-1.1.1

                  Volume 1 (conventional banks) of the CBB Rulebook is issued by the CBB pursuant to the Central Bank of Bahrain and Financial Institutions Law 2006 ('the CBB Law'). The CBB Law provides for two formal rulemaking instruments: Regulations (made pursuant to Article 37) and Directives (made pursuant to Article 38). Other articles in the CBB Law also prescribe various specific requirements (for example, requirements relating to licensing (Articles 44 to 49), or the notification and approval of controllers of licensees (Articles 52 to 56)).

                  October 07

                • UG-1.1.2

                  The Purpose Section of each Module specifies in all cases the rulemaking instrument(s) used to issue the content of the Module in question, and the legal basis underpinning the Module's requirements.

                  October 07

                • UG-1.1.3

                  Conventional bank licensees that are members of the Bahrain Stock Exchange are reminded that they are also subject to the membership and operating rules of that exchange. These rules are issued by the Bahrain Stock Exchange under powers given the Exchange under the Bahrain Stock Exchange Law, Decree No. 4 of 1987 (as amended by Decree No. 21 of 2002). These rules are additional to the requirements contained in Volume 1 (conventional banks).

                  October 07

              • CBB's Rulemaking Instruments

                • UG-1.1.4

                  Regulations are made pursuant to Article 37 of the CBB Law. These instruments have general application throughout the Kingdom and bind all persons ordinarily affected by Bahraini legislative measures (i.e. residents and/or Bahraini persons wherever situated).

                  October 07

                • UG-1.1.5

                  Because Regulations have wide general application, they are subject to two important safeguards: (i) the CBB is under a duty to consult with interested parties and to review and consider their comments; and (ii) the finalised Regulations only become effective after they are published in the Official Gazette.

                  October 07

                • UG-1.1.6

                  Where Regulations are used to support Rulebook requirements, their contents are included in the CBB Rulebook, as well as published in the Official Gazette. They only have legal effect, however, when published in the Official Gazette.

                  October 07

                • UG-1.1.7

                  Directives are made pursuant to Article 38 of the CBB Law. These instruments do not have general application in the Kingdom, but are rather addressed to specific licensees (or categories of licensees), approved persons or registered persons. Directives are binding on those to whom they are addressed.

                  October 07

                • UG-1.1.8

                  Unlike Regulations, there is no duty on the CBB to either consult with addressees or publicise a Directive by publishing it in the Official Gazette (save that an addressee must obviously have actual or constructive notice of a Directive). However, as a matter of general policy, the CBB also consults on Rulebook content issued by way of a Directive.

                  October 07

            • UG-1.2 UG-1.2 Status of Provisions

              • UG-1.2.1

                The contents of the Rulebook have the formal status either of Rules or Guidance.

                October 07

              • UG-1.2.2

                Rules have a binding effect and breaches of Rules constitute breaches of the CBB Law. If a licensee breaches a Rule to which it is subject, it is liable to enforcement action by CBB and, in certain cases, criminal proceedings by the Office of the Public Prosecutor.

                Amended: July 2012
                October 07

              • UG-1.2.3

                Guidance is not binding. It is material that helps inform a particular Rule or set of Rules, or provides other general information. Where relevant, compliance with Guidance will generally lead the CBB to assess that the business has complied with the rule(s) to which the Guidance relates. Conversely, failure to comply with Guidance will generally be viewed by the CBB as tending to suggest breach of a Rule.

                October 07

              • UG-1.2.4

                The status of each Paragraph within the Rulebook can be identified by its text format, as follows:

                (a) Rules are in bold, font size 12. The Paragraph reference number is also highlighted in a coloured box.
                (b) Guidance is in normal type, font size 11.
                October 07

              • UG-1.2.5

                The CBB's interpretation of all Rules and Guidance in this Volume is final.

                Amended: January 2011
                October 07

              • UG-1.2.6

                Paragraph UG-1.2.5 does not prejudice the rights of an authorised person to make a judicial appeal, should it believe that the CBB is acting unreasonably or beyond its legal powers.

                October 07

              • UG-1.2.7

                All Rulebook content has the formal status of at least a Directive. Some Rulebook content may also have the status of Regulations. Rulebook content that is categorised as a Rule is therefore legally mandatory and must be complied with by those to whom the content is addressed.

                October 07

              • UG-1.2.8

                [This Paragraph was deleted in July 2012].

                Deleted: July 2012

              • UG-1.2.9

                The CBB's enforcement powers and processes are set out in Module EN.

                October 07

            • UG-1.3 UG-1.3 Application

              • UG-1.3.1

                Volume 1 of the CBB Rulebook for the most part applies only to conventional bank licensees and to individuals undertaking key functions in those licensees (so-called "approved persons"), except for representative offices of banks which are subject to the relevant requirements in Volume 5 (specialised activities) and Islamic banks which are covered in Volume 2.

                October 07

              • UG-1.3.2

                A few Rules and Guidance have general applicability (and thus also have the formal status of a Regulation): for instance no one may carry on banking business within or from Bahrain without the appropriate license, and controllers of licensees are also subject to various requirements.

                Amended: January 2011
                October 07

              • UG-1.3.3

                Each Module in Volume 1 contains a Scope of Application Chapter, setting out which Rules and Guidance apply to which particular type of conventional bank licensee or person, for the Module concerned. In addition, each Rule (or Section containing a series of Rules) is drafted such that its application is clearly highlighted for the user. Finally, each Module, in its Purpose Section, specifies in all cases the rulemaking instrument(s) used to issue the content of the Module in question (i.e. Directive and/or Regulation), and the legal basis underpinning the Module's requirements.

                October 07

              • UG-1.3.4

                All references in this Module to 'he' or 'his' shall, unless the context otherwise requires, be construed as also being references to 'she' and 'her'.

                Added: October 2016

            • UG-1.4 UG-1.4 Effective Date

              • UG-1.4.1

                Volume 1 (conventional banks) of the CBB Rulebook was first issued in July 2004. It replaces all regulations previously issued with respect to conventional banks.

                Amended: January 2011
                October 07

          • UG-2 UG-2 Rulebook Structure and Format

            • UG-2.1 UG-2.1 Rulebook Structure

              • Rulebook Volumes

                • UG-2.1.1

                  The Rulebook is divided into 7 Volumes, covering different areas of financial services activity, as follows:

                  Volume 1 Conventional Banks

                  Volume 2 Islamic Banks

                  Volume 3 Insurance

                  Volume 4 Investment Business

                  Volume 5 Specialised Activities

                  Volume 6 Capital Markets

                  Volume 7 Collective Investment Undertakings

                  Amended: July 2012
                  October 07

                • UG-2.1.2

                  Volume 5 (Specialised Activities) covers money changers; financing companies; representative offices; administrators; trust service providers, micro-finance institutions and providers of ancillary services to the financial sector.

                  Amended: April 2013
                  Amended: January 2011
                  October 07

              • Rulebook contents (overview)

                • UG-2.1.3

                  Except for Volumes 5, 6 and 7 the basic structure of each Rulebook is the same. Each Volume starts with a contents page and User's Guide. Subsequent material is organised underneath the following headings:

                  (a) High-level Standards;
                  (b) Business Standards;
                  (c) Prudential Requirements;
                  (d) Reporting Requirements;
                  (e) Enforcement and Redress; and, where appropriate
                  (f) Sector Guides.
                  Amended: April 2013
                  Amended: July 2012
                  Amended: January 2011
                  October 07

                • UG-2.1.4

                  Volume 5 is organised by the Category of specialised firm concerned, whilst Volume 6 by subject area (authorised exchanges; issuers of securities etc).

                  October 07

                • UG-2.1.5

                  The material in Volumes 1-4 is contained in Modules, each covering a specific area of requirements (e.g. High-level Controls). In turn, each Module is divided into Chapters, Sections and Paragraphs, as detailed below.

                  October 07

                • UG-2.1.6

                  Each Volume has its own appendix Volume containing relevant reporting and authorisation forms; a glossary; and any supplementary information. In all cases, the main Volume is called "Part A" and the appendix Volume is called "Part B".

                  October 07

            • UG-2.2 UG-2.2 Volume Structure

              • Modules

                • UG-2.2.1

                  Rulebook Volumes are subdivided into Modules, arranged in groups according to their subject matter, underneath the headings listed in Paragraph UG-2.1.3 above.

                  October 07

                • UG-2.2.2

                  Each Module in a Volume is referenced using a two-or three-letter code which is usually a contraction or abbreviation of its title. These codes are used for cross-referencing within the text.

                  Amended: July 2012
                  October 07

              • Chapters

                • UG-2.2.3

                  Each Module consists of Chapters, categorised into two types:

                  (a) A standard introductory Chapter (referenced with a letter: e.g. UG-A); and
                  (b) Chapters containing the substantive content of the Module (referenced with a number: e.g. CA-1, CA-2, etc.)

                  October 07

                • UG-2.2.4

                  The introductory Chapters summarise the purpose of the Module, its history (in terms of changes made to its contents). A separate introductory Chapter also prescribes the scope of application of the Module's requirements.

                  October 07

              • Sections and Paragraphs

                • UG-2.2.5

                  Chapters are further sub-divided into Sections (numbered consecutively after the Chapter number: e.g. FC-1.1, FC-1.2, FC-1.3 etc). In turn, Sections are sub-divided into Paragraphs (numbered consecutively after the Chapter and Section numbers: e.g. FC-1.1.1, FC-1.1.2, FC-1.1.3 etc.). Where appropriate, sub-Section headings may be used, to guide the reader through a Section: sub-Section headings are italicised and unnumbered, and act purely as an indicator (without limitation as to the status of the Paragraphs that follow.

                  October 07

              • Table of Contents

                • UG-2.2.6

                  Each Volume's contents page lists all the Modules contained within it (Part A), and the information contained in the relevant appendix Volume (Part B).

                  October 07

                • UG-2.2.7

                  The contents page of each Module lists the Chapters, Sections and the latest version date of each Section in issue.

                  October 07

            • UG-2.3 UG-2.3 Format and Page Layout

              • Headers

                • UG-2.3.1

                  The top of each page in the Rulebook identifies the Volume, Module and Chapter in question. Each Module is a separate document. New Chapters start on a fresh page.

                  October 07

              • Footers

                • UG-2.3.2

                  The bottom of each page in the Rulebook (on the left hand side) identifies the Module in question, its Section and page number. Page numbering starts afresh for each Section: the total number of pages in each respective Section is shown as well as the individual page number. The bottom right hand side shows an end-calendar quarter issue date. The Contents Page for each Module, and each Section in a Module, are each given their own issue date. In addition, the Module Contents page lists the latest issue date for each Section in that Module. The Contents page thus acts as a summary checklist of the current version in force for each Section. Further explanation is provided in Section UG-3.1 below.

                  October 07

              • Defined Terms

                • UG-2.3.3

                  Defined terms used in the Rulebook are underlined. Each Volume has its own glossary listing defined terms and giving their meaning. Definitions of terms used apply only to the Volume in question. It is possible for the same term to be used in a different Volume with a different meaning.

                  October 07

              • Cross-references

                • UG-2.3.4

                  Any cross-references given in a text state the Module code, followed (where appropriate) by the numbering convention for any particular Chapter, Section or paragraph being referred to. For example, the cross-reference FC-1.2.3 refers to the third Paragraph in the second Section of the first Chapter of the Financial Crime Module. Many references will be quite general, referring simply to a particular Module, Chapter or Section rather than a specific Paragraph.

                  October 07

              • Text Format

                • UG-2.3.5

                  Each Paragraph is assigned a complete reference to the Module, Chapter, and Section, as well as its own Paragraph number, as explained in UG-2.3.4 above. The format of the Paragraph reference and Paragraph text indicates their status as either a Rule or Guidance, as explained in UG-1.2.4 above.

                  October 07

                • UG-2.3.6

                  When cross-referring to specific Paragraphs, and it is important to make clear the status of the Paragraph in question as a Rule or Guidance, then the words 'Rule' or 'Guidance' may be used instead of 'Paragraph', followed by the reference number (e.g. 'As required by Rule FC-1.1.1, licensees must...').

                  October 07

          • UG-3 UG-3 Rulebook Maintenance and Access

            • UG-3.1 UG-3.1 Rulebook Maintenance

              • Quarterly Updates

                • UG-3.1.1

                  Any changes to the Rulebook are generally made on a quarterly cycle (the only exception being when changes are urgently required), in early January, April, July and October. When changes are made to a Module, the amended Sections are given a new version date, in the bottom right-hand page.

                  October 07

                • UG-3.1.2

                  The contents page for each amended Module is also updated; the table of contents is changed to show the new version date for each amended Section (in the 'Date Last Changed' Column), and the contents page itself is also given its own new version date in the bottom right-hand corner. The Module contents pages thus act as a checklist for hard-copy users to verify which are the current version dates for each Section in that Module.

                  October 07

                • UG-3.1.3

                  A summary of any changes made to a Module is included in the Module History Section of each Module. The table summarises the nature of the change made, the date of the change and the Module components and relevant pages affected. The Module History can thus be used to identify which pages were updated within individual Sections.

                  October 07

                • UG-3.1.4

                  Hard-copy users of the CBB Rulebook can check that they have the latest copy of each Module's contents pages, by referring to the overall table of contents for each Volume. The Volume table of contents lists the date each Module was last changed; users can use this table to check the date showing in the bottom right-hand corner of each Module's contents page.

                  October 07

                • UG-3.1.5

                  The website version of the Rulebook acts at all times as the definitive version of the Rulebook. CBB tries to limit changes as much as possible, in order to minimise the compliance burden on licensees. The updates are posted to the CBB website, together with a summary of changes for that quarter. Licensees are in addition e-mailed the summary of each quarter's changes. Hard-copy users are required to print off the updated pages from the website to incorporate in their Rulebook in order to keep it current.

                  October 07

              • Changes to Numbering

                • UG-3.1.6

                  In order to limit the knock-on impact of inserting or deleting text on the numbering of text that follows the change, the following conventions apply:

                  (a) Where a new Paragraph is to be included in a Section, such that it would impact the numbering of existing text that would follow it, the Paragraph retains the numbering of the existing Paragraph immediately preceding it, but with the addition of an "A"; a second inserted Paragraph that follows immediately afterwards would be numbered with a "B", and so on. For example, if a new Paragraph needs to be inserted after UG-3.1.6, it would be numbered UG-3.1.6A; a second new Paragraph would be numbered UG-3.1.6B, and so on. This convention avoids the need for renumbering existing text that follows an insertion. The same principle is applied where a new Section or a new Chapter needs to be inserted: for example, UG-3.1A (for a new Section), and UG-3A (for a new Chapter)
                  (b) Where a Paragraph is deleted, then the numbering of the old Paragraph is retained, and the following inserted in square brackets: '[This Paragraph was deleted in April 2006.]' (The date given being the actual end-calendar quarter date of the deletion.) The same principle is applied with respect to Sections and Chapters.
                  October 07

                • UG-3.1.7

                  Where many such changes have built up over time, then the CBB may reissue the whole Section, Paragraph, Chapter or even Module concerned, consolidating all these changes.

                  October 07

            • UG-3.2 UG-3.2 Rulebook Access

              • Availability

                • UG-3.2.1

                  The Rulebook is available on the CBB website.

                  Amended: January 2013

              • Queries

                • UG-3.2.2

                  Questions regarding the administration of the Rulebook (e.g. website availability, the updating of material etc) should be addressed to the Rulebook Section of the Regulatory Policy Unit:
                  Rulebook Section
                  Regulatory Policy Unit
                  Central Bank of Bahrain
                  PO Box 27
                  Manama
                  Kingdom of Bahrain

                  Tel: + 973 - 17 54 7413
                  E-mail: rulebook@cbb.gov.bh
                  Web: www.cbb.gov.bh

                  Questions regarding interpretation of the policy and requirements contained in the Rulebook should be addressed to the licensee's regular supervisory point of contact within the CBB.

                  Amended: April 2020
                  Amended: January 2013
                  Added: October 07

          • Annex CBB Rulebook Order Form [This form was deleted in January 2013]

            Deleted: January 2013

      • High Level Standards

        • LR LR Licensing Requirements

          • LR-A LR-A Introduction

            • LR-A.1 LR-A.1 Purpose

              • Executive Summary

                • LR-A.1.1

                  The Licensing Requirements Module sets out the Central Bank of Bahrain's ('CBB's) approach to licensing providers of regulated conventional banking services in the Kingdom of Bahrain.

                  October 2007

              • Legal Basis

                • LR-A.1.2

                  This Module contains the CBB's Regulations, Resolutions and Directive (as amended from time to time) relating to Licensing Requirements and is issued under the powers available to the CBB under Articles 37 to 42, 44 to 48 and 180 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). It also includes the requirements contained in Resolution No (1) of 2007 (as amended from time to time) with respect to determining fees categories due for licensees and services provided by the CBB. The Module also contains requirements under Regulation No (1) of 2007 pertaining to the CBB's regulated services issued under Article 39 of the CBB Law and those conditions of granting a license for the provision of regulated services as prescribed under Resolution No.(43) of 2011 and issued under the powers available to the CBB under Article 44(c). The Module contains requirements under Resolution No.(16) for the year 2012 including the prohibition of marketing financial services pursuant to Article 42 of the CBB Law. This Module contains the prior approval requirements for approved persons under Resolution No (23) of 2015. The Directive and Resolutions in this Module are applicable to all conventional bank licensees (including their approved persons).

                  Amended: January 2016
                  Amended: January 2013
                  Amended: July 2012
                  Amended: October 2011
                  Amended: January 2011
                  Amended: October 2010
                  October 2007

                • LR-A.1.2A

                  For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                  Amended: January 2011

                • LR-A.1.3

                  Persons wishing to undertake regulated banking services are required to be licensed by the CBB as a conventional bank licensee. Regulated banking services consist of two determinant activities undertaken in combination — deposit-taking and providing credit. In addition, various supplementary regulated activities may also be undertaken. These activities are defined in Rule LR-1.3.1.

                  October 2007

                • LR-A.1.4

                  In other words, persons wishing to undertake deposit-taking must also undertake the activity of providing credit. In addition, they may undertake any of the other activities falling within the definition of regulated banking services. Deposit-taking may not be undertaken on its own, without the activity of providing credit also being undertaken. Persons wishing to provide credit without undertaking deposit-taking may qualify as a finance company, a Category of specialised licensee (see separate regulations regarding these: they will fall under Volume 5 of the CBB Rulebook, when issued in the future).

                  Amended: January 2013
                  Amended: April 2011
                  October 2007

              • License Categories

                • LR-A.1.5

                  Conventional bank licensees are divided into two sub-categories: conventional retail banks and conventional wholesale banks. Certain specific regulatory requirements may differ between these two sub-categories, where appropriate to address their different risk profiles. (See Section LR-1.2.)

                  Amended: January 2011
                  October 2007

                • LR-A.1.6

                  Conventional retail banks may undertake transactions in any currency, with both Bahraini residents and non-residents. To qualify as a conventional retail bank, the activity of providing credit must account for a significant portion of the institution's business (defined, broadly, as accounting for over 20% of an institution's assets — See Paragraphs LR-1.2.4LR-1.2.8).

                  October 2007

                • LR-A.1.7

                  Conventional wholesale banks may also undertake transactions without restriction, when dealing with the Government of Bahrain and its agencies; CBB bank licensees; and non-residents. However, they may only undertake transactions denominated in Bahraini Dinar and/or with a resident of the Kingdom of Bahrain, if these are wholesale in nature. Wholesale transactions are defined in terms of transaction size (broadly, BD 7 million or more for a credit or deposit transaction, and US$ 100,000 or more for an investment transaction — See Paragraphs LR-1.2.9LR-1.2.26).

                  October 2007

                • LR-A.1.8

                  Collectively, licensed providers of regulated banking services are called conventional bank licensees. Bahrain-incorporated conventional bank licensees are called Bahraini conventional bank licensees. Conventional bank licensees that are incorporated in an overseas jurisdiction and operate via a branch presence in the Kingdom of Bahrain are called branches of foreign conventional bank licensees. The same naming convention applies to the two sub-categories of conventional bank license: thus, Bahraini conventional retail bank licensees and Bahraini conventional wholesale bank licensees are those incorporated in Bahrain, whilst retail branches of foreign banks and wholesale branches of foreign banks are those incorporated in an overseas jurisdiction and operating in Bahrain via a branch presence.

                  Amended: July 2017
                  October 2007

                • LR-A.1.9

                  Conventional bank licensees may not hold themselves out as an Islamic bank. They may nonetheless enter into Shari'a compliant transactions, subject to certain restrictions outlined in Section LR-1.4.

                  October 2007

              • Licensing Conditions

                • LR-A.1.10

                  Conventional bank licensees are subject to 8 licensing conditions, mostly specified at a high level in Module LR, and further expanded in underlying subject Modules (such as Module CA). These licensing conditions are broadly equivalent to the standards applied in other Volumes of the CBB Rulebook, to other license categories, and are consistent with international good practice, such as relevant Basel Committee standards.

                  October 2007

                • LR-A.1.11

                  The requirements contained in Chapter LR-2 represent the minimum conditions that have to be met in each case, both at the point of licensing and on an on-going basis thereafter, in order for licensed status to be retained.

                  October 2007

              • Information Requirements and Processes

                • LR-A.1.12

                  Chapter LR-3 specifies the processes and information requirements that have to be followed for applicants seeking a conventional bank license, as well as existing licensees seeking to vary the scope of their license, by adding new regulated activities. It also covers the voluntary surrender of a license, or its cancellation by the CBB.

                  October 2007

              • Representative Offices, Finance Companies and Ancillary Service Providers

                • LR-A.1.13

                  Representative offices of conventional banks, and providers of ancillary services in the financial sector are not covered in Volume 1 (Conventional Banks) of the Rulebook. Requirements covering representative offices (for all financial services firms) and providers of ancillary services to the financial sector are included in Volume 5.

                  Amended: July 2017
                  Amended: July 2012
                  October 2007

                • LR-A.1.14

                  Representative offices of conventional banks are subject to requirements contained in Volume 5 (Specialised Licensees), common Modules and specific Modules for representative offices. Until such time as all parts of Volume 5 (Specialised Licensees) of the CBB Rulebook is issued, providers of ancillary services to the financial sector remain subject to the requirements contained in the CBB's "Standard Conditions and Licensing Criteria".

                  Amended: July 2017
                  Amended: July 2012
                  October 2007

                • LR-A.1.15

                  This paragraph was merged with paragraph LR-A.1.13 above in October 2007]

                • LR-A.1.16

                  This paragraph was merged with paragraph LR-A.1.14 above in October 2007]

                • LR-A.1.17

                  This paragraph was deleted in October 2007.

            • LR-A.2 LR-A.2 Module History

              • Evolution of Module

                • LR-A.2.1

                  This Module (Module LR — "Licensing and Authorisation Requirements") was first issued in July 2004, as part of the initial release of Volume 1 of the CBB Rulebook. It was subsequently reissued in full in July 2006 (and renamed "Licensing Requirements").

                  October 2007

                • LR-A.2.2

                  The reissued Module was one of several Modules modified to reflect the introduction of the CBB's new integrated license framework. Module LR was amended to reflect the new conventional bank licenses introduced by the framework, and to more closely align its presentation with that found in other CBB Rulebook volumes.

                  October 2007

                • LR-A.2.3

                  The reissued Module is dated July 2006. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made; Chapter UG-3 provides further details on Rulebook maintenance and version control.

                  October 2007

                • LR-A.2.3A

                  When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

                  October 2007

                • LR-A.2.4

                  A list of recent changes made to this Module is provided below:

                  Module Reference Change Date Description of Changes
                  LR-6 01/2005 New guidance on record-keeping.
                  Whole Module 07/2006 Whole Module reissued to reflect integrated license framework: new license categories and updated licensing conditions introduced.
                  LR-A.1.2 10/2007 New Rule LR-A.1.2 introduced, categorising this Module as a Directive.
                  LR-1.4 10/2007 New section added on Shari'a Compliant Transactions
                  LR-A.2.8 10/2007 Changes to provision of information requirements as result of CBB Law
                  LR-3 10/2007 Revised requirements due to new CBB Law
                  LR-4 10/2007 New Chapter LR-4 on application and license fees (incorporating material on fees previously contained in Module GR).
                  LR-2.5.10 04/2008 Minimum daily cash reserve balance with the CBB increased from 5% to 7%.
                  LR-1.2.16 04/2008 Lower threshold of $100,000 for investment business transactions for wholesale banks
                  LR-2.5.10 07/2009 Minimum daily cash reserve balance with the CBB brought back to 5% from 7%.
                  LR 10/2010 Various minor amendments to ensure consistency in formatting of CBB Rulebook.
                  LR-A.1.2 10/2010 Revised legal basis.
                  LR-1A 10/2010 New Chapter on Approved Persons moved from Section HC-1.2 and from Paragraphs in Section HC-1.5.
                  LR-3.1.12A 10/2010 Added new paragraph, requiring capital to be injected prior to license being issued.
                  LR-3.1.15 10/2010 Additional details pertaining to information required, within 6 months of a license being issued.
                  LR-3.1.15A 10/2010 Transition rule added to comply with new requirement under Subparagraph HC-3.1.15(j).
                  LR-4.2.13 10/2010 Amendment to guidance.
                  LR 01/2011 Various minor amendments to ensure consistency in formatting of CBB Rulebook.
                  LR-A.1.2 01/2011 Clarified legal basis.
                  LR-3.1.5 and 3.1.5A 01/2011 Clarified the use of letters of guarantee as part of the licensing process.
                  LR-4.2.9A 01/2001 Added the requirement for annual fees for SPV's to be in line with the requirements of Resolution No (1) of 2007.
                  LR-A.1.4 04/2011 Corrected issue date.
                  LR-3.1.3 04/2011 Clarified the appointment of a representative as part of the licensing process.
                  LR-3.1.5(l) 04/2011 Deleted reference to Phase 1.
                  LR-4.2.9A 04/2011 Clarified the payment of annual license fees for SPVs.
                  LR-1.4.6 07/2011 Added Paragraph concerning Shari'a compliant financing contracts for the purchase of land and property.
                  LR-2.8.1 07/2011 Updated language to reflect current terminology.
                  LR-A.1.2 10/2011 New reference added to reflect the issuance of Resolution No.(43) of 2011.
                  LR-3.3 10/2011 Clarified language on cancellation of a license or closure of a branch to be in line with other Volumes of the CBB Rulebook.
                  LR-1A.1.23 04/2012 Last sentence of Paragraph deleted as cross reference no longer applies.
                  LR-A.1.2 07/2012 Added reference to Regulation No 1 of 2007 pertaining to regulated services.
                  LR-A.1.13 and LR-A.1.14 07/2012 Amended Paragraphs to reflect updates for Volume 5
                  LR-B.1.3 07/2012 Corrected cross-reference.
                  LR-1.2.10 07/2012 Reference to 'other banks' deleted.
                  LR-1A.1.20 07/2012 Changed Guidance to Rule.
                  LR-1A.2.4 07/2012 Added cross-reference.
                  LR-1A.3.3 07/2012 Corrected cross-reference.
                  LR-2.8.1 and LR-2.8.2 07/2012 Attributed reference to CBB Law to correct Paragraph.
                  LR-3.1.18 07/2012 Corrected cross-reference.
                  LR-4.2.9B 07/2012 Added guidance regarding annual fees of SPVs of Bahrain domiciled CIUs.
                  LR-A.1.2 01/2013 Updated legal basis.
                  LR-A.1.4 01/2013 Updated reference to when Volume 5 will be issued.
                  LR-B.1.1 01/2013 Updated prohibition as per issuance of Resolution No.(16) for the year 2012.
                  LR-1.1 01/2013 References added to requirements under Resolution No.(16) for the year 2012.
                  LR-1.3.18 01/2013 Corrected typo.
                  LR-1.3.36 to LR-1.3.39 01/2013 Updated reference to CIU to be aligned with Volume 7.
                  LR-1A.1.3 01/2013 Clarified approval requirements for controlled functions for Bahrain operations.
                  LR-4.2 07/2013 Amended due date and collection process for annual license fee.
                  LR-1A.1 10/2013 Aligned controlled functions with Module TC.
                  LR-4.2.9A 10/2013 Clarified annual license fees for newly established SPVs.
                  LR-1.2.20 01/2014 Updated to refer to licensed exchange.
                  LR-1A.1.3 01/2014 Correction made to clarify which controlled functions are in relation to Bahrain operations.
                  LR-1A.1.17 01/2014 Amended requirement for notification for appointment of financial instrument trader and moved requirement to Paragraph BR-5.1.7.
                  LR-2.8.1 01/2014 Corrected to refer to proper accounting standards.
                  LR-1A.1 04/2014 Amended Rule on notification requirements dealing with approved persons.
                  LR-1.4.5 04/2015 Corrected reference in Rule to 'customers'.
                  LR-A.1.2 01/2016 Legal basis updated to reflect Resolution No (23) of 2015.
                  LR-1.4.4 01/2016 Expanded the scope of Shari'a compliant investments allowed for the bank's own account.
                  LR-1A 01/2016 Amended to reflect the issuance of Resolution No. (23) of the year 2015 dealing with approved persons.
                  LR-1A.1.20B 04/2016 Clarified approval process for applicants for approved persons.
                  LR-1A.1.18C 07/2016 Clarified Guidance on authorised representative for approval of controlled functions.
                  LR-3.1.11 10/2016 Added definition of certification
                  LR-2.5.2 04/2017 Deleted Paragraph on minimum paid up capital requirement.
                  LR-2.5.2A 04/2017 Added new paragraph on minimum paid up capital requirement for locally incorporated retail banks.
                  LR-2.5.2B 04/2017 Added new paragraph on minimum paid up capital requirement for locally incorporated wholesale banks.
                  LR-2.5.6 04/2017 Amended paragraph to delete the requirement of endowment capital for overseas wholesale banks.
                  LR-1A.1.7 07/2017 Amended paragraph.
                  LR-2.2.2 07/2017 Amended paragraph.
                  LR-3.4 07/2017 Added new Section on Publication of the decision to grant, cancel or amend a license.
                  LR 07/2017 Changed the term "Overseas banks" to "branches of foreign banks".
                  LR-1A.1.18 04/2018 Amended Paragraph.
                  LR-3.1.1 04/2018 Amended Paragraph.
                  LR-1.2.20A 10/2018 Added new Paragraph on Providing Trust Services.
                  LR-1.2.23 10/2018 Amended Paragraph.
                  LR-1.3.1 10/2018 Amended Paragraph adding—Providing Trust Services.
                  LR-1.3.4 10/2018 Amended Paragraph.
                  LR-1.3.54—LR-1.3.57 10/2018 Added new Sub-section on Providing Trust Services.
                  LR-2.5.2A 10/2018 Amended paragraph on minimum total shareholders' equity maintained by retail bank licensees.
                  LR-2.5.2B 10/2018 Amended paragraph on minimum total shareholders' equity maintained by wholesale bank licensees.
                  LR-1.3.49A 04/2019 Added a new Paragraph on robo-advice.
                  LR-3.1.1 07/2019 Amended Paragraph to remove references to hardcopy Form 1 submission to online submission.
                  LR-3.2.4 10/2019 Changed from Rule to Guidance.
                  LR-3.4.1 10/2019 Changed from Rule to Guidance.
                  LR-1A.1.17 & LR-1A.1.18A 07/2020 Amended Paragraphs on online submission of Form 3.
                  LR-1.3.1A 10/2020 Added a new Paragraph on compliance with AAOIFI Shari’a Standards.
                  LR-1.3.1 07/2021 Amended Paragraph.
                  LR-1.3.1B 07/2021 Added a new Paragraph on obtaining approval for services not included in its application.
                  LR-1.3.58 – LR-1.3.61 07/2021 Added new Paragraphs on Account Information Service and Payment Initiation Services.
                  LR-1.3.1C 01/2022 Added a new Paragraph on submission of information in relation to a bank wishing to undertake regulated banking services which were not included in its application for license.
                  LR-2.5.8 10/2022 Amended Paragraph removing the requirement for agreeing a liquidity management policy with the CBB.

                • LR-A.2.5

                  [This Paragraph was deleted in October 2007]

                  Amended: January 2013

          • LR-B LR-B Scope of Application

            • LR-B.1 LR-B.1 Scope and Prohibitions

              • LR-B.1.1

                The licensing requirements in Chapter LR-1 have general applicability, in that they prevent any person from providing (or seeking to provide) regulated banking services within or from the Kingdom of Bahrain, unless they have been licensed as a conventional bank licensee by the CBB or marketing any financial services unless specifically allowed to do so by the CBB (see Rule LR-1.1.1).

                Amended: January 2013
                October 2007

              • LR-B.1.2

                In addition, no one may use the term 'bank' in their trading or corporate name, or otherwise hold themselves out to be a bank in Bahrain, unless they hold the appropriate license from CBB (see Rule LR-1.1.2).

                October 2007

              • LR-B.1.3

                The remaining requirements in Chapters LR-1 to LR-4 (besides those mentioned in Section LR-B.1 above) apply to all those licensed by the CBB as a conventional bank licensee, or which are in the process of seeking such a license. They apply regardless of whether the person concerned is incorporated in the Kingdom of Bahrain, or in an overseas jurisdiction, unless otherwise specified.

                Amended: July 2012
                October 2007

              • LR-B.1.4

                These remaining requirements prescribe the types of license offered; their associated operating conditions; the licensing conditions that have to be satisfied in order to secure and retain a license; and the processes to be followed when applying or varying a license, or when a license is withdrawn.

                October 2007

              • LR-B.1.5

                The Rules referred to above are supported by statutory restrictions contained in the CBB Law (cf. Articles 39 to 41 and 44 to 51).

                October 2007

            • LR-B.2 [This section was merged with section LR-B.1 in October 2007

          • LR-1 LR-1 Requirement to Hold a License

            • LR-1.1 LR-1.1 Conventional Bank Licensees

              • General Prohibitions

                • LR-1.1.1

                  No person may:

                  (a) Undertake (or hold themselves out to undertake) regulated banking services within or from the Kingdom of Bahrain unless duly licensed by the CBB;
                  (b) Hold themselves out to be licensed by the CBB unless they have as a matter of fact been so licensed; or
                  (c) Market any financial services in the Kingdom of Bahrain unless:
                  (i) Allowed to do by the terms of a license issued by the CBB;
                  (ii) The activities come within the terms of an exemption granted by the CBB by way of a Directive; or
                  (iii) Has obtained the express written permission of the CBB to offer financial services.
                  Amended: January 2013
                  Amended: October 2010
                  October 2007

                • LR-1.1.1A

                  In accordance with Resolution No.(16) for the year 2012 and for the purpose of Subparagraph LR-1.1.1(c), the word 'market' refers to any promotion, offering, announcement, advertising, broadcast or any other means of communication made for the purpose of inducing recipients to purchase or otherwise acquire financial services in return for monetary payment or some other form of valuable consideration.

                  Added: January 2013

                • LR-1.1.1B

                  Persons in breach of Subparagraph LR-1.1.1(c) are considered in breach of Resolution No.(16) for the year 2012 and are subject to penalties under Articles 129 and 161 of the CBB Law (see also Section EN-10.3).

                  Added: January 2013

                • LR-1.1.2

                  According to Article 41(a) of the CBB Law, only persons licensed to undertake regulated banking services (or regulated Islamic banking services), may use the term 'bank' in their corporate or trading names, or otherwise hold themselves out to be a bank.

                  October 2007

                • LR-1.1.3

                  Licensees are not obliged to include the word 'bank' in their corporate or trading names; however, they are required to make clear their regulatory status in their letter heads, customer communications, website and so on.

                  Amended: July 2012
                  October 2007

                • LR-1.1.4

                  For the purposes of Rule LR-1.1.2, persons will be considered in breach of this requirement if they attempt to operate as, or incorporate a bank in Bahrain with a name containing the word "bank" (or the equivalents in any language), without holding the appropriate CBB license or obtaining the prior approval of the CBB.

                  October 2007

              • Licensing

                • LR-1.1.5

                  Persons wishing to be licensed to undertake regulated banking services within or from the Kingdom of Bahrain must apply in writing to the CBB.

                  October 2007

                • LR-1.1.6

                  An application for a license must be in the form prescribed by the CBB and must contain:

                  (a) A business plan specifying the type of business to be conducted;
                  (b) Application forms for all controllers; and
                  (c) Application forms for all controlled functions.
                  Amended: October 2010
                  October 2007

                • LR-1.1.7

                  The CBB will review the application and duly advise the applicant in writing when it has:

                  (a) Granted the application without conditions;
                  (b) Granted the application subject to conditions specified by the CBB; or
                  (c) Refused the application, stating the grounds on which the application has been refused and the process for appealing against that decision.
                  Amended: October 2010
                  October 2007

                • LR-1.1.8

                  Detailed rules and guidance regarding information requirements and processes for license applications can be found in Section LR-3.1. As specified in Paragraph LR-3.1.14, the CBB will provide a formal decision on a license application within 60 calendar days of all required documentation having been submitted in a form acceptable to the CBB.

                  October 2007

                • LR-1.1.9

                  In granting new licenses, the CBB will specify the specific types of regulated banking service for which a license has been granted, and on what basis (i.e. conventional retail bank or conventional wholesale bank).

                  October 2007

                • LR-1.1.10

                  All applicants for conventional bank licenses must satisfy the CBB that they meet, by the date of their license, the minimum conditions for licensing, as specified in Chapter LR-2. Once licensed, conventional bank licensees must maintain these criteria on an on-going basis.

                  October 2007

                • LR-1.1.11

                  Conventional bank licensees must not carry on any commercial business in the Kingdom of Bahrain or elsewhere other than banking business and activities directly arising from or incidental to that business.

                  October 2007

                • LR-1.1.12

                  Rule LR-1.1.11 is intended to restrict bank licensees from undertaking any material non-financial business activities. The Rule does not prevent a bank undertaking commercial activities if these directly arise from their financial business: for instance, in the context of Islamic contracts, such as murabaha, ijara and musharaka, where the bank may hold the physical assets being financed or leased. Nor does it restrict a bank from undertaking commercial activities if, in the judgment of the CBB, they are incidental and do not detract from the financial nature of the bank's operations: for example, a bank may rent out spare office space in its own office building, and provide services associated with the rental (e.g. office security or cleaning).

                  October 2007

                • LR-1.1.13

                  Rule LR-1.1.11 applies to the legal entity holding the bank license. A bank may thus own subsidiaries that undertake non-financial activities, although the CBB generally does not support the development of significant commercial activities within a banking group. Capital invested in such subsidiaries by a bank would be deducted from the bank's capital base under the CBB's capital rules (see Module CA). In addition, the CBB may impose restrictions — such as dealings between the bank and its commercial subsidiaries — if it was felt necessary to limit the bank's exposure to non-financial risks.

                  October 2007

            • LR-1.2 LR-1.2 License Sub-Categories

              • Retail vs. Wholesale

                • LR-1.2.1

                  Depending on the nature of activities undertaken, conventional bank licensees must be licensed either as a conventional retail bank or as a conventional wholesale bank.

                  October 2007

                • LR-1.2.2

                  The nature of activities allowed under each license sub-Category is specified below (cf. Rule LR-1.2.4 and the following Paragraphs). The conventional retail bank Category replaces the Full Commercial Bank (conventional principles) Category that existed prior to July 2006; the conventional wholesale bank Category replaces the Offshore Banking Unit and Investment Bank License (conventional principles) categories.

                  Amended: July 2012
                  October 2007

                • LR-1.2.3

                  Banks licensed prior to the introduction of these new license categories in July 2006 are not required to reapply for their license. Rather, their new license Category is to be confirmed by an exchange of letters with the CBB, and the issuance of a new license certificate. Where (prior to July 2006) the same legal entity holds multiple licenses, the CBB will agree transitional measures aimed at rationalizing the number of licenses held.

                  October 2007

              • Conventional Retail Banks

                • LR-1.2.4

                  Conventional retail banks are allowed to transact with both residents and non-residents of the Kingdom of Bahrain, and in both Bahrain Dinar and foreign currencies.

                  October 2007

                • LR-1.2.5

                  To qualify as a conventional retail bank, the person concerned must undertake (as a minimum), the activities of deposit-taking and providing credit (as defined in Rules LR-1.3.16 and LR-1.3.18). The activity of providing credit must be a significant part of the bank's business, relative to other activities.

                  October 2007

                • LR-1.2.6

                  When assessing the significance of credit-related activities, in the context of Rule LR-1.2.5, the CBB would normally expect to see loans and other credit-related activity (such as overdraft facilities, loan commitments, letters of credit, guarantees and other activities falling under the definition of providing credit), to constitute at least 20% of the total assets of the institution. Other activities and criteria may also be taken into account, if the CBB believes they are of a credit-related nature, and that such activities constitute a significant share of the bank's overall business.

                  October 2007

                • LR-1.2.7

                  In the case of new applicants, the above assessment is made based on the financial projections and business plan provided as part of the license application. Where existing licensees fail to satisfy the condition contained in Rule LR-1.2.5, the CBB will initiate discussion with the licensee as to the appropriateness of their license category: this may result in the licensee being required to change its license category. A branch of an overseas bank may nonetheless be allowed to hold a bank license in Bahrain, even if it fails to undertake the activities specified in Rule LR-1.2.5, providing that it undertakes other regulated banking services in Bahrain and its head office is licensed as a bank in its home country.

                  October 2007

                • LR-1.2.8

                  The purpose of Rule LR-1.2.5 is to ensure that, besides deposit-taking, the core banking activity of providing credit forms part of the definition of conventional retail banks, and accounts for a significant share of their business, in keeping with their intermediation function.

                  October 2007

              • Conventional Wholesale Banks

                • LR-1.2.9

                  Conventional wholesale banks are allowed to transact with residents of the Kingdom of Bahrain (irrespective of currency), and in Bahrain Dinar (irrespective of the location of the counterparty), subject to the conditions and exemptions specified in Rules LR-1.2.11, LR-1.2.13, LR-1.2.16 and LR-1.2.18. Foreign currency transactions with non-residents are not subject to these conditions.

                  October 2007

                • LR-1.2.10

                  The effect of Rule LR-1.2.9 is to limit the on-shore/Bahrain Dinar customer business of conventional wholesale banks to larger transactions. By definition, their on-shore client base is therefore wholesale in nature (i.e. large corporates and high net-worth individuals).

                  Amended: July 2012
                  October 2007

                • LR-1.2.11

                  To qualify as a conventional wholesale bank, the person concerned must undertake (as a minimum), the activities of deposit-taking and providing credit (as defined in Rules LR-1.3.16 and LR-1.3.18).

                  October 2007

                • LR-1.2.12

                  The purpose of Rule LR-1.2.11 is to ensure that the core banking activities of deposit taking and providing credit form part of the definition of conventional wholesale banks. However, unlike conventional retail banks, there is no requirement that the activity of providing credit must be a significant part of the bank's business, relative to other activities. This is to allow conventional wholesale banks greater flexibility as to the nature of their activities; it also recognises that, because of the wholesale nature of their client base, there is less need to limit the scale of non-credit related risks to which their depositors may be exposed. Rule LR-1.2.11 does not in any way prevent conventional wholesale banks from developing the provision of credit as a major activity, should they wish to. The Guidance provided in Paragraph LR-1.2.7 with regards to overseas banks is also applicable to Rule LR-1.2.11.

                  October 2007

                • LR-1.2.13

                  Conventional wholesale banks may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (a) to (e) listed in Rule LR-1.3.1, only where the individual transaction is BD 7 million or above (or its foreign currency equivalent).

                  October 2007

                • LR-1.2.14

                  To comply with Rule LR-1.2.13, the initial amount taken as a deposit must be BD 7 million or above (or its equivalent in foreign currency); however, subsequent additions and withdrawals from that deposit account may be for any amount. The initial amount taken as deposit may be split between different types of accounts (e.g. call, 3-month and 6-month accounts) — providing at least BD 7 million is taken from the customer on the same day and the bank's records can demonstrate this. Where subsequent withdrawals lead to a zero balance on an account (or the aggregate of accounts where more than one was originally opened), then a further BD 7 million must be deposited to re-start the 'wholesale' relationship, before additional deposits for smaller amounts may be made.

                  October 2007

                • LR-1.2.15

                  Similarly, with respect to credit-related transactions, the initial facility amount advised must be for BD 7 million or above (or its equivalent); but drawdowns (and repayments) under the facility may be for any amount, as may any subsequent changes to the facility amount. If the facility is fully repaid, then a further BD 7 million transaction must be agreed in order to re-start the 'wholesale' relationship.

                  October 2007

                • LR-1.2.16

                  Conventional wholesale banks may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (f) to (l) listed in Rule LR-1.3.1, only where the individual transaction is US$ 100,000 or above (or its foreign currency equivalent).

                  October 2007
                  Amended: April 2008

                • LR-1.2.17

                  With respect to activities (f) and (g) (dealing in financial instruments as principal / agent), the threshold refers to the individual transaction size. With respect to activities (h) and (i) (managing / safeguarding financial instruments), the threshold refers to the initial investment amount. With respect to activity (j) (operating a collective investment scheme), the threshold refers to the minimum investment required for participation in the scheme. With respect to activities (k) and (l) (arranging deals in / advising on financial instruments), the threshold refers to the size of the deal arranged or of the investment on which advice is being given.

                  October 2007

                • LR-1.2.18

                  Note that the threshold with respect to activities (h) and (i) applies to the initial investment amount: where a subsequent distribution to a client or a reduction in the mark to market value of the investment reduces the initial investment amount below US$ 100,000 it is still considered a wholesale transaction. The threshold in Rule LR-1.2.16 applies to a client even if the same client satisfies the BD 7m threshold in Rule LR-1.2.13, with respect to deposit/credit activities. Finally, the initial amount taken as an investment may be split between two or more investment products — providing at least US$ 100,000 is taken from the customer on the same day and the bank's records can demonstrate this.

                  Amended: April 2008
                  October 2007

                • LR-1.2.19

                  Conventional wholesale bank licensees may only undertake activities (m) and (n) listed in Rule LR-1.3.1, on behalf of residents of Bahrain and/or in Bahrain Dinar, where the customer concerned meets either of the thresholds specified in LR-1.2.13 or LR-1.2.16 (in which case, activities (m) and (n) may be undertaken for any amount).

                  October 2007

                • LR-1.2.20

                  Notwithstanding Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19, conventional wholesale banks are allowed to transact in Bahrain Dinar (or any other currency) for any amount with the Government of Bahrain, Bahrain public sector entities (as defined in the Guidelines for completion of the Prudential Information Reports), and CBB bank licensees. Conventional wholesale banks may also transact in Bahrain Dinar for any amount, where required to fund their normal operating expenses; or when investing for their own account in securities listed on a licensed exchange.

                  Amended: January 2014
                  October 2007

                • LR-1.2.20A

                  Conventional wholesale bank licensees may undertake activity (o) listed in Rule LR-1.3.1, on behalf of residents and/or non-residents of the Kingdom of Bahrain and/or in Bahrain Dinar or foreign currency, where the customer concerned meets either of the thresholds specified in LR-1.2.13 or LR-1.2.16.

                  Added: October 2018

                • LR-1.2.21

                  Any transactions entered into prior to 1 July 2006 which may be in breach of the conditions specified in Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19 must be notified to the CBB. These transactions will be allowed to mature.

                  October 2007

                • LR-1.2.22

                  Since the conventional wholesale bank regime represents an easing of the restrictions on on-shore business that previously applied to offshore bank licensees (i.e. OBUs and IBLs), there should be few transactions of the type specified in Rule LR-1.2.21 — they are likely to exist only where individual ad-hoc exemptions may have been previously granted by the CBB, and these exemptions went further than those now being applied across the Board to all conventional wholesale bank licensees.

                  October 2007

                • LR-1.2.23

                  Conventional wholesale banks must seek prior written CBB approval if they wish to undertake transactions of the type specified in Rules LR-1.2.13, LR-1.2.16, LR-1.2.19 and LR-1.2.20A if the transactions are below the thresholds mentioned in LR-1.2.13 or LR-1.2.16.

                  Amended: October 2018
                  Amended: October 2009
                  October 2007

                • LR-1.2.24

                  The approval requirement in Rule LR-1.2.23 only has to be made once, prior to the licensee starting to undertake such transactions. Its purpose is to allow the CBB to monitor the initiation of such business by conventional wholesale bank licensees, and to check that adequate systems and controls have been in place, so that such transactions are likely to be well managed. In addition, it is to allow, where relevant, for the necessary arrangements to be made to ensure that conventional wholesale banks comply with the CBB's reserve requirements (which apply to deposit liabilities denominated in Bahraini Dinars — see LR-2.5.10).

                  October 2007

                • LR-1.2.25

                  Conventional wholesale banks that are unclear about the interpretation of the conditions specified in Rules LR-1.2.13, LR-1.2.16 or LR-1.2.19 must consult the CBB prior to undertaking the transaction concerned.

                  October 2007

                • LR-1.2.26

                  The CBB may publish additional interpretative guidance on the above conditions, in response to licensees' queries. The minimum thresholds specified under Rules LR-1.2.13 and LR-1.2.16 will be kept under review by the CBB and may be amended in response to market developments.

                  October 2007

              • Shari'a Compliant Transactions

                • LR-1.2.27

                  Conventional bank licensees may not hold themselves out as an Islamic bank. Conventional bank licensees may only enter into activities (c) to (e) listed in Rule LR-1.3.1, in accordance with the conditions outlined in Section LR-1.4.

                  October 2007

                • LR-1.2.28

                  [This paragraph was deleted in October 2007]

                • LR-1.2.29

                  Conventional bank licensees may freely deal in financial instruments or operate a collective investment scheme that happens to be Shari'a compliant (because of the nature of the financial instruments concerned).

                  October 2007

            • LR-1.3 LR-1.3 Definition of Regulated Banking Services

              • LR-1.3.1

                Regulated banking services are any of the following activities, carried on by way of business:

                (a) Deposit-taking;
                (b) Providing Credit;
                (c) Accepting Shari'a money placements/deposits;
                (d) Managing Shari'a profit/loss sharing investment accounts;
                (e) Offering Shari'a Financing Contracts;
                (f) Dealing in financial instruments as principal;
                (g) Dealing in financial instruments as agent;
                (h) Managing financial instruments;
                (i) Safeguarding financial instruments;
                (j) Operating a Collective Investment Undertaking;
                (k) Arranging deals in financial instruments;
                (l) Advising on financial instruments;
                (m) Providing money exchange/remittance services;
                (n) Issuing/administering means of payment;
                (o) Providing Trust Services;
                (p) Providing account information services; and
                (q) Providing payment initiation services.
                Amended: July 2021
                Amended: October 2018
                Amended: October 2010
                October 2007

              • LR-1.3.1A

                Where licensees are undertaking regulated activities in accordance with Shari'a, all transactions and contracts concluded by conventional bank licensees must comply with Sharia standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). The validity of the contract or transaction is not impacted, if at a later date, the relevant AAOIFI Sharia standards are amended.

                Added: October 2020

              • LR-1.3.1B

                A conventional bank licensee that wishes to undertake regulated banking services which were not included in its application for licence must obtain CBB’s written approval prior to offering such services. In such situations, CBB may impose additional conditions that it deems necessary for the provision of such services.

                Added: July 2021

              • LR-1.3.1C

                For the purposes of Paragraph LR-1.3.1B, conventional bank licensees must submit the following minimum information in relation to the provision of such services:

                a) Description of the services/products;
                b) Proposed fees and charges;
                c) Experience of resources responsible for such services and their details;
                d) Policies and procedures for such services;
                e) Enhancements to its risk management framework to capture, monitor, measure, control and report risks arising from the activity; and
                f) Relevant staff training plans.
                Added: January 2022

              • LR-1.3.2

                Upon application, the CBB may exclude specific transactions from the definition of regulated banking services.

                October 2007

              • LR-1.3.3

                The CBB will normally only consider granting such an exemption when a Bahrain resident is unable to obtain a specific product in Bahrain and it would be unreasonable to require the overseas provider of that product to be licensed for that specific transaction, and the provider has no intention of regularly soliciting such business in Bahrain.

                October 2007

              • LR-1.3.4

                For the purposes of Rule LR-1.3.1, carrying on a regulated banking service by way of business means:

                (a) Undertaking the regulated banking service of (a), plus any of the activities (b) to (o), as defined in Section LR-1.3, for commercial gain;
                (b) Holding oneself out as willing and able to engage in such activities; or
                (c) Regularly soliciting other persons to engage in transactions constituting such activities.
                Amended: October 2018
                Amended: October 2010
                October 2007

              • LR-1.3.5

                Licensees should note that they may still undertake activities falling outside the definition of regulated banking services, such as investing in physical commodities — subject to Rule LR-1.1.11. The fact that an activity is not included in the definition of regulated banking services does not mean that it is prohibited. In transitioning to the new licensing framework, the CBB will be closely liaising with licensees to ensure that no disruption occurs to their legitimate business activities.

                October 2007

              • LR-1.3.6

                Licensees should note that the same legal entity cannot combine regulated banking services with other regulated services, such as regulated insurance services. However, different legal entities within the same group may of course each hold a different license (e.g. banking and insurance).

                October 2007

              • General Exclusions

                • LR-1.3.7

                  A person does not carry on an activity constituting a regulated banking service if the activity:

                  (a) Is carried on in the course of a business which does not ordinarily constitute the carrying on of financial services;
                  (b) May reasonably be regarded as a necessary part of any other services provided in the course of that business; and
                  (c) Is not remunerated separately from the other services.
                  Amended: October 2010
                  October 2007

                • LR-1.3.8

                  For example, the taking of a deposit in connection with the rental of a property would not be considered a regulated banking service, since it satisfies the criteria in Rule LR-1.3.7.

                  October 2007

                • LR-1.3.9

                  A person does not carry on an activity constituting a regulated banking service if the person is a body corporate and carries on that activity solely with or for other bodies corporate that are members of the same group.

                  October 2007

                • LR-1.3.10

                  A person does not carry on an activity constituting a regulated banking service if such person carries on an activity with or for another person, and they are both members of the same family.

                  October 2007

                • LR-1.3.11

                  A person does not carry on an activity constituting a regulated banking service if the sole or main purpose for which the person enters into the transaction is to limit any identifiable risks arising in the conduct of his business, providing the business conducted does not itself constitute a regulated activity.

                  October 2007

                • LR-1.3.12

                  For example, an industrial company entering into an interest rate swap to switch floating-rate borrowings for fixed rate borrowings, in order to manage interest rate risk, would not be considered to be dealing in financial instruments as principal, and would not therefore be required to be licensed as a conventional bank.

                  Amended: October 2010
                  October 2007

                • LR-1.3.13

                  A person does not carry on an activity constituting a regulated banking service if that person enters into that transaction solely as a nominee for another person, and acts under instruction from that other person.

                  October 2007

                • LR-1.3.14

                  A person does not carry on an activity constituting a regulated banking service if that person is a government body charged with the management of financial instruments on behalf of a government or public body.

                  October 2007

                • LR-1.3.15

                  A person does not carry on an activity constituting a regulated banking service if that person is an exempt person, as specified by Royal decree.

                  October 2007

              • Deposit-taking

                • LR-1.3.16

                  Deposit-taking is defined as receiving a sum of money paid on terms under which it will be repaid in full, with or without interest or a premium, and either on demand or in circumstances agreed by the parties involved. It excludes sums referable to the giving of security or as a fee paid in advance for goods or services. It also excludes money received by a person in consideration for debt instruments issued by the same person, or money received by a person entering into a loan or other financing agreement.

                  October 2007

                • LR-1.3.17

                  The above definition, therefore, includes savings, current, notice, fixed and time deposits.

                  October 2007

              • Providing Credit

                • LR-1.3.18

                  Providing credit is defined as the provision of credit to a person in his capacity as borrower or potential borrower. This includes consumer and mortgage credit; and providing credit by way of finance leases, factoring, forfaiting, and reverse repo transactions. It also includes the issuance or endorsement of letters of credit; the issuance of letters of guarantee and other contingent credit activities (such as the underwriting of loans); the purchase on the secondary market of loans and other contracts of credit (that do not otherwise fall under the definition of financial instruments); and the provision of ancillary credit-related activities, such as advising on or arranging loans. It excludes money advanced to a person in consideration for debt instruments issued by the same person.

                  Amended: January 2013
                  October 2007

              • Accepting Shari'a Money Placements/Deposits

                • LR-1.3.19

                  Accepting Shari'a money placements is defined as the acceptance of sums of money for safe-keeping ('al-wadia', 'q'ard') in a Shar'ia compliant framework, under which it will be repaid, either on demand or in circumstances agreed by the parties involved, and which is not referable to the giving of security.

                  October 2007

              • Offering Shari'a Financing Contracts

                • LR-1.3.20

                  Offering Shari'a financing contracts is defined as entering into, or making arrangement for another person to enter into, a contract to provide finance in accordance with Shari'a principles, such as murabaha, bay muajjal, bay salam, ijara wa iktina and istisna'a contracts.

              • Managing Shari'a Profit Sharing Investment Accounts

                • LR-1.3.21

                  Managing a Shari'a profit sharing investment account is defined as managing an account, portfolio or fund, whereby a sum of money is placed with the service provider on terms that a return will be made according to an agreed Shari'a compliant profit-sharing arrangement, based either on a mudaraba or musharaka partnership.

                  October 2007

              • Dealing in Financial Instruments as Principal

                • LR-1.3.22

                  Dealing in financial instruments as principal means buying, selling, subscribing for or underwriting any financial instrument on one's own account.

                  October 2007

                • LR-1.3.23

                  Rule LR-1.3.22 includes the underwriting of equity and other financial instruments. The underwriting of loans comes under the activity of providing credit (see Rule LR-1.3.18). It also includes the temporary sale of a financial instrument through a repo transaction.

                  October 2007

                • LR-1.3.24

                  A person does not carry on an activity specified in Rule LR-1.3.22 if the activity relates to the person issuing his own shares/debentures, warrants or bonds.

                  October 2007

              • Dealing in Financial Instruments as Agent

                • LR-1.3.25

                  Dealing in financial instruments as agent means buying, selling, subscribing for or underwriting financial instruments on behalf of a client.

                  October 2007

                • LR-1.3.26

                  A licensee that carries on an activity of the kind specified by Rule LR-1.3.25 does not determine the terms of the transaction and does not use its own financial resources for the purpose of funding the transaction. Such a licensee may however receive or hold assets in connection with the transaction, in its capacity as agent of its client.

                  October 2007

              • Managing Financial Instruments

                • LR-1.3.27

                  Managing financial instruments means managing on a discretionary basis financial instruments on behalf of another person.

                  October 2007

                • LR-1.3.28

                  The activities included under the definition of Rule LR-1.3.27 include activities such as asset management.

                  October 2007

              • Safeguarding Financial Instruments (i.e. Custodian)

                • LR-1.3.29

                  Safeguarding financial instruments means the safeguarding of financial instruments for the account of clients.

                  October 2007

                • LR-1.3.30

                  A person does not carry on an activity specified in Rule LR-1.3.29 if the person receives documents relating to a financial instrument for the purpose of onward transmission to, from, or at the direction of the person to whom the financial instrument belongs; or else is simply providing a physical safekeeping service such as a deed box.

                  October 2007

                • LR-1.3.31

                  A person does not carry on an activity specified in Rule LR-1.3.29 if a third person, namely a qualifying custodian, accepts responsibility with regard to the financial instrument.

                  October 2007

                • LR-1.3.32

                  A "qualifying custodian" means a person who is:

                  (a) A licensee who has permission to carry on an activity of the kind specified in Rule LR-1.3.29; or
                  (b) An exempt person in relation to activities of that kind.
                  Amended: October 2010
                  October 2007

                • LR-1.3.33

                  A person does not carry on an activity specified in Rule LR-1.3.29 if they are managing a central depository, which is part of an exchange recognised by the CBB.

                  October 2007

                • LR-1.3.34

                  The following are examples of activities, which when taken in isolation, are unlikely to be regarded as an activity of the kind specified under Rule LR-1.3.29:

                  (a) Providing information as to the number of units or the value of any assets safeguarded; and
                  (b) Converting currency.
                  Amended: October 2010
                  October 2007

                • LR-1.3.35

                  A person undertaking an activity of the kind specified under Rule LR-1.3.29 may also be engaged in the administration of the financial instruments, including related services such as cash/collateral management.

                  October 2007

              • Operating a Collective Investment Undertaking

                • LR-1.3.36

                  Operating a collective investment undertaking ('CIU') means operating, establishing or winding up a collective investment undertaking.

                  Amended: January 2013
                  October 2007

                • LR-1.3.37

                  For the purposes of LR-1.3.36, a CIU is defined in Volume 7 Paragraph ARR-B.1.1

                  Amended: January 2013
                  October 2007

                • LR-1.3.38

                  [This Paragraph was deleted in January 2013].

                  Deleted: January 2013

                • LR-1.3.39

                  [This Paragraph was deleted in January 2013].

                  Deleted: January 2013

              • Arranging Deals in Financial Instruments

                • LR-1.3.40

                  Arranging deals in financial instruments means making arrangements with a view to another person, whether as principal or agent, buying, selling, or subscribing for, or underwriting deals in, financial instruments.

                  October 2007

                • LR-1.3.41

                  A person does not carry on an activity specified in Rule LR-1.3.40 if the arrangement does not bring about the transaction to which the arrangement relates.

                  October 2007

                • LR-1.3.42

                  A person does not carry on an activity specified in Rule LR-1.3.40 if a person's activities are limited solely to introducing clients to licensees.

                  October 2007

                • LR-1.3.43

                  The exclusion in Rule LR-1.3.42 does not apply if the agent receives from any person, other than the client, any pecuniary reward or other advantage, which he does not account to the client, arising out of his entering into the transaction. Thus, if A receives a commission from B for arranging credit or deals in investment for C, the exclusion in Rule LR-1.3.42 does not apply.

                  October 2007

                • LR-1.3.44

                  A person does not carry on an activity specified in Rule LR-1.3.40 merely by providing the means of communication between two parties to a transaction.

                  October 2007

                • LR-1.3.45

                  A person does not carry on an activity specified in Rule LR-1.3.40 if they operate an exchange, duly recognised and authorised by the CBB.

                  October 2007

                • LR-1.3.46

                  Negotiating terms for an investment on behalf of a client is an example of an activity which may be regarded as an activity of the kind specified in Rule LR-1.3.40.

                  October 2007

                • LR-1.3.47

                  The following are examples of activities, which when taken in isolation, are unlikely to be regarded as an activity of the kind specified in Rule LR-1.3.40:

                  (a) Appointing professional advisers;
                  (b) Preparing a prospectus/business plan;
                  (c) Identifying potential sources of funding;
                  (d) Assisting investors/subscribers/borrowers to complete and submit application forms; or
                  (e) Receiving application forms for processing/checking and/or onward transmission.
                  Amended: October 2010
                  October 2007

              • Advising on Deals in Financial Instruments

                • LR-1.3.48

                  Advising on financial instruments means giving advice to an investor or potential investor (or a person in his capacity as an agent for an investor or potential investor) on the merits of buying, selling, subscribing for or underwriting a particular financial instrument or exercising any right conferred by such a financial instrument.

                  October 2007

                • LR-1.3.49

                  The following are examples of activities, which may be regarded as an activity as defined by Rule LR-1.3.48:

                  (a) A person may offer to tell a client when shares reach a certain value on the basis that when the price reaches that value it would be a good time to buy or sell them;
                  (b) Recommendation on the size or timing of transactions; and
                  (c) Advice on the suitability of the financial instrument, or on the characteristics or performance of the financial instrument concerned.
                  Amended: October 2010
                  October 2007

                • LR-1.3.49A

                  For the purpose of Rule LR-1.3.48, advising on financial instruments includes giving digital financial advice also known as 'robo-advice' or 'automated advice' using a computer program and algorithm to generate the advice.

                  Added: April 2019

                • LR-1.3.50

                  A person does not carry on an activity specified in Rule LR-1.3.48 by giving advice in any newspaper, journal, magazine, broadcast services or similar service in any medium if the principal purpose of the publication or service, taken as a whole, is neither that of:

                  (a) Giving advice of the kind mentioned in Rule LR-1.3.48; nor
                  (b) Leading or enabling persons to buy, sell, subscribe for or underwrite a financial instrument.
                  Amended: October 2010
                  October 2007

                • LR-1.3.51

                  The following are examples of activities, which when taken in isolation, are unlikely to be regarded as an activity as defined by Rule LR-1.3.48:

                  (a) Explaining the structure, or the terms and conditions of a financial instrument;
                  (b) Valuing financial instruments for which there is no ready market;
                  (c) Circulating company news or announcements;
                  (d) Comparing the benefits and risks of one financial instrument to another; and
                  (e) Advising on the likely meaning of uncertain provisions in an agreement relating to, or the terms of, a financial instrument or on the effect of contractual terms and their commercial consequences or on terms that are commonly accepted in the market.
                  Amended: October 2010
                  October 2007

              • Providing Money Exchange / Remittance Services

                • LR-1.3.52

                  Means providing exchange facilities between currencies, and the provision of wire transfer or other remittance services.

                  October 2007

              • Issuing / Administering Means of Payment

                • LR-1.3.53

                  Means the selling or issuing of payment instruments, or the selling or issuing of stored value (e.g. credit cards, travellers' cheques, electronic purses).

                  October 2007

              • Providing Trust Services

                • LR-1.3.54

                  Providing trust services is defined as:

                  (a) Establishment of trusts;
                  (b) Administration of trusts in accordance with the provisions of the trust deed;
                  (c) Providing related ancillary services to trusts in accordance with the provisions of the trust deed; and
                  (d) Providing financial advisory services to trust business clients only.
                  Added: October 2018

                • LR-1.3.55

                  The related ancillary services under sub-paragraph LR-1.3.54(c) include providing directorship services, company secretarial services, providing a registered address and/or acting as a shareholder to the company holding the assets of a trust.

                  Added: October 2018

                • LR-1.3.56

                  Conventional bank licensees must ensure that the trust services in Paragraph LR-1.3.54 are handled by an independent trust service department within the bank.

                  Added: October 2018

                • LR-1.3.57

                  Conventional bank licensees must comply with the legislative Decree No. (23) of 2016 with regards to Trust, and CBB's resolutions and directives issued in this regard.

                  Added: October 2018

              • Account Information Service and Payment Initiation Services

                • LR-1.3.58

                  Providing account information services (AIS) means the activity of obtaining access and the provision of information to customers about their transactions and account balances with other licensees (banks, financing companies or payment service providers) and the handling of communication or electronic documents between the customer and other licensees using an online portal, mobile devices or applications.

                  Added: July 2021

                • LR-1.3.59

                  Providing payment initiation services (PIS) means the activity of initiating payment or fund transfers for the customer from an account he holds with other licensees.

                  Added: July 2021

                • LR-1.3.60

                  Conventional bank licensees undertaking AIS and/or PIS activities must comply with the requirements in the Open Banking Module (OB Module) included in the CBB Rulebook Volume 5 – Ancillary Service Providers.

                  Added: July 2021

                • LR-1.3.61

                  Conventional retail bank licensees that wish to offer AIS or PIS services must ensure that an independent review is conducted prior to commencement of AIS or PIS services to confirm compliance with the Operational Guidelines, Security Standards and Guidelines, Open Banking Application Program Interface (API) Specifications and Customer Journey Guidelines included in the Bahrain Open Banking Framework available on the CBB website. Such a review must be conducted by a third-party consultant, other than the external auditor.

                  Added: July 2021

            • LR-1.4 LR-1.4 Shari'a Compliant Transactions

              • General Requirements for all Conventional Banks

                • LR-1.4.1

                  Conventional bank licensees may not hold themselves out as an Islamic bank. Conventional bank licensees are allowed to enter into activities (c) to (e) listed in Rule LR-1.3.1 under the conditions outlined in the remainder of this section, subject to the thresholds and conditions outlined in Section LR-1.2 (concerning facilities offered to Bahrain residents and facilities in Bahrain Dinar in particular).

                  October 2007

                • LR-1.4.2

                  Shari'a compliant financing facilities provided by conventional bank licensees are treated as normal risk-weighted assets in the PIR and are not subject to the risk-weighting treatment under Volume 2.

                  October 2007

                • LR-1.4.3

                  When offering any of the Shari'a compliant activities (c) to (e) listed in Rule LR-1.3.1, conventional bank licensees must have staff trained in Shari'a compliant banking business. The bank must also disclose in the notes to its Annual Report/Financial Statement all quantitative and qualitative disclosures on its Shari'a compliant business as required by AAOIFI accounting and auditing standards.

                  October 2007

                • LR-1.4.4

                  Conventional bank licensees may invest in Shari'a compliant financial instruments for their own account or make an investment in a Shari'a compliant syndication where the bank's role is limited to provide the funding for such investment and the bank has not participated in the structuring nor the preparation of any documentation in relation to this investment.

                  Amended: January 2016
                  October 2007

              • Additional requirements for conventional retail banks

                • LR-1.4.5

                  Conventional retail bank licensees may provide Shari'a compliant activities (c) to (e) listed in Rule LR-1.3.1 in any amount and in any currency to customers subject to the following conditions:

                  (a) Shari'a compliant financing and funding to be undertaken through a special counter or branch as deemed necessary by the bank;
                  (b) The bank must maintain separate books for Shari'a compliant banking activities to ensure no co-mingling of conventional and Islamic funds;
                  (c) The bank must have a dedicated treasurer or senior trader for Shari'a compliant business and must also have a Shari'a compliance reviewer; and
                  (d) The bank must establish a Shari'a Supervisory Board with a minimum of three board members. The board may have global authority for all Shari'a compliant business or may have authority purely for Islamic business booked in Bahrain.
                  Amended: April 2015
                  April 2011
                  October 2007

              • Additional Requirements for the Financing of Land or Property in Bahrain by way of Shari'a Compliant Financing Contracts

                • LR-1.4.6

                  Retail bank branches of foreign banks may provide Shari'a compliant financing (activity (e) listed in Rule LR-1.3.1) in any amount and in any currency to customers for the purpose of purchasing land or properties in Bahrain subject to the conditions below:

                  (a) The branch must secure the CBB's prior written approval for offering such financing;
                  (b) The purpose of ownership of the concerned land or property by the bank must be for the purpose of the subsequent resale to the customer under a Shari'a compliant financing contract;
                  (c) The period of legal ownership of the concerned land or property by the branch must be limited only to the financing phase of the Shari'a compliant financing contract; and
                  (d) In the case of default by the customer and repossession by the branch, the land or property must be disposed of within one year of the date of the termination of the Shari'a compliant financing contract. Branches may approach the CBB to extend this period for a maximum of one additional year.
                  Added: July 2011

          • LR-1A LR-1A Approved Persons

            • LR-1A.1 LR-1A.1 CBB Notification and Approval

              • General Requirement

                • LR-1A.1.1

                  Conventional bank licensees must obtain the CBB's prior written approval for any person wishing to undertake a controlled function in a conventional bank licensee. The approval from the CBB must be obtained by the CBB prior to their appointment (subject to the variations contained in Rule LR-1A.1.3).

                  Amended: January 2016
                  Added: October 2010

                • LR-1A.1.2

                  Controlled functions are those functions occupied by board members and persons in executive positions and include:

                  (a) Board Member;
                  (b) Chief Executive or General Manager and their Deputies;
                  (c) Chief Financial Officer and/or Financial Controller;
                  (d) Head of Risk Management;
                  (e) Head of Internal Audit;
                  (f) Head of Shari'a Review;
                  (g) Compliance Officer;
                  (h) Money Laundering Reporting Officer;
                  (i) Deputy Money Laundering Reporting Officer; and
                  (j) Heads of other Functions.
                  Amended: January 2016
                  Amended: October 2013
                  Added: October 2010

                • LR-1A.1.3

                  Prior approval is required for all controlled functions in relation to Bahrain operations. Controlled functions (g) and (h) may be combined, however (see also FC-4.1, regarding the MLRO function).

                  Amended: January 2014
                  Amended: October 2013
                  Amended: January 2013
                  Added: October 2010

              • Basis for Approval

                • LR-1A.1.4

                  Approval under Rule LR-1A.1.1 is only granted by the CBB, if it is satisfied that the person is fit and proper to hold the particular position in the licensee concerned. 'Fit and proper' is determined by the CBB on a case-by-case basis. The definition of 'fit and proper' and associated guidance is provided in Sections LR-1A.2 and LR-1A.3 respectively.

                  Added: October 2010

              • Definitions

                • LR-1A.1.5

                  Board members collectively are responsible for the business performance and strategy of the conventional bank licensee, as outlined in more details in Section HC-1.2.

                  Amended: October 2013
                  Added: October 2010

                • LR-1A.1.6

                  When taken as a whole, the board of directors of a conventional bank licensee must be able to demonstrate that it has the necessary skills and expertise, as outlined in Paragraph HC-1.2.10.

                  Amended: October 2013
                  Added: October 2010

                • LR-1A.1.7

                  The Chief Executive or General Manager means a person who is responsible for the conduct of the licensee (regardless of actual title). The Chief Executive or General Manager must be resident in Bahrain. The scope of authority of the CEO and his deputies is outlined in more detail in Subparagraph HC-6.3.2 (a).

                  Amended: July 2017
                  Amended: October 2013
                  Added: October 2010

                • LR-1A.1.8

                  The head of risk management is responsible for the management and control of all risk exposures arising from the activities of the conventional bank licensee.

                  Amended: October 2013
                  Added: October 2010

                • LR-1A.1.9

                  The head of internal audit is responsible for providing independent and objective review on the adequacy and effectiveness of the holistic internal control environment within the conventional bank licensee. The duties of the head of internal audit are outlined in more detail in Subparagraph HC-6.3.2 (d).

                  Amended: October 2013
                  Added: October 2010

                • LR-1A.1.9A

                  The head of Shari'a review in a conventional bank licensee, dealing with Islamic products and services, is responsible for the examination of the extent of a conventional bank licensee's compliance, in all its activities, with the Shari'a. This examination includes contracts, agreements, policies, products, transactions memorandum and articles of association, financial statements, reports (especially internal audit and central bank inspection), circulars, etc. The objective of the Shari'a review is to ensure that the activities carried out by a conventional bank licensee do not contravene the Shari'a.

                  Added: October 2013

              • Compliance Officer

                • LR-1A.1.10

                  All banks must appoint a senior member of staff with responsibility for the management of compliance risk as their Compliance Officer/Manager.

                  Added: October 2010

                • LR-1A.1.11

                  The compliance function must be independent (i.e. it must not be placed in a position where its other duties or responsibilities may cause a conflict of interest with its compliance risk management responsibilities). Therefore the compliance function must be separate from the internal audit function. The compliance officer or manager may however, perform other limited related compliance roles (e.g. the MLRO or legal advisor), subject to the CBB's prior approval.

                  Added: October 2010

                • LR-1A.1.12

                  The compliance function must have adequate resources to carry out its functions effectively.

                  Amended: January 2016
                  Added: October 2010

                • LR-1A.1.13

                  The bank must also outline how the compliance function fits into the bank's senior management reporting structure, and must give details of relevant reporting lines within the bank.

                  Amended: January 2016
                  Added: October 2010

                • LR-1A.1.14

                  In the case of locally incorporated banks, the compliance officer/manager must have access to the Board of Directors in addition to the senior management.

                  Added: October 2010

                • LR-1A.1.15

                  Heads of other functions, where risk acquisition or control is involved, are responsible for tracking specific functional performance goals in addition to identifying, managing, and reporting critical organisational issues upstream. Certain functions require dealing directly with clients while others do not. Both categories of functions, however, require specific qualifications and experience to meet the objectives as well as compliance requirements of the conventional bank licensee.

                  Amended: October 2013
                  Added: October 2010

                • LR-1A.1.16

                  Where a firm is in doubt as to whether a function should be considered a controlled function it must discuss the case with the CBB.

                  Added: October 2010

              • Prior Approval Requirements and Process

                • LR-1A.1.17

                  Conventional bank licensees must obtain CBB's prior written approval before a person is formally appointed to a controlled function; the request for CBB approval must be made by submitting to the CBB a duly completed Form 3 (Application for Approved Person status) and Curriculum Vitae after verifying that all the information contained in Form 3, including previous experience, is accurate. Conventional bank licensees must fill in the Application Form 3 (Application for Approved Person status) online, available on the CBB website under E-services/online Forms and must upload scanned copies of supporting documents listed in Paragraph LR-1A.1.18A, unless otherwise directed by the CBB.

                  Amended: July 2020
                  Amended: January 2016
                  Amended: January 2014
                  Added: October 2010

                • LR-1A.1.18

                  When the request for approved person status forms part of a license application, the Form 3 must be marked for the attention of the Director, Licensing Directorate. When the submission to undertake a controlled function is in relation to an existing conventional bank licensee, the Form 3 must be marked for the attention of either the Director, Retail Banks Supervision or the Director, Wholesale Banks Supervision, as appropriate. In the case of the MLRO or DMLRO, Form 3 should be marked for the attention of the Director, Compliance Directorate.

                  Amended: April 2018
                  Amended: January 2016
                  Added: October 2010

                • LR-1A.1.18A

                  When submitting Form 3, conventional bank licensees must ensure that the Form 3 is:

                  (a) Submitted to the CBB with a covering letter signed by an authorised representative of the conventional bank licensee, seeking approval for the proposed controlled function;
                  (b) Submitted online on the CBB website under E-services/online Forms;
                  (c) Submitted with a certified copy of the applicant's passport, certified copies of educational and professional qualification certificates (and translation if not in Arabic or English) and the Curriculum Vitae; and
                  (d) Signed by an authorised representative of the conventional bank licensee and all pages stamped on with the conventional bank licensee's seal.
                  Amended: July 2020
                  Added: January 2016

                • LR-1A.1.18B

                  Conventional bank licensees seeking to appoint Board Directors must seek CBB approval for all the candidates to be put forward for election/approval at a shareholders' meeting, in advance of the agenda being issued to shareholders. CBB approval of the candidates does not in any way limit shareholders' rights to refuse those put forward for election/approval.

                  Added: January 2016

                • LR-1A-1.18C

                  For existing conventional bank licensees applying for the appointment of a Board Director or the Chief Executive/General Manager, the authorised representative should be the Chairman of the Board or a Director signing on behalf of the Board. For all other controlled functions, the authorised representative should be the Chief Executive/General Manager, or a suitably senior representative of the bank.

                  Amended: July 2016
                  Added: January 2016

                • LR-1A.1.19

                  [This Paragraph was deleted in January 2016.]

                  Deleted: January 2016
                  Added: October 2010

                • LR-1A.1.20

                  [This Paragraph was moved to Paragraph LR-1A.1.18B in January 2016.]

                  Amended: January 2016
                  Amended: July 2012
                  Added: October 2010

              • Assessment of Application

                • LR-1A.1.20A

                  The CBB shall review and assess the application for approved person status to ensure that it satisfies all the conditions required in Paragraph LR-1A.2.6 and the criteria outlined in Paragraph LR-1A.2.7.

                  Added: January 2016

                • LR-1A.1.20B

                  For purposes of Paragraph LR-1A.1.20A, conventional bank licensees should give the CBB a reasonable amount of notice in order for an application to be reviewed. The CBB shall respond within 15 business days from the date of meeting all required conditions and regulatory requirements, including but not limited to, receiving the application complete with all the required information and documents, as well as verifying references and interviewing the applicant. The CBB will advise the conventional bank licensee once the application is considered complete.

                  Amended: April 2016
                  Added: January 2016

                • LR-1A.1.20C

                  The CBB reserves the right to refuse an application for approved person status if it does not satisfy the conditions provided for in Paragraph LR-1A.2.6 and does not satisfy the CBB criteria in Paragraph LR-1A.2.7. A notice of such refusal is issued by registered mail to the conventional bank licensee concerned, setting out the basis for the decision.

                  Added: January 2016

              • Appeal Process

                • LR-1A.1.21

                  Conventional bank licensees or the nominated approved persons may, within 30 calendar days of the notification, appeal against the CBB's decision to refuse the application for approved person status. The CBB shall decide on the appeal and notify the conventional bank licensees of its decision within 30 calendar days from the date of submitting the appeal.

                  Amended: January 2016
                  Added: October 2010

                • LR-1A.1.21A

                  When notification of the CBB's decision to grant a person approved person status is not issued within 15 business days from the date of meeting all required conditions and regulatory requirements, including but not limited to, receiving the application complete with all the required information and documents, conventional bank licensees or the nominated approved person may appeal to the Executive Director, Banking Supervision of the CBB provided that the appeal is justified with supporting documents. The CBB shall decide on the appeal and notify the conventional bank licensees of its decision within 30 calendar days from the date of submitting the appeal.

                  Added: January 2016

              • Notification Requirements and Process

                • LR-1A.1.22

                  Conventional bank licensees must immediately notify the CBB when an approved person, for whatever reason, ceases to hold the controlled function for which they have been approved (i.e. transferred to another function within the bank, or to another group entity, or else has resigned, been suspended or dismissed). The notification must include the reasons for the action taken.

                  Amended: April 2014
                  Added: October 2010

                • LR-1A.1.23

                  [Rule moved to Paragraph BR-5.1.17 in April 2014.]

                  Amended: April 2014
                  Amended: April 2012
                  Added: October 2010

                • LR-1A.1.24

                  [This Paragraph was deleted in April 2014].

                  Deleted: April 2014
                  Added: October 2010

                • LR-1A.1.25

                  If a controlled function falls vacant, the conventional bank licensee must appoint a permanent replacement (after obtaining CBB approval), within 120 calendar days of the vacancy occurring. Pending the appointment of a permanent replacement, the conventional bank licensee must make immediate interim arrangements to ensure continuity of the duties and responsibilities of the controlled function affected. These interim arrangements must be approved by the CBB.

                  Added: October 2010

                • LR-1A-1.26

                  Conventional bank licensees must immediately notify the CBB should they become aware of information that could reasonably be viewed as calling into question an approved person's compliance with CBB's 'fit and proper' requirement (see LR-1A.2).

                  Added: October 2010

            • LR-1A.2 LR-1A.2 Approved Persons Conditions: 'Fit and proper' Requirement

              • LR-1A.2.1

                Conventional bank licensees seeking an approved person authorisation for an individual, must satisfy the CBB that the individual concerned is 'fit and proper' to undertake the controlled function in question.

                Amended: January 2016
                Added: October 2010

              • LR-1A.2.2

                Each applicant applying for approved person status and those individuals occupying approved person positions must comply with the following conditions:

                (a) Has not previously been convicted of any felony or crime that relates to his/her honesty and/or integrity unless he/she has subsequently been restored to good standing;
                (b) Has not been the subject of any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud;
                (c) Has not been adjudged bankrupt by a court unless a period of 10 years has passed, during which the person has been able to meet all his/her obligations and has achieved economic accomplishments;
                (d) Has not been disqualified by a court, regulator or other competent body, as a director or as a manager of a corporation;
                (e) Has not failed to satisfy a judgement debt under a court order resulting from a business relationship;
                (f) Must have personal integrity, good conduct and reputation;
                (g) Has appropriate professional and other qualifications for the controlled function in question (see Appendix TC-1 in Module TC (Training and Competency)); and
                (h) Has sufficient experience to perform the duties of the controlled function (see Appendix TC-1 in Module TC (Training and Competency)).
                Amended: January 2016
                Added: October 2010

              • LR-1A.2.3

                In assessing the conditions prescribed in Rule LR-1A.2.2, the CBB will take into account the criteria contained in Paragraph LR-1A.2.4. The CBB reviews each application on a case-by-case basis, taking into account all relevant circumstances. A person may be considered 'fit and proper' to undertake one type of controlled function but not another, depending on the function's job size and required levels of experience and expertise. Similarly, a person approved to undertake a controlled function in one conventional bank licensee may not be considered to have sufficient expertise and experience to undertake nominally the same controlled function but in a much bigger licensee.

                Amended: January 2016
                Added: October 2010

              • LR-1A.2.4

                In assessing a person's fitness and propriety, the CBB will also consider previous professional and personal conduct (in Bahrain or elsewhere) including, but not limited to, the following:

                (a) The propriety of a person's conduct, whether or not such conduct resulted in a criminal offence being committed, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;
                (b) A conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;
                (c) Any adverse finding in a civil action by any court or competent jurisdiction, relating to misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;
                (d) Whether the person, or any body corporate, partnership or unincorporated institution to which the applicant has, or has been associated with as a director, controller, manager or company secretary been the subject of any disciplinary proceeding, investigation or fines by any government authority, regulatory agency or professional body or association;
                (e) The contravention of any financial services legislation;
                (f) Whether the person has ever been refused a license, authorisation, registration or other authority;
                (g) Dismissal or a request to resign from any office or employment;
                (h) Whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;
                (i) The extent to which the person has been truthful and open with supervisors; and
                (j) Whether the person has ever entered into any arrangement with creditors in relation to the inability to pay due debts.
                Added: January 2016

              • LR-1A.2.5

                With respect to Paragraph LR-1A.2.4, the CBB will take into account the length of time since any such event occurred, as well as the seriousness of the matter in question.

                Amended: January 2016
                Added: October 2010

              • LR-1A.2.6

                Approved persons undertaking a controlled function must act prudently, and with honesty, integrity, care, skill and due diligence in the performance of their duties. They must avoid conflicts of interest arising whilst undertaking a controlled function (refer to Chapter HC-2).

                Amended: January 2016
                Amended: July 2012
                Added: October 2010

              • LR-1A.2.7

                In determining whether a conflict of interest may arise, factors that may be considered include whether:

                (a) A person has breached any fiduciary obligations to the company or terms of employment;
                (b) A person has undertaken actions that would be difficult to defend, when looked at objectively, as being in the interest of the licensee; and
                (c) A person has failed to declare a personal interest that has a material impact in terms of the person's relationship with the licensee.
                Amended: January 2016
                Added: October 2010

              • LR-1A.2.8

                Further guidance on the process for assessing a person's 'fit and proper' status is given in Module EN (Enforcement): see Chapter EN-5.

                Amended: January 2016
                Amended: July 2012
                Added: October 2010

            • LR-1A.3 LR-1A.3 [This Section was deleted in January 2016.]

              Deleted: January 2016

              • LR-1A.3.1

                [This Paragraph was deleted in January 2016.]

                Deleted: January 2016
                Added: October 2010

          • LR-2 LR-2 Licensing Conditions

            • LR-2.1 LR-2.1 Condition 1: Legal Status

              • LR-2.1.1

                The legal status of a conventional bank licensee must be:

                (i) A Bahraini joint stock company (BSC); or
                (ii) A branch resident in Bahrain of a conventional bank incorporated under the laws of its territory of incorporation and authorised as a bank in that territory.
                Amended: October 2010
                October 2007

              • LR-2.1.2

                Where the conventional bank licensee is a branch of a foreign bank, in deciding whether to grant a license, the CBB will pay close regard to its activities elsewhere and how these activities are regulated. If the conventional bank licensee is not regulated elsewhere or in a jurisdiction not substantially compliant with Basel Core Principles or FATF standards, then an application for licensing can only be considered after exhaustive enquiries into the bank's shareholders, management structure and financial position.

                Amended: July 2017
                October 2007

            • LR-2.2 LR-2.2 Condition 2: Mind and Management

              • LR-2.2.1

                Conventional bank licensees with their Registered Office in the Kingdom of Bahrain must maintain their Head Office in the Kingdom. Branches of foreign conventional bank licensees must maintain a local management presence and premises in the Kingdom appropriate to the nature and scale of their activities.

                Amended: July 2017
                October 2007

              • LR-2.2.2

                In assessing the location of a conventional bank licensee's Head Office, the CBB will take into account the residency of its Directors and senior management. The CBB requires the majority of key decision makers in executive management — including the Chief Executive Officer — to be resident in Bahrain. In the case of branches of foreign bank licensees, the CBB requires the branch to have a substantive presence, demonstrated by a level of staff and other resources sufficient to ensure adequate local scrutiny and control over business booked in the Bahrain branch or subsidiary.

                Amended: July 2017
                October 2007

            • LR-2.3 LR-2.3 Condition 3: Controllers

              • LR-2.3.1

                Conventional bank licensees must satisfy the CBB that their controllers are suitable and pose no undue risks to the licensee. Conventional banks must also satisfy the CBB that their group structures do not prevent the effective supervision of the conventional bank licensee by the CBB and otherwise pose no undue risks to the licensee.

                October 2007

              • LR-2.3.2

                Chapter GR-5 contains the CBB's requirements and definitions regarding controllers.

                October 2007

              • LR-2.3.3

                In summary, controllers are persons who directly or indirectly are significant shareholders in a conventional bank licensee, or who are otherwise able to exert significant influence on the conventional bank licensee. The CBB seeks to ensure that controllers pose no significant risks to the licensee. In general terms, controllers are assessed in terms of their financial standing, their judicial and regulatory record, and standards of business and (where relevant) personal probity.

                October 2007

              • LR-2.3.4

                As regards group structures, the CBB seeks to ensure that these do not prevent adequate consolidated supervision being applied to financial entities within the group, and that other group entities do not pose any material financial, reputational or other risks to the licensee.

                October 2007

              • LR-2.3.5

                In all cases, when judging applications from existing groups, the CBB will have regard to the reputation and financial standing of the group as a whole. Where relevant, the CBB will also take into account the extent and quality of supervision applied to overseas members of the group and take into account any information provided by other supervisors in relation to any member of the group.

                October 2007

            • LR-2.4 LR-2.4 Condition 4: Board and Employees

              • LR-2.4.1

                Those nominated to carry out controlled functions must satisfy the CBB's approved persons requirements. This Rule is supported by Article 65 of the CBB Law.

                Amended: October 2010
                October 2007

              • LR-2.4.2

                The definition of controlled functions is contained in Paragraph LR-1A.1.2, whilst Section LR-1A.2 sets out the CBB's approved persons requirements.

                Amended: October 2010
                October 2007

              • LR-2.4.3

                The conventional bank licensee's staff, taken together, must collectively provide a sufficient range of skills and experience to manage the affairs of the licensee in a sound and prudent manner. Conventional bank licensees must ensure their employees meet any training and competency requirements specified by the CBB.

                October 2007

            • LR-2.5 LR-2.5 Condition 5: Financial Resources

              • Capital Adequacy

                • LR-2.5.1

                  Conventional bank licensees must maintain a level of financial resources, as agreed with the CBB, adequate for the level of business proposed. The level of financial resources held must at all times meet the minimum risk-based requirements contained in Module CA (Capital Adequacy), as specified for the Category of banking license held.

                  October 2007

                • LR-2.5.2

                  This paragraph was deleted in April 2017.

                  Deleted: April 2017
                  October 2007

                • LR-2.5.2A

                  All Bahraini conventional retail banks licensees must maintain a minimum total shareholders equity of BD 100 million.

                  Amended: October 2018
                  Added: April 2017

                • LR-2.5.2B

                  All Bahraini conventional wholesale banks licensees must maintain a minimum total shareholders equity of US$ 100 million.

                  Amended: October 2018
                  Added: April 2017

                • LR-2.5.3

                  Persons seeking a license as a conventional bank licensee must submit a 3-year business plan, with financial projections. Their proposed level of paid-up capital must be sufficient to cover expected regulatory capital requirements over that period, based on projected activities.

                  October 2007

                • LR-2.5.4

                  In practice, applicants seeking a conventional bank license are likely to be required to hold significantly more capital than the minimum paid-up capital specified in Rule LR-2.5.2.

                  October 2007

                • LR-2.5.5

                  Foreign bank applicants are required to provide written confirmation from their head office that the head office will provide financial support to the branch sufficient to enable it to meet its obligations as and when they fall due. Foreign bank applicants must also demonstrate that the bank as a whole is adequately resourced for the amount of risks underwritten, and that it and its group meet capital adequacy standards applied by its home supervisor.

                  Amended: July 2017
                  October 2007

                • LR-2.5.6

                  For conventional retail bank licensees, deposit liabilities must not exceed 20 times their capital and reserves.

                  Amended: April 2017
                  October 2007

                • LR-2.5.7

                  Factors taken into account in setting endowment capital for branches includes the financial strength of the parent company, the quality of its risk management, and the nature and scale of the Bahrain operations of the branch.

                  October 2007

              • Liquidity

                • LR-2.5.8

                  Conventional bank licensees must maintain sufficient liquid assets to meet their obligations as they fall due in the normal course of their business.

                  Amended: October 2022
                  October 2007

                • LR-2.5.9

                  The CBB would normally expect the mark-to-market value of assets that could be readily realised at short-notice to exceed 25% of deposit liabilities at all times. Liquidity arrangements may vary, however, particularly for branches of foreign conventional banks, as agreed with the CBB and documented in the liquidity management policy.

                  Amended: July 2017
                  Amended: January 2011
                  October 2007

              • Reserve Requirements

                • LR-2.5.10

                  Conventional bank licensees must maintain a minimum daily cash reserve balance with the CBB set as a ratio of its total non-bank Bahrain Dinar deposits and Bahrain Dinar denominated Certificates of Deposit. The current required ratio is 5% and may be varied by the CBB at its discretion.

                  Amended July 09
                  Amended April 2008
                  October 2007

            • LR-2.6 LR-2.6 Condition 6: Systems and Controls

              • LR-2.6.1

                Conventional bank licensees must maintain systems and controls that are, in the opinion of the CBB, adequate for the scale and complexity of their activities. These systems and controls must meet the minimum requirements contained in Modules HC, CM and OM.

                October 2007

              • LR-2.6.2

                Conventional bank licensees must maintain systems and controls that are, in the opinion of the CBB, adequate to address the risks of financial crime occurring in the licensee. These systems and controls must meet the minimum requirements contained in Module FC, as specified for the Category of license held.

                October 2007

              • LR-2.6.3

                Applicants will be required to demonstrate in their business plan (together with any supporting documentation) what risks their business would be subject to and how they would manage those risks. Applicants may be asked to provide an independent assessment of the appropriateness of their systems and controls to the CBB, as part of the license approval process.

                October 2007

            • LR-2.7 LR-2.7 Condition 7: External Auditor

              • LR-2.7.1

                Article 61 of the CBB Law requires that conventional bank licensees must appoint an external auditor, subject to the CBB's prior approval. The minimum requirements regarding external auditors contained in Module AU (Auditors and Accounting Standards) must be met.

                Amended: October 2010
                October 2007

              • LR-2.7.2

                Applicants must submit details of their proposed external auditor to the CBB as part of their license application.

                Amended: October 2010
                October 2007

            • LR-2.8 LR-2.8 Condition 8: Other Requirements

              • Books and Records

                • LR-2.8.1

                  Article 59 of the CBB Law requires that conventional bank licensees must maintain comprehensive books of accounts and other records, and satisfy the minimum record-keeping requirements contained in Article 60 of the pre-mentioned Law and Module OM. Books of accounts must comply with the financial accounting standards issued by the International Financial Reporting Standards (IFRS)/International Accounting Standards (IAS), as updated from time to time.

                  Amended: January 2014
                  Amended: July 2012
                  Amended: July 2011
                  October 2007

              • Provision of Information

                • LR-2.8.2

                  Article 58, 111, 114 and 163 of the CBB Law require that conventional bank licensees and their staff must act in an open and cooperative manner with the CBB. Conventional bank licensees must meet the regulatory reporting and public disclosure requirements contained in Modules BR and PD respectively. As per Article 62 of the CBB Law, audited financial statements must be submitted to the CBB within 3 months of the licensee's financial year-end.

                  Amended: July 2012
                  October 2007

              • General Conduct

                • LR-2.8.3

                  Conventional bank licensees must conduct their activities in a professional and orderly manner, in keeping with good market practice. Conventional bank licensees must comply with the general standards of business conduct contained in Module PB, as well as the standards relating to treatment of customers contained in Modules BC and CM.

                • LR-2.8.4

                  [This paragraph has been moved to chapter LR-4 in October 2007]

                • LR-2.8.5

                  [This paragraph has been deleted in October 2007]

              • Additional conditions

                • LR-2.8.6

                  Conventional bank licensees must comply with any other specific requirements or restrictions imposed by the CBB on the scope of their license.

                  October 2007

                • LR-2.8.7

                  Bank licensees are subject to the provisions of the CBB Law. These include the right of the CBB to impose such terms and conditions, as it may deem necessary when issuing a license, as specified in Article 45 of the CBB Law. Thus, when granting a license, the CBB specifies the regulated banking services that the licensee may undertake. Licensees must respect the scope of their license. LR-3.2 sets out the process for varying the scope of an authorisation, should a licensee wish to undertake new activities.

                  October 2007

                • LR-2.8.8

                  In addition, the CBB may impose additional restrictions or requirements, beyond those already specified in Volume 1, to address specific risks. For instance, a license may be granted subject to strict limitations on intra-group transactions.

                  October 2007

                • LR-2.8.9

                  Conventional retail bank licensees are subject to the deposit protection scheme of eligible deposits held with the Bahrain offices of the licensee (see Chapter CP-2). This Rule is supported by Article 177 of the CBB Law.

                  Amended: October 2010
                  October 2007

          • LR-3 LR-3 Information Requirements and Processes

            • LR-3.1 LR-3.1 Licensing

              • LR-3.1.1

                Applicants for a license must fill in the Application Form 1 (Application for a License) online, available on the CBB website under E-services/online Forms. The applicant must upload scanned copies of supporting documents listed in Paragraph LR-3.1.5, unless otherwise directed by the CBB.

                Amended: July 2019
                Amended: April 2018
                October 2007

              • LR-3.1.2

                [This paragraph was deleted in October 2007]

              • LR-3.1.3

                References to applicant mean the proposed licensee seeking authorisation. An applicant may appoint a representative — such as a law firm or professional consultancy — to prepare and submit the application. However, the applicant retains full responsibility for the accuracy and completeness of the application, and is required to certify the application form accordingly. The CBB also expects to be able to liaise directly with the applicant during the authorisation process, when seeking clarification of any issues.

                Adopted: April 2011

              • LR-3.1.4

                [This paragraph was deleted in October 2007]

              • LR-3.1.5

                Unless otherwise directed by the CBB, the following documents must be provided together with the covering letter referred in LR-3.1.1 above in support of a license application:

                (a) A duly completed Form 2 (Application for Authorisation of Controller) for each controller of the proposed licensee;
                (b) A duly completed Form 3 (Application for Approved Person status), for each proposed Director of the proposed licensee;
                (c) A comprehensive business plan for the application, addressing the matters described in LR-3.1.6;
                (d) For branches of foreign banks, a copy of the bank's current commercial registration or equivalent documentation;
                (e) Where the applicant is a registered institution, a copy of the applicant's commercial registration;
                (f) Any relevant Private Placement Memoranda or public offering documents (if funds are to be raised by external shareholders);
                (g) Where the applicant is a corporate body, a certified copy of a Board resolution of the applicant along with minutes of the concerned meeting, confirming the board's decision to seek a CBB conventional bank license;
                (h) In the case of applicants that are part of a regulated group, a letter of non-objection to the proposed license application from the applicant's home supervisor, together with confirmation that the group is in good regulatory standing and is in compliance with applicable supervisory requirements, including those relating to capital adequacy and solvency requirements;
                (i) In the case of branches of foreign banks applicants, a letter of non-objection to the proposed license application from the applicant's home supervisor, together with confirmation that the applicant is in good regulatory standing and is in compliance with applicable supervisory requirements, including those relating to capital adequacy requirements;
                (j) In the case of branch applicants, copies of the audited financial statements of the applicant (head office) for the three years immediately prior to the date of application; and
                (k) In the case of applicants for a licence for a locally incorporated bank, copies of the audited financial statements of the applicant's major shareholder and/or group (as directed by the CBB), for the three years immediately prior to the date of application;
                (l) A duly completed Form 3 (Application for Approved Person status), for each individual, (other than for Directors covered in item (b) above) applying to undertake controlled functions in the applicant; and
                (m) A draft copy of the applicant's (and parent's where applicable) memorandum and articles of association, addressing the matters described in LR-3.1.7.
                Amended: July 2017
                Amended: April 2011
                Amended: January 2011
                Amended: October 2010
                October 2007

              • LR-3.1.5A

                The CBB, in its complete discretion may ask for a guarantee from the applicant's controlling or major shareholders on a case by case basis as it deems appropriate/necessary as part of the required documents to be submitted as mentioned in Paragraph LR-3.1.5 above.

                Adopted: January 2011

              • LR-3.1.6

                The business plan submitted in support of an application should explain:

                (a) An outline of the history of the applicant and its shareholders;
                (b) The reasons for applying for a license, including the applicant's strategy and market objectives;
                (c) The proposed type of activities to be carried on by the applicant in/from the Kingdom of Bahrain;
                (d) The proposed Board and senior management of the applicant and the proposed organisational structure of the applicant;
                (e) An assessment of the risks that may be faced by the applicant, together with the proposed systems and controls framework to be put in place for addressing those risks and to be used for the main business functions; and
                (f) An opening balance sheet for the applicant, together with a three-year financial projection, with all assumptions clearly outlined, demonstrating that the applicant will be able to meet applicable capital adequacy and liquidity requirements.
                Amended: October 2010
                October 2007

              • LR-3.1.7

                The applicant's (and where applicable, its parent's) memorandum and articles of association must explicitly provide for it to undertake the activities proposed in the licensed application, and must preclude the applicant from undertaking other commercial activities, unless these arise out of its banking activities or are incidental to those.

                October 2007

              • LR-3.1.8

                In the case of a new bank's capital being financed by a private placement, the Private Placement Memorandum must also be submitted to the CBB for its approval.

                October 2007

              • LR-3.1.9

                The purpose of Rule LR-3.1.8 is to allow the CBB to verify that the contents of the Private Placement Memorandum are consistent with other information supplied to the CBB, notably in the business plan, and otherwise meets any applicable regulatory requirements with respect to PPM documents. The CBB's review of the PPM does not in any way constitute an approval or endorsement as to any claims it may contain as to the future value of the proposed bank.

                October 2007

              • LR-3.1.10

                [This paragraph was deleted in October 2007]

              • LR-3.1.11

                All documentation provided to the CBB as part of an application for a license must be in either Arabic or English language. Any documentation in a language other than English or Arabic must be accompanied by a certified English or Arabic translation thereof. Certification must be performed by an official of the concerned licensee (if already licensed), a lawyer, or a Government body such as an Embassy or Ministry. The certification must include the words "original sighted" together with a date and signature of the concerned authorised official (along with corporate stamp where applicable). The certifier's contact details should be clearly available (e.g. business card) with the certification.

                Amended: October 2016
                October 2007

              • LR-3.1.12

                Any material changes or proposed changes to the information provided to the CBB in support of an authorisation application that occurs prior to authorisation must be reported to the CBB.

                October 2007

              • LR-3.1.12A

                Before the final approval is granted to a licensee, confirmation from a retail bank addressed to the CBB that the licensee's capital (injected funds) — as specified in the business plan submitted under Rule LR-3.1.5 — has been paid in must be provided to the CBB.

                Added: October 2010

              • LR-3.1.13

                Failure to inform the CBB of the changes specified in LR-3.1.12 is likely to be viewed as a failure to provide full and open disclosure of information, and thus a failure to meet licensing condition LR-2.8.2.

                October 2007

              • LR-3.1.14

                As part of the application process, the CBB will provide a formal decision on a license application within 60 calendar days of all required documentation having been submitted in a form acceptable to the CBB, as specified in Article 44 (e) of the CBB Law. The applicant must submit within 6 months of the application date, all remaining requirements or otherwise has to submit a new application to the CBB.  Applicants are encouraged to approach the CBB to discuss their application at an early stage, so that any specific questions can be dealt with prior to the finalisation of the application.

                October 2007

              • LR-3.1.15

                Within 6 months of the license being issued, the new licensee must provide to the CBB:

                (a) A detailed action plan for establishing the operations and supporting infrastructure of the bank, such as the completion of written policies and procedures, and recruitment of remaining employees (having regard to the time limit set by Article 48 (c) of the CBB Law);
                (b) The registered office address and details of premises to be used to carry out the business of the proposed licensee;
                (c) The address in the Kingdom of Bahrain where full business records will be kept;
                (d) The licensee's contact details including telephone and fax number, e-mail address and website;
                (e) A description of the business continuity plan;
                (f) A description of the IT system that will be used, including details of how IT systems and other records will be backed up;
                (g) A copy of the auditor's acceptance to act as auditor for the applicant;
                (h) A copy of the applicant's notarised memorandum and articles of association, addressing the matters described in Paragraph LR-3.1.7;
                (i) A copy of the Ministry of Industry & Commerce commercial registration certificate in Arabic and in English;
                (j) A copy of the bank's business card and any written communication (including stationery, website, e-mail, business documentation, etc.) including a statement that the bank is licensed by the CBB, specifying whether it is licensed either as conventional wholesale or conventional retail bank; and
                (k) Other information as may be specified by the CBB.
                Amended: October 2010
                October 2007

              • LR-3.1.15A

                With respect to the requirement under Subparagraph LR-3.1.15(j), conventional bank licensees must ensure that they comply with this Rule by 31st March 2011.

                Added: October 2010

              • LR-3.1.16

                Applicants issued new licenses by the CBB must start operations within 6 months of the license being issued, as per Article 48 (c) of the CBB Law. Failure to comply with this rule lead to enforcement action being taken against the licensee concerned, as specified in Article 128 of the CBB Law. Conventional bank licensee must at all times keep an approved copy of the licence displayed in a visible place on the Licensee's premises in the Kingdom, as per Article 47 (b) of the CBB Law.

                Amended: April 2011
                October 2007

              • LR-3.1.17

                Applicants who are refused a license have a right of appeal under the provisions contained in Article 46 of the CBB Law, which shall not be less than thirty days from the date of the decision. The Central Bank will decide on the appeal made by the applicant and notify him of its decision within thirty days from the date of submission of the appeal.

                October 2007

              • LR-3.1.18

                Applicants may not publicise in any way the application for a licence for, or formation of, a bank before the formal decision referred to in Paragraph LR-3.1.14 is provided to the applicant or the concerned agent.

                Amended: July 2012
                October 2007

            • LR-3.2 LR-3.2 Variations to a License

              • LR-3.2.1

                As per Article 48 of the CBB Law, conventional bank licensees must seek prior CBB approval before undertaking new regulated banking services.

                October 2007

              • LR-3.2.2

                Failure to secure CBB approval prior to undertaking a new regulated activity may lead to enforcement action being taken against the concerned person. This is supported by Article 40 of the CBB law.

                October 2007

              • LR-3.2.3

                In addition to any other information requested by the CBB, and unless otherwise directed by the CBB, a conventional bank licensee requesting CBB approval to undertake a new regulated banking service must provide the following information:

                (a) A summary of the rationale for undertaking the proposed new activities;
                (b) A description of how the new business will be managed and controlled;
                (c) An analysis of the financial impact of the new activities; and
                (d) A summary of the due diligence undertaken by the Board and management of the conventional bank licensee on the proposed new activities.
                Amended: October 2010
                October 2007

              • LR-3.2.4

                The CBB may amend or revoke a licence in any of the following cases:

                (a) If the licensee fails to satisfy any of the license conditions;
                (b) If the licensee violates the terms of this regulation or any of the Volume's directives;
                (c) If the licensee fails to start business within six months from the date of the licence;
                (d) If the licensee ceases to carry out the licensed activity in the Kingdom; and
                (e) The legitimate interests of the customers or creditors of a licensee required such amendment or cancellation.
                Amended: October 2019
                Amended: October 2010
                October 2007

              • LR-3.2.5

                The CBB's procedures for amending or revoking a license is outlined in detail in the Enforcement Module (EN).

                October 2007

            • LR-3.3 LR-3.3 Withdrawal of a License or Closure of a Branch

              • Voluntary Surrender of a License or Closure of a Branch

                • LR-3.3.1

                  In accordance with Article 50 of the CBB Law, all requests for the voluntary surrender of a license or closure of a branch are subject to the CBB's prior written approval, before ceasing such activities. Such requests must be made in writing to the Executive Director of Banking Supervision, setting out in full the reasons for the request and how the voluntary surrender of the license or branch closure is to be carried out.

                  Amended: October 2011
                  October 2007

                • LR-3.3.2

                  Conventional bank licensees must satisfy the CBB that their customers' interests are to be safeguarded during and after the proposed voluntary surrender or closure of the branch. The requirements contained in Chapter GR-7 regarding cessation of business must be satisfied.

                  Amended: October 2011
                  October 2007

                • LR-3.3.3

                  The CBB will only approve a voluntary surrender where it has no outstanding regulatory concerns and any relevant customers' interests would not be prejudiced. A voluntary surrender will not be accepted where it is aimed at pre-empting supervisory actions by the CBB. Also, a voluntary surrender will only take effect once the licensee, in the opinion of the CBB, has discharged all its regulatory responsibilities to customers.

                  October 2007

              • Cancellation of a License by the CBB

                • LR-3.3.3A

                  As provided for under Article 48 (c) of the CBB Law, the CBB may itself move to cancel a license. The CBB generally views the cancellation of a license as appropriate only in the most serious of circumstances, and generally tries to address supervisory concerns through other means beforehand. See also Chapter EN-9, regarding the cancellation or amendment of licenses, including the procedures used in such instances and the licensee's right to appeal the formal notice of cancellation issued by the CBB.

                  October 2011

                • LR-3.3.4

                  Cancellation of a license requires the CBB to issue a formal notice of cancellation to the person concerned. The notice of cancellation must describe the CBB's rationale for the proposed cancellation, as specified in Article 48(d) of the CBB Law.

                  Amended: July 2012
                  Amended: October 2011
                  October 2007

                • LR-3.3.5

                  [This Paragraph was deleted in October 2011].

                  Deleted: October 2011
                  October 2007

                • LR-3.3.6

                  Where the cancellation of a license has been confirmed by the CBB, the CBB will only effect the cancellation once a licensee has discharged all its regulatory responsibilities to customers. Until such time, the CBB will retain all its regulatory powers with regards to the licensee, and will direct the licensee such that no new regulated banking services may be undertaken whilst the licensee discharges its obligations to customers.

                  Amended: October 2011
                  October 2007

            • LR-3.4 LR-3.4 Publication of the Decision to Grant, Cancel or Amend a License

              • LR-3.4.1

                In accordance with Articles 47 and 49 of the CBB Law, the CBB must publish its decision to grant, cancel or amend a license in the Official Gazette and in two local newspapers, one in Arabic and the other in English.

                Amended: October 2019
                Added: July 2017

              • LR-3.4.2

                For the purposes of Paragraph LR-3.4.1, the cost of publication must be borne by the Licensee.

                Added: July 2017

              • LR-3.4.3

                The CBB may also publish its decision on such cancellation or amendment using any other means it considers appropriate, including electronic means.

                Added: July 2017

          • LR-4 LR-4 License Fees

            • LR-4.1 LR-4.1 License Application Fees

              • LR-4.1.1

                With immediate effect, applicants seeking a conventional bank license from the CBB must pay a non-refundable license application fee of BD 100 at the time of submitting their formal application to the CBB.

                Amended: October 2010
                October 2007

              • LR-4.1.2

                There are no application fees for those seeking approved person status.

                October 2007

            • LR-4.2 LR-4.2 Annual License Fees

              • LR-4.2.1

                Conventional bank licensees must pay the relevant annual license fee to the CBB on 1st of December of the previous year for which the fees are due.

                Amended: July 2013
                October 2007

              • LR-4.2.2

                Conventional retail bank licensees must pay a variable annual licensing fee based on 1% of their total annual operating expenses by way of an annual license fee, subject to a floor of BD30,000 and a cap of BD240,000.

                Amended: July 2013
                October 2007

              • LR-4.2.3

                Bahraini conventional wholesale bank licensees must pay a variable annual licensing fee based on 0.5% of their total annual operating expenses by way of an annual license fee, subject to a floor of BD13,000 and a cap of BD100,000.

                Amended: July 2013
                October 2007

              • LR-4.2.4

                Wholesale branches of foreign bank licensees must pay a variable annual licensing fee based on 0.25% of their total annual operating expenses by way of an annual license fee, subject to a floor of BD13,000 and a cap of BD100,000.

                Amended: July 2017
                Amended: July 2013
                October 2007

              • LR-4.2.5

                The fees due on 1st December are those covering the following calendar year and are calculated on the basis of the conventional bank's latest audited financial statements for the previous calendar year: i.e. the fee payable on 1st December 2013 for the 2014 year (for example) is calculated using the audited financial statements for 2012, assuming a 31st December year end. Where a licensee does not operate its accounts on a calendar-year basis, then the most recent audited financial statements available are used instead.

                Amended: July 2013
                October 2007

              • LR-4.2.6

                Relevant operating expenses are defined as the total operating expenses of the licensee concerned, as recorded in the most recent audited financial statements available, subject to the adjustments specified in Rule LR-4.2.7.

                October 2007

              • LR-4.2.7

                The adjustments to be made to relevant operating expenses are the exclusion of the following items from total operating expenses:

                (a) Training fees;
                (b) Charitable donations;
                (c) Previous year's CBB fees paid; and
                (d) Non-executive Directors' remuneration.
                Amended: July 2013
                October 2007

              • LR-4.2.8

                For the avoidance of doubt, operating expenses for the purposes of this Section, do not include items such as depreciation, provisions, interest expense, and dividends.

                October 2007

              • LR-4.2.9

                The CBB would normally rely on the audited accounts of a licensee as representing a true and fair picture of its operating expenses. However, the CBB reserves the right to enquire about the accounting treatment of expenses, and/or policies on intra-group charging, if it believes that these are being used artificially to reduce a license fee.

                October 2007

              • LR-4.2.9A

                Conventional bank licensees must pay a fixed annual fee of BD 1,000 for each locally incorporated SPV in Bahrain which is under the control of and/or providing an actual business function, service or activity (whether actively or passively) for the bank and/or others at the bank's direction or having been established under the bank's direction for that purpose. The CBB approval for any new SPV will only be granted, once the annual fee has been paid. The full amount of the BD 1,000 annual fee is due in the year the SPV is set up and it is not prorated for the number of months remaining in the year.

                Amended: October 2013
                Amended: April 2011
                Adopted: January 2011

              • LR-4.2.9B

                Paragraph LR-4.2.9A does not apply to SPVs of Bahrain domiciled CIUs. In the case of Bahrain domiciled CIUs, banks should refer to the relevant Chapter in Module ARR of Volume 7, depending on the classification of the Bahrain domiciled CIU.

                Added: July 2012

              • LR-4.2.10

                Conventional Bank licensees must complete and submit Form ALF (Annual License Fee) to the CBB, no later than 15th October of the preceding year for which the fees are due.

                Amended: July 2013
                October 2007

              • LR-4.2.10A

                All conventional bank licensees are subject to direct debit for the payment of the annual fees and must complete and submit to the CBB a Direct Debit Authorisation Form by 15th September, available under Part B of Volume 1 (Conventional Banks) CBB Rulebook on the CBB Website.

                Added: July 2013

              • LR-4.2.11

                For new licensees, their first annual license fee is payable when their license is issued by the CBB. The amount payable is the floor amount specified for conventional bank licensees, reduced on a pro-rata basis such that they are charged only for the number of complete months left in the current calendar year.

                October 2007

              • LR-4.2.12

                For example, if a conventional retail bank is issued a license on 6 June 2007, then it would be asked to pay an annual license fee that same month, covering the remaining period left for the calendar year 2007. The fee would be calculated as BD 30,000 (the minimum amount payable by a conventional retail bank licensee, multiplied by 6/12 (the number of complete months left in the year, i.e. July to December inclusive, divided by the total number of months in the year), giving a fee liability of BD 15,000. For the following year (2008) annual fee, the licensee would submit a Form ALF by 15th October 2007, and calculate its fee as the floor amount. For future years, the licensee would submit a Form ALF by 15th October of the preceding year for which the fees are due and calculate its fee using its last audited financial statements (or alternative arrangements as agreed with CBB, should its first set of accounts cover an 18-month period).

                Amended: July 2013
                October 2007

              • LR-4.2.13

                Where a license is cancelled (whether at the initiative of the firm or the CBB), no refund is paid for any months remaining in the calendar year in question, should a fee have been paid for that year.

                Amended: October 2010
                October 2007

              • LR-4.2.14

                Conventional bank licensees failing to comply with this Section may be subject to financial penalties for date sensitive requirements as outlined in Section EN-6.2A or may have their licenses withdrawn by the CBB.

                Added: July 2013

        • PB PB Principles of Business

          • PB-A PB-A Introduction

            • PB-A.1 PB-A.1 Purpose

              • Executive Summary

                • PB-A.1.1

                  The Principles of Business are a general statement of the fundamental obligations of all Central Bank of Bahrain ('CBB') conventional bank licensees and approved persons. They serve as a basis for other material in Volume 1 (Conventional Banks), and help address specific circumstances not covered elsewhere in the Rulebook.

                  October 07

                • PB-A.1.2

                  The Principles of Business have the status of Rules and apply alongside other Rules contained in Volume 1 (Conventional Banks). However, these other Rules do not exhaust the fundamental obligations contained in the Principles. Compliance with all other Rules, therefore, does not necessarily guarantee compliance with the Principles of Business.

                  October 07

              • Legal Basis

                • PB-A.1.3

                  This Module contains the CBB's Directive (as amended from time to time) relating to Principles of Business and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all conventional bank licensees (including their approved persons).

                  Amended: January 2011
                  October 07

                • PB-A.1.4

                  For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                  October 07

            • PB-A.2 PB-A.2 Module History

              • PB-A.2.1

                This Module was first issued in July 2004 by the BMA as part of the conventional principles volume. All regulations in this volume have been effective since this date. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made; Chapter UG-3 provides further details on Rulebook maintenance and version control.

                October 07

              • PB-A.2.2

                When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

                October 07

              • PB-A.2.3

                A list of recent changes made to this Module is provided below:

                Module Ref. Change Date Description of Changes
                PB-A.1 10/2007 New Rule PB-A.1.3 introduced, categorising this Module as a Directive.
                PB-1.1 10/2007 Small expansion of Principle 1 to refer to disclosure of all relevant information to customers, as required by CBB Regulations and Directives. Reordering and expansion of other Principles, although no substantive changes.
                PB-A.1.3 01/2011 Clarified legal basis.
                PB-B.1.5 01/2011 Corrected cross reference.
                     
                October 07

          • PB-B PB-B Scope of Application

            • PB-B.1 PB-B.1 Scope of Application

              • PB-B.1.1

                The 10 Principles of Business apply to all CBB conventional bank licensees, in accordance with Paragraph PB-B.1.2. Principles 1-8 also apply to all approved persons, in accordance with Paragraph PB-B.1.3.

                October 07

              • PB-B.1.2

                Principles 1 to 10 apply to activities carried out by the conventional bank licensee, including activities carried out through overseas branches (if any). Principles 9 and 10 also take into account any activities of other members of the group of which the conventional bank licensee is a member.

                October 07

              • PB-B.1.3

                Principles 1 to 8 apply to approved persons in respect of the controlled function for which they have been approved.

                October 07

              • PB-B.1.4

                Principles 1 to 8 do not apply to behaviour by an approved person with respect to any other functions or activities they may undertake. However, behaviour unconnected to their controlled function duties may nonetheless be relevant to an assessment of that person's fitness and propriety.

                October 07

              • PB-B.1.5

                The CBB's requirements regarding approved persons and controlled functions are located in Module LR (Licensing Requirements).

                Amended: January 2011
                October 07

            • PB-B.2 PB-B.2 Non-compliance

              • PB-B.2.1

                Breaching a Principle of Business makes the conventional bank licensee or approved person concerned liable to enforcement action. In the case of a licensee, this may call into question whether they continue to meet the licensing conditions (see Chapter LR-2). In the case of an approved person, this may call into question whether they continue to meet the 'fit and proper' requirements for the function for which they have been approved (see Section HC-2.2).

                October 07

              • PB-B.2.2

                Module EN (Enforcement) sets out the CBB's policy and procedures on enforcement action.

                October 07

          • PB-1 PB-1 The Principles

            • PB-1.1 PB-1.1 Principles

              • Principle 1 — Integrity

                • PB-1.1.1

                  Conventional bank licensees and approved persons must observe high standards of integrity and fair dealing. They must be honest and straightforward in their dealings with customers, and provide full disclosure of all relevant information to customers, as required by the CBB's Regulations and Directives.

                  October 07

              • Principle 2 — Conflicts of Interest

                • PB-1.1.2

                  Conventional bank licensees and approved persons must take all reasonable steps to identify, and prevent or manage, conflicts of interest that could harm the interests of a customer.

                  October 07

              • Principle 3 — Due Skill, Care and Diligence

                • PB-1.1.3

                  Conventional bank licensees and approved persons must act with due skill, care and diligence.

                  October 07

              • Principle 4 — Confidentiality

                • PB-1.1.4

                  Conventional bank licensees and approved persons must observe in full any obligations of confidentiality, including with respect to customer information. This requirement does not over-ride lawful disclosures.

                  October 07

              • Principle 5 — Market Conduct

                • PB-1.1.5

                  Conventional bank licensees and approved persons must observe proper standards of market conduct, and avoid action that would generally be viewed as improper.

                  October 07

              • Principle 6 — Customer Assets

                • PB-1.1.6

                  Conventional bank licensees and approved persons must take reasonable care to safeguard the assets and deposits of customers for which they are responsible.

                  October 07

              • Principle 7 — Customer Interests

                • PB-1.1.7

                  Conventional bank licensees and approved persons must pay due regard to the legitimate interests and information needs of their customers and communicate with them in a fair and transparent manner. Conventional bank licensees and approved persons, when dealing with customers who are entitled to rely on their advice or discretionary decisions, must take reasonable care to ensure the suitability of such advice or decisions.

                  October 07

              • Principle 8 — Relations with Regulators/Supervisors

                • PB-1.1.8

                  Conventional bank licensees and approved persons must act in an open and co-operative manner with the CBB and other regulatory/supervisory bodies whose authority they come under. They must take reasonable care to ensure that their activities comply with all applicable laws and regulations.

                  October 07

              • Principle 9 — Adequate Resources

                • PB-1.1.9

                  Conventional bank licensees must maintain adequate human, financial and other resources sufficient to run their business in an orderly manner.

                  October 07

              • Principle 10 — Management, Systems & Controls

                • PB-1.1.10

                  Conventional bank licensees must take reasonable care to ensure that their affairs are managed effectively and responsibly, with appropriate systems and controls in relation to the size and complexity of their operations. Conventional bank licensees' systems and controls, as far as is reasonably practical, must be sufficient to manage the level of risk inherent in their business and ensure compliance with the CBB Rulebook.

                  October 07

        • HC HC High-Level Controls

          • HC-A HC-A Introduction

            • HC-A.1 HC-A.1 Executive Summary

              • Purpose

                • HC-A.1.1

                  The purpose of this Module is to:

                  (a) Explicitly reinforce the collective oversight and risk governance responsibilities of the board;
                  (b) Emphasise key components of risk governance such as risk culture, risk appetite and their relationship to a licensee’s risk capacity;
                  (c) Delineate the specific roles of the board, board committees, senior management, chief financial officer, internal auditor, chief risk officer and head of compliance; and
                  (d) Strengthen licensees’ overall checks and balances.
                  Added: April 2023

                • HC-A.1.2

                  All references in this Module to ‘he’ or ‘his’ shall, unless the context otherwise requires, be construed as also being references to ‘she’ and ‘her’.

                  Added: April 2023

              • Legal Basis

                • HC-A.1.3

                  This Module contains the CBB’s Directive (as amended from time to time) relating to high-level controls and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 (‛CBB Law’). The Directive in this Module is applicable to conventional bank licensees (including their approved persons).

                  Added: April 2023

                • HC-A.1.4

                  All Rulebook content that is categorized as a rule must be complied with by those to whom the content is addressed. Other parts of this Module are guidance paragraphs which are considered best market practices and licensees are encouraged to implement the same.

                  Added: April 2023

              • Effective Date

                • HC-A.1.5

                  The new requirements in this amended Module are effective from 1st October 2023 on which date the existing Module HC will become redundant, and any exemptions allowed under the existing Module will be subject to grandfathering requirements unless the relevant requirement has undergone change within this amended Module.

                  Added: April 2023

            • HC-A.2 HC-A.2 Module History

              • HC-A.2.1

                This Module was first issued in June 2004 by the BMA and updated in October 2007 to reflect the switch to the CBB. Following the issuance of the Corporate Governance Code by the Ministry of Industry and Commerce in March 2010, the Module was amended in October 2010 to be in line with the new Corporate Governance Code and to include previous requirements that were in place in the originally issued Module HC. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

                Added: April 2023

              • HC-A.2.2

                A list of recent changes made to this Module is detailed in the table below:

                Module Ref.Change DateDescription of Changes
                Full Module HC04/2023New restructured HC Module supersedes the previous version. The new Module is consistent with Corporate Governance Principles for banks Paper issued in July 2015 by the Basel Committee on Banking Supervision.
                Full Module HC01/2024Restructured Module HC containing Part 1 applicable to Bahraini bank licensees and Part 2 applicable to Branches of foreign banks.

          • HC-B HC-B Scope of Application

            • HC-B.1 HC-B.1 Scope of Application

              • HC-B.1.1

                This Module consists of two parts; Part one of this Module is applicable to Bahraini Conventional bank licensees whereas Part two is applicable to branches of foreign bank licensees.

                Amended: January 2024
                Added: April 2023

              • HC-B.1.2

                The implementation of the rules in this Module should be commensurate with the size, complexity, structure, economic significance, risk profile and business model of the licensee and the group to which it belongs, if any. DSIBs are expected to have in place the corporate governance structure and practices commensurate with their role and potential impact on national financial stability. In cases of certain licensees (e.g. smaller and limited scope Bahraini banks, Bahraini government owned banks, digital banks and any Bahraini bank wholly owned by another Bahraini bank) where CBB assesses that certain specific rules in this Module are less relevant or too cumbersome to apply, it will be willing to consider alternative governance arrangement.

                Amended: January 2024
                Added: April 2023

              • HC-B.1.3

                [This Paragraph has been deleted in January 2024].

                Deleted: January 2024
                Added: April 2023

              • HC-B.1.4

                [This Paragraph has been deleted in January 2024].

                Deleted: January 2024
                Added: April 2023

            • Part One: Bahraini Bank Licensees

              • HC-B.2 HC-B.2 Subsidiaries and Foreign Branches of Bahraini Islamic Bank Licensees

                • HC-B.2.1

                  Bahraini conventional bank licensees must ensure that, as a minimum, the same or equivalent provisions of this Module apply to their subsidiaries and overseas branches. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.

                  Added: April 2023

                • HC-B.2.2

                  Where a conventional bank licensee is unable to satisfy the CBB that its subsidiaries and overseas branches are subject to the same or equivalent arrangements, the CBB will assess the potential impact of risks to the licensee arising from inadequate high-level controls. In such instances, the CBB may impose certain restrictions on the licensee. Where weaknesses in controls are assessed by the CBB to pose a major threat to the financial soundness of the licensee and/or the financial stability in the Kingdom, then its license may be called into question.

                  Added: April 2023

              • HC-1 HC-1 Board’s Overall Responsibilities

                • HC-1.1 HC-1.1 Responsibilities of the Board

                  • HC-1.1.1

                    The board of directors (“Board”) of the licensee must:

                    (a) Set the “tone at the top” and play a leading role in establishing the licensee’s corporate culture and values, and oversee management’s role in fostering and maintaining a sound corporate and risk culture;
                    (b) Ensure that no individual or group of directors dominates the Board’s decision-making and no individual or group has unfettered powers of decision.
                    (c) Approve and oversee the development of the licensee’s strategy, business plans and budget, and monitor their implementation. Bahraini conventional bank licensees must submit to the CBB for its review their proposed strategy and any major proposed changes to it;
                    (d) Actively engage in the affairs of the licensee, keep up with material changes in the licensee’s business and the external environment and act in a timely manner to protect the long-term interests of the licensee;
                    (e) Convene and prepare the agenda for shareholder meetings;
                    (f) Approve, and oversee the implementation of, the licensee’s governance framework, risk management framework and all policies, and review the relevant parts of these as well as review key controls in case a new business activity is considered, or in case of material changes to the licensee’s size, complexity, business strategy, markets or regulatory requirements, or the occurrence of a major failure of controls;
                    (g) Establish, along with senior management and the chief risk officer, the licensee’s risk appetite, considering the licensee’s strategy, competitive and regulatory landscape, the licensee’s long-term interests, risk exposure and ability to manage risk effectively, and oversee the licensee’s adherence to the risk appetite statement, risk policy and risk limits;
                    (h) Ensure that:
                    i. Adequate systems, controls, processes and procedures are implemented by senior management in line with the Board approved policies;
                    ii. The licensee has adequate processes to ensure full compliance with the requirements of the CBB Law, other relevant laws and the pertinent rulebooks;
                    iii. The licensee has a robust finance function responsible for accounting and financial data;
                    iv. The risk management, compliance and internal audit functions are properly positioned, staffed and resourced and carry out their responsibilities independently, objectively and effectively; and
                    v. Senior management maintains an effective and transparent relationship with the CBB;
                    (i) Approve the annual and interim financial statements;
                    (j) At minimum, approve the selection and oversee the performance of the chief executive officer (CEO), chief financial officer and heads of the risk management, compliance and internal audit functions;
                    (k) Actively oversee, with the assistance and advise of the Remuneration Committee, the remuneration system’s design and operation for approved persons and material risk-takers and monitor and review executive compensation and assess whether it is aligned with the licensee’s remuneration policy, risk culture and risk appetite; and
                    (l) Consider the legitimate interests of depositors, shareholders and other relevant stakeholders in their decision-making process.
                    Added: April 2023

                  • HC-1.1.2

                    The Board may, where appropriate, delegate some of its functions, but not its responsibilities, to the Board committees.

                    Added: April 2023

                  • HC-1.1.3

                    The members of the Board must exercise their fiduciary and other duties of care, candor and loyalty to the licensee in accordance with local laws and regulations.

                    Added: April 2023

                  • HC-1.1.4

                    Each director must:

                    (a) Understand the Board’s role and responsibilities pursuant to the CBB Rulebook, the Commercial Companies Law and any other laws or regulations that may govern their responsibilities from time to time;
                    (b) Consider themselves as representing all shareholders and must act accordingly; and
                    (c) Ensure that they receive adequate and timely information before each meeting and must study it carefully.
                    Added: April 2023

                • HC-1.2 HC-1.2 Corporate Culture and Values

                  • HC-1.2.1

                    In order to promote a sound corporate culture, the Board must:

                    (a) Approve an appropriate code of conduct/ ethics that must outline the acceptable practices that all Board members, senior management and other staff must follow in performing their duties, and the unacceptable practices/ conduct that must be avoided;
                    (b) Set and adhere to corporate values that create expectations that the business must be conducted in a legal, professional and ethical manner, and oversee the adherence to such values by Board members, senior management and other employees;
                    (c) Promote risk awareness within a strong risk culture, convey the Board’s expectation that it does not support risk-taking beyond the risk appetite and risk limits set by the Board, and that all employees are responsible for ensuring that the licensee operates within the established risk appetite and risk limits;
                    (d) Ensure that the corporate values, professional standards and codes of conduct it sets, together with supporting policies, are adequately communicated throughout the licensee; and
                    (e) Ensure that all directors, senior management and other staff are aware that appropriate disciplinary or other actions will follow unacceptable behaviour, practices and transgressions.
                    Added: April 2023

                  • HC-1.2.2

                    Employees must be encouraged and be able to communicate, confidentially and without the risk of reprisal, legitimate concerns about illegal, unethical or questionable practices. This must be facilitated through a well communicated and Board approved whistleblowing policy and adequate procedures and processes, consistent with applicable laws. This includes the escalation of material concerns to the CBB.

                    Added: April 2023

                  • HC-1.2.3 HC-1.2.3

                    The Board must:

                    (a) Have oversight of the whistleblowing policy mechanism and ensure that senior management addresses legitimate issues that are raised;
                    (b) Take responsibility for ensuring that staff who raise concerns are protected from detrimental treatment or reprisals, and that their rights are not undermined;
                    (c) Approve and oversee how and by whom legitimate material concerns shall be investigated and addressed such as by an objective and independent internal or external body, senior management and/or the Board itself; and
                    (d) Ensure that, after verifying the validity of the allegations, the person responsible for any misconduct is held accountable and is subjected to an appropriate disciplinary measure.
                    Added: April 2023

                    • HC-1.2.4

                      The Board must establish a conflict of interest policy on identifying and managing potential conflicts of interest related to all approved persons. The policy must include:

                      (a) An approved person’s duty to:
                      i. Avoid, to the extent possible, activities that could create conflicts of interest or the appearance of conflicts of interest. An approved person shall be considered to have a “personal interest” in a transaction with a company if they themselves, or a member of their family (i.e. spouse, father, mother, sons, daughters, brothers or sisters), or another company of which they are a director or controller, are a party to the transaction or have a material financial interest in the transaction or are expected to derive material personal benefit from the transaction (transactions and interests which are de minimis in value should not be included);
                      ii. Promptly disclose any matter that may result, or has already resulted, in a conflict of interest;
                      iii. Abstain from getting involved in or voting on any matter where they may have a conflict of interest or where their objectivity or ability to properly fulfil duties to the licensee may be otherwise compromised. Any decision to enter into a transaction in which an approved person appears to have a material conflict of interest must be formally and unanimously approved by the entire Board;
                      iv. Act with honesty, integrity and care for the best interest of the licensee and its shareholders and other stakeholders;
                      v. Not use properties of the licensee for their personal needs;
                      vi. Not misuse or misappropriate the licensee’s assets or resources;
                      vii. Not disclose confidential information of the licensee or use it for their personal profit or interest;
                      viii. Make every practicable effort to arrange their personal and business affairs to avoid a conflict of interest with the licensee;
                      ix. Not take business opportunities of the licensee for themselves; and
                      x. Not compete in business with the licensee or serve the licensee’s interest in any transaction with a company in which they have a personal interest.
                      (b) Examples of where conflict of interest may arise when serving as an approved person;
                      (c) A rigorous review and approval process for approved persons to follow before they engage in certain activities (such as serving on another Board) so as to ensure that such activity will not create a conflict of interest;
                      (d) Adequate requirements that transactions with related parties must be made on an arm’s length basis;
                      (e) Sufficient restrictions on and/or a robust and transparent process for the employment of relatives of approved persons;
                      (f) Requirements for properly managing and disclosing conflict of interest that cannot be prevented;
                      (g) Requirements for all approved persons to annually declare in writing all their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager or other form of significant participation) to the Board or a designated Board committee; and
                      (h) The way in which the Board will deal with any non-compliance with the policy.
                      Added: April 2023

                    • HC-1.2.5

                      Where there is a potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent Board members capable of exercising independent judgement, to address the conflict.

                      Added: April 2023

                    • HC-1.2.6

                      The CEO/General Manager of the licensee must disclose to the Board of directors on an annual basis those individuals who are occupying controlled functions and who are relatives of any approved persons within the licensee.

                      Added: April 2023

                • HC-1.3 HC-1.3 Oversight of Senior Management

                  • HC-1.3.1

                    The Board must exercise proper oversight of senior management against formal performance and remuneration standards consistent with the long-term strategic objectives and the financial soundness of the licensee. In doing so, the Board must:

                    (a) Meet regularly with senior management;
                    (b) Subject senior management to annual performance assessment and document such assessments;
                    (c) Ensure that approved persons’ collective knowledge and expertise remain appropriate given the licensee’s nature of business and risk profile;
                    (d) Ensure that senior management’s actions are in full compliance with applicable laws and regulations and consistent with the strategy, business plan and policies approved by the Board, including risk appetite;
                    (e) Question, challenge and critically review the explanations and information provided by senior management; and
                    (f) Ensure that appropriate succession plans are in place for all approved persons within senior management (provided that such plans are subject to review in case of any changes to approved persons within senior management).
                    Added: April 2023

              • HC-2 HC-2 Board Formation

                • HC-2.1 HC-2.1 Board Composition

                  • HC-2.1.1

                    The Board must comprise of individuals with a balance of skills, diversity and expertise, who individually and collectively possess the necessary qualifications commensurate with the size, complexity and risk profile of the licensee. The Board must have a sufficient number of independent directors.

                    Added: April 2023

                  • HC-2.1.2

                    In case of a Bahraini conventional bank licensee with a controller, at least one-third of the Board must be independent.

                    Added: April 2023

                  • HC-2.1.3

                    If the Bahraini conventional bank licensee has a controller or a group of controllers acting in concert, such person(s) must recognise their specific responsibility to the minority shareholders as Board members have responsibilities to the licensee’s overall interests, regardless of who appoints them.

                    Added: April 2023

                  • HC-2.1.4

                    At least half of a Bahraini conventional bank licensee’s Board should be non-executive directors and at least three of those persons should be independent directors.

                    Added: April 2023

                  • HC-2.1.5

                    The CBB may call upon each independent director at its discretion to have a general discussion on the affairs of the Bahraini conventional bank licensee.

                    Added: April 2023

                • HC-2.2 HC-2.2 Board Member Selection

                  • HC-2.2.1

                    The Board must have a clear and rigorous process for identifying, assessing and selecting Board candidates. The Board, and not management, must nominate the candidates for shareholders’ approval.

                    Added: April 2023

                  • HC-2.2.2

                    Board candidates must:

                    (a) Possess the knowledge, skills, experience and, particularly in the case of non-executive directors, independence of mind necessary to discharge their responsibilities on the Board in light of the licensee’s business and risk profile;
                    (b) Have a record of integrity and good repute;
                    (c) Have sufficient time to fully carry out their responsibilities;
                    (d) Not have any conflicts of interest that may impede their ability to perform their duties independently and objectively and subject them to undue influence from:
                    i. Other approved persons, controllers or other connected parties;
                    ii. Past or present positions held; or
                    iii. Personal, professional or other economic relationships with other approved persons (or with other entities within the group); and
                    (e) Not have more than two directorships of Bahraini banks, bearing in mind that two directorships of licensees within the same license category (e.g. ‘Retail Bank’) are not permitted.
                    Added: April 2023

                  • HC-2.2.3

                    Board candidates should not hold more than three directorships in public companies in Bahrain. In case such directorships exist, there must be no conflict of interest, and the Board must not propose the election or re-election of any director where such conflict of interest exists.

                    Added: April 2023

                  • HC-2.2.4

                    Nominated directors of a Bahraini conventional bank licensee must possess the requisite experience and competencies specified in Module TC (Training and Competency).

                    Added: April 2023

                  • HC-2.2.5

                    A CEO of a Bahraini conventional bank licensee who has resigned or retired, must not be appointed as an independent director of the same bank unless a period of three years has passed from the date of his/her resignation/ retirement. Additionally, where a CEO is terminated from his/her position, he/she must not be appointed or retained as a Board member of the same bank.

                    Added: April 2023

                  • HC-2.2.6

                    Each proposal by the Board to the shareholders for election or re-election of a director must be accompanied by a recommendation from the Board, a summary of the advice of the Nomination Committee and the following specific information:

                    (a) The term to be served, which may not exceed three years;
                    (b) Biographical details and professional qualifications;
                    (c) In the case of an independent director, a statement that the Board has determined that the applicable rules and criteria for independent director have been met;
                    (d) Any other directorships held;
                    (e) Particulars of other positions which involve significant time commitments; and
                    (f) Details of relationships (if any) between:
                    i. the candidate and the conventional bank licensee, and
                    ii. the candidate and other approved persons of the conventional bank licensee.
                    Added: April 2023

                  • HC-2.2.7

                    Newly appointed non-executive directors must be made aware of their duties before their nomination, particularly as to the time commitment required.

                    Added: April 2023

                • HC-2.3 HC-2.3 Board Members’ Appointment and Induction

                  • Board Members’ Appointment

                    • HC-2.3.1

                      The chairperson of the Board must confirm to shareholders when proposing re-election of a director that, following a formal performance evaluation, the person’s performance continues to be effective and they continue to demonstrate commitment to the role.

                      Added: April 2023

                    • HC-2.3.2

                      Where an independent director has served three consecutive terms on the Board, such director will lose his independence status and must not be classified as an independent director if reappointed.

                      Added: April 2023

                    • HC-2.3.3

                      Bahraini conventional bank licensees must have a written appointment agreement with each director which recites the directors’ powers, duties and responsibilities, accountability, term, the time commitment envisaged, the committee assignment (if any), remuneration, expense reimbursement entitlement and their access to independent legal or other professional advice at the expense of the bank when needed to discharge their responsibilities as directors.

                      Added: April 2023

                  • Board Members’ Induction

                    • HC-2.3.4

                      The Board must ensure that:

                      (a) Sufficient time, budget and other resources are allocated annually for the Board members’ induction programmes;
                      (b) Each new director receives a formal and tailored induction and has access to ongoing training on relevant issues which may involve internal or external resources to ensure their effective contribution to the Board from the beginning of their term; and
                      (c) The induction programmes include meetings with senior management, visits to the conventional bank licensee’s facilities, presentations regarding strategic plans, significant financial, accounting and risk management issues, compliance programs, and meetings with internal and external auditors and legal counsel.
                      Added: April 2023

                    • HC-2.3.5

                      Board members must understand their oversight and corporate governance role and be able to exercise sound, objective judgment about the affairs of the licensee.

                      Added: April 2023

                    • HC-2.3.6

                      All continuing directors must be invited to attend orientation meetings and all directors must continually educate themselves as to the conventional bank licensee’s business and corporate governance.

                      Added: April 2023

              • HC-3 HC-3 Board’s Structure and Practices

                • HC-3.1 HC-3.1 Organisation and Assessment of the Board

                  • HC-3.1.1

                    The Board of a Bahraini conventional bank licensee must:

                    (a) Adopt a formal Board charter specifying matters which are reserved for it, which must include, but are not limited to, the specific requirements and responsibilities of directors stipulated in this Module and the Commercial Companies Law;
                    (b) Structure itself in terms of leadership, size and the use of committees so as to effectively carry out its oversight role and other responsibilities. This includes ensuring that the Board has the time and means to cover all necessary subjects in sufficient depth and have a robust discussion of key issues;
                    (c) Maintain and periodically update its governance structure, organisational rules, by-laws and other similar documents setting out its organisation, rights, responsibilities and key activities; and
                    (d) Carry out annual evaluation and assessments – alone or with the assistance of external experts – of the Board, its committees and individual Board members. This must include:
                    i. Assessing how the Board operates in terms of the requirements of the CBB Rulebook and the Commercial Companies Law;
                    ii. Evaluating the performance of each committee considering its specific purposes and responsibilities, which shall include review of the self-evaluations undertaken by each committee;
                    iii. Reviewing each director's work, their attendance at Board and committee meetings, and their independence and constructive involvement in discussions and decision making;
                    iv. Reviewing, based on the Nomination Committee’s advice and assessment, the Board’s current structure, size, composition as well as committees’ structures and composition in order to maintain an appropriate balance of skills, diversity and experience and for the purpose of planned and progressive refreshing of the Board; and
                    v. Recommendations for new directors to replace long-standing members or those members whose contribution to the Board or its committees is not adequate.
                    Added: April 2023

                  • HC-3.1.2

                    Where the Board has serious reservations about the performance or integrity of a Board member, or he ceases to be qualified, the Board must take appropriate action and inform the CBB accordingly.

                    Added: April 2023

                  • HC-3.1.3

                    The Board must report to the shareholders, at each annual shareholder meeting, that evaluations have been done and report its findings.

                    Added: April 2023

                  • HC-3.1.4

                    Executive directors must provide the Board with all relevant business and financial information within their knowledge and must recognise that their role as a director is different from their role as a member of management.

                    Added: April 2023

                  • HC-3.1.5

                    Non-executive directors must be fully independent of management and must constructively scrutinise and challenge management and executive directors.

                    Added: April 2023

                  • HC-3.1.6

                    The Board must maintain appropriate records of meeting minutes, including key points of discussions held, recommendations made, decisions taken and dissenting opinions (if any).

                    Added: April 2023

                  • HC-3.1.7

                    The Board must meet at least four times a year to enable it to discharge its responsibilities effectively, and half of all Board meetings in any financial year must be held in the Kingdom of Bahrain.

                    Added: April 2023

                  • HC-3.1.8

                    Individual Board members must attend at least 75% of all Board meetings in a given financial year, whether in-person or virtually (if needed) so as to enable the Board to discharge its responsibilities effectively (see table below). Voting and attendance proxies for Board meetings are prohibited.

                    Meetings per year 75% Attendance requirement
                    4 3
                    5 4
                    6 5
                    7 5
                    8 6
                    9 7
                    10 8
                    Added: April 2023

                  • HC-3.1.9

                    The absence of Board members at Board and committee meetings must be noted in the relevant meeting minutes. In addition, Board attendance percentage must be reported during any general assembly meeting when Board members stand for re-election (e.g. Board member XYZ attended xx% of scheduled meetings this year).

                    Added: April 2023

                  • HC-3.1.10

                    If a Board member has not attended at least 75% of Board meetings in any given financial year, the licensee must notify the CBB, within one month from its financial year-end, indicating which member has failed to satisfy this requirement, their level of attendance and the reason for non-attendance. The CBB shall then consider the matter and determine whether enforcement action pursuant to Article 65 of the CBB Law is appropriate.

                    Added: April 2023

                  • HC-3.1.11

                    Board governance framework should require members to step down if they are not actively participating in Board meetings.

                    Added: April 2023

                  • HC-3.1.12

                    Non-executive directors should have free access to the Bahraini conventional bank licensee’s management beyond that provided in Board meetings. Such access should be through the chairperson of the Audit Committee or the CEO. The Board should make this policy known to management to alleviate any management concerns about a director’s authority in this regard.

                    Added: April 2023

                • HC-3.2 HC-3.2 Board Chairperson

                  • HC-3.2.1

                    The Chairperson of the Board of the Bahraini conventional bank licensee must:

                    (a) Not be an executive director;
                    (b) Not be the same person as the CEO. This applies also to the deputy chairperson;
                    (c) Commit sufficient time to perform their role effectively;
                    (d) Play a critical role in promoting mutual trust, efficient functioning of the Board, open discussion, constructive dissent from decisions and constructive support for decisions after they have been made;
                    (e) Ensure that all directors receive an agenda, minutes of prior meetings and adequate background information on each agenda item in writing well before each Board meeting;
                    (f) Encourage and promote critical and objective discussion and ensure that dissenting views can be freely expressed, discussed and recorded in the minutes of the Board meeting; and
                    (g) Ensure that Board decisions are taken on sound and well-informed bases.
                    Added: April 2023

                  • HC-3.2.2

                    The chairperson of a Bahraini conventional bank licensee should be an independent Board member.

                    Added: April 2023

                • HC-3.3 HC-3.3 Board Committees

                  • HC-3.3.1

                    The Board of the Bahraini conventional bank licensee must establish Audit, Risk, Remuneration and Nomination Committees described elsewhere in this Module.

                    Added: April 2023

                  • HC-3.3.2

                    Objectivity and independence must be ensured by the selection of appropriate Board members in each committee.

                    Added: April 2023

                  • HC-3.3.3

                    Committees may be combined provided that no conflict of interest arises between the duties of such committees, and subject to the CBB’s prior approval.

                    Added: April 2023

                  • HC-3.3.4

                    Every committee must have a formal written charter or other instrument which sets out its roles and responsibilities, how the committee will report to the Board, what is expected of committee members and any tenure limits for serving on the committee.

                    Added: April 2023

                  • HC-3.3.5

                    Each committee must have the resources and the authority necessary to discharge its duties and responsibilities, including the authority to select, retain, terminate and approve the fees of external legal, accounting or other advisors as it deems necessary.

                    Added: April 2023

                  • HC-3.3.6

                    Each Board committee must maintain appropriate records of their deliberations and decisions in their meeting minutes, including key points of discussions held, recommendations made, decisions taken (and update on their subsequent implementation) and dissenting opinions (if any).

                    Added: April 2023

                  • HC-3.3.7

                    Each committee must prepare and review with the Board an annual performance evaluation of the committee and its members and must recommend to the Board any improvements deemed necessary or desirable to the committee’s charter or composition. The report must be in the form of a written report presented at any regularly scheduled Board meeting.

                    Added: April 2023

                  • HC-3.3.8

                    Members of each committee must exercise judgment free from any personal conflicts of interest or bias.

                    Added: April 2023

                  • HC-3.3.9

                    The Board should consider occasional rotation of membership and chair of the Board committees provided that doing so does not impair the collective skills, experience and effectiveness of these committees.

                    Added: April 2023

                • HC-3.4 HC-3.4 Audit Committee

                  • HC-3.4.1

                    The audit committee of the Bahraini conventional bank licensee must have at least three directors of which the majority must be independent and have no conflict of interest with any other duties they have.

                    Added: April 2023

                  • HC-3.4.2

                    The Chairperson of the audit committee must:

                    (a) Be independent;
                    (b) Not be the chairperson of the board, unless he is considered independent; and
                    (c) Not be the chairperson of any other Board committee.
                    Added: April 2023

                  • HC-3.4.3

                    The CEO and other senior management of the Bahraini conventional bank licensee must not be members of the audit committee.

                    Added: April 2023

                  • HC-3.4.4

                    The audit committee members must have sufficient experience in audit practices, financial reporting and accounting.

                    Added: April 2023

                  • HC-3.4.5

                    The audit committee must meet:

                    (a) At least four times a year.
                    (b) At least twice a year with the external auditor.
                    (c) At least once a year in the absence of the CEO and any executive management, but in presence of the Head of Compliance, Internal Auditor and CRO.
                    Added: April 2023

                  • HC-3.4.6

                    The audit committee must, at minimum:

                    (a) Ensure that the licensee has effective and adequate policies covering all its business activities, internal audit, financial reporting, compliance, risk management, prevention of frauds and cyber security breaches, etc.;
                    (b) Oversee the financial reporting process;
                    (c) Oversee and interact with the licensee’s internal and external auditors;
                    (d) Review the integrity of the conventional bank licensee’s financial statements;
                    (e) Recommend to the Board, based on a Board approved objective criteria, the appointment, remuneration, dismissal and rotation of external auditors;
                    (f) Review and approve the internal and external audit and compliance scope;
                    (g) Receive internal and external audit and compliance reports and ensure that senior management is taking necessary corrective actions in a timely manner to address any control weaknesses, non-compliance with policies, laws and regulations, and other problems identified by auditors, the head of compliance and other control functions;
                    (h) Assess once a year the extent to which the licensee is managing its compliance risk effectively;
                    (i) Ensure that the agenda for their meetings includes compliance and internal audit issues at least every quarter;
                    (j) Recommend the appointment and dismissal of the heads of internal audit and compliance functions. The licensee must also discuss the reasons for their dismissal with the CBB.
                    (k) Make a determination, at least once a year, of the external auditor’s independence;
                    (l) Commission every five years a quality review of the effectiveness and efficiency of the internal audit and compliance functions by a third-party consultant, other than the external auditor. The results of such independent review must be provided to the CBB by 30th September of the relevant year;
                    (m) Review and supervise the implementation and enforcement of the licensee's code of conduct, unless such mandate is delegated to another committee such as the Governance Committee; and
                    (n) Ensure that senior management establishes and maintains an adequate and effective internal control systems, procedures and processes for the business of the licensee.
                    Added: April 2023

                  • HC-3.4.7

                    In case the licensee has a different board committee overseeing and monitoring compliance issues, then all of the above compliance-related requirements in Paragraph HC-3.4.6 can be handled by such committee instead.

                    Added: April 2023

                • HC-3.5 HC-3.5 Risk Committee

                  • HC-3.5.1

                    The risk committee of the Bahraini conventional bank licensee must have at least three directors of which the majority must be independent. In addition, the committee members must have experience in risk management issues and practices and have no conflict of interest with any other duties they may have.

                    Added: April 2023

                  • HC-3.5.2

                    The chairperson of the risk committee must:

                    (a) Be independent;
                    (b) Not be the chairperson of the Board, unless he is considered independent; and
                    (c) Not be the chairperson of any other Board committee.
                    Added: April 2023

                  • HC-3.5.3

                    The CEO and other senior management must not be members of the risk committee.

                    Added: April 2023

                  • HC-3.5.4

                    The licensee must have a strong and appropriate risk governance framework which:

                    (a) Includes a strong risk culture, and a well-developed risk appetite articulated through the risk appetite statement (RAS);
                    (b) Outlines actions to be taken when the stated risk limits are breached, including disciplinary actions for excessive risk-taking, escalation procedures and notification to the Board; and
                    (c) Includes well-defined organisational responsibilities for risk management.
                    Added: April 2023

                  • HC-3.5.5

                    The Bahraini conventional bank licensee’s RAS must:

                    (a) Include both quantitative and qualitative considerations;
                    (b) Establish the individual and aggregate level and types of risks that the bank is willing to assume;
                    (c) Define the boundaries and business considerations according to which the bank is expected to operate;
                    (d) Be aligned with the bank’s strategic, capital and financial plans and compensation practices; and
                    (e) Be communicated effectively throughout the bank, linking it to daily operational decision-making and establishing the means to raise risk issues and strategic concerns across the bank on a timely and proactive basis.
                    Added: April 2023

                  • HC-3.5.6

                    Conventional Bank licensees must avoid organisational silos that can impede effective sharing of risk information across the organisation and can result in decisions being taken in isolation from the rest of the bank. Accordingly, the Board, senior management and control functions must re-evaluate established practices in order to encourage greater communication.

                    Added: April 2023

                  • HC-3.5.7

                    The risk committee must, at minimum:

                    (a) Recommend the appointment or removal of the Chief Risk Officer (CRO) or equivalent. The licensee must also discuss the reasons for removal with the CBB;
                    (b) Discuss all risk strategies on both an aggregated basis and by type of risk and make recommendations to the Board, and on the risk appetite;
                    (c) Ensure that:
                    i. Risks are identified, measured, aggregated, controlled, mitigated, monitored and reported on an ongoing basis across all business lines, the licensee as a whole, its subsidiaries and overseas branches (if any);
                    ii. Risk identification and measurement include both quantitative and qualitative elements;
                    iii. Each key risk has a policy, process and controls;
                    iv. The licensee has sufficient and robust management information system and policies, supported by appropriate control procedures and processes, designed to ensure that the licensee’s risk identification, measurement, aggregation, controlling, mitigation, monitoring and reporting capabilities are commensurate with the licensee’s size, complexity and risk profile. The sophistication of the licensee’s risk management information system and internal control infrastructure must keep pace with changes to the licensee’s risk profile, the external risk landscape and industry practices;
                    v. The licensee’s risk management infrastructure, including a sufficiently robust data infrastructure, data governance and architecture and information technology infrastructure keeps pace with developments such as balance sheet and revenue growth, increasing complexity of the licensee’s business, risk configuration or operating structure, geographical expansion, mergers and acquisitions, or the introduction of new products or business lines;
                    vi. Senior management has in place processes to promote the licensee’s adherence to the approved risk policies and risk appetite;
                    vii. The licensee’s policies must determine the key management decisions that must be taken by more than one person;
                    viii. The licensee has an adequate communication within the licensee about risk, both across the organisation and through reporting to the Board and senior management;
                    ix. The licensee has a strong risk culture that promotes risk awareness and encourages open communication and challenge about risk-taking across the organisation as well as vertically to and from the Board and senior management; and
                    x. The licensee has adequate escalation procedures on risks related matters.
                    (d) Advise the Board on the licensee’s risk appetite, overseeing senior management’s implementation of the RAS, reporting on the state of risk culture in the licensee, and interacting with and overseeing the CRO;
                    (e) Oversee the strategies for capital and liquidity management as well as for all relevant risks of the licensee, such as credit, market, operational, interest rate risk in the banking book and reputational risks, to ensure that they are consistent with the stated risk appetite;
                    (f) Commission every five years a quality review of the effectiveness and efficiency of the risk management framework and function by a third-party consultant, other than the external auditor. The results of such independent review must be provided to the CBB by 31st May of the relevant year. More specifically, a conventional bank licensee must undertake reviews referred to above with regards to the following individual areas that are relevant to the risk management framework:
                    i. ICAAP Framework referred to in Module IC;
                    ii. Capital adequacy requirements under Module CA;
                    iii. Recovery and resolution planning (RRP) and related documents referred to in Module DS;
                    iv. Credit risk management framework and compliance with Module CM;
                    v. Operational risk management framework and compliance with Module OM;
                    vi. Stress testing framework included in Module ST;
                    vii. Liquidity risk management framework and compliance with Module LM; and
                    viii. Compliance with Module RR.
                    (g) Receive regular reporting and communication from the CRO and other relevant functions about the licensee’s current risk profile, current state of the risk culture, utilisation against the established risk appetite and limits, limit breaches and mitigation plans.
                    Added: April 2023

                  • HC-3.5.8

                    There must be effective communication and coordination between the audit committee and the risk committee to facilitate the exchange of information and effective coverage of all risks, including emerging risks, and any needed adjustments to the risk governance framework of the bank.

                    Added: April 2023

                • HC-3.6 HC-3.6 Remuneration Committee

                  • HC-3.6.1

                    The remuneration committee of the Bahraini conventional bank licensee must have at least three directors.

                    Added: April 2023

                  • HC-3.6.2

                    Members of the remuneration committee must be independent of any risk-taking function or committee.

                    Added: April 2023

                  • HC-3.6.3

                    The remuneration committee should include only independent directors or, alternatively, only non-executive directors of whom a majority are independent directors and the chairperson should be an independent director.

                    Added: April 2023

                  • HC-3.6.4

                    The remuneration committee should meet at least twice a year.

                    Added: April 2023

                  • HC-3.6.5

                    The remuneration committee must, at minimum:

                    (a) Recommend to the Board:
                    i. An appropriate remuneration policy designed to reduce employees’ incentives to take excessive and undue risk, which must be approved by the shareholders; and
                    ii. A fair and internally transparent remuneration system, which includes relevant performance measures and effective controls.
                    (b) Ensure on an annual basis that the remuneration policy and its implementation:
                    i. Are in full compliance with CBB requirements;
                    ii. Are consistent with the licensee’s strategy, culture, long-term business objectives, risk appetite, performance and control environment; and
                    iii. Are creating the desired incentives for managing risk, capital and liquidity.
                    (c) Work closely with the risk committee in evaluating the incentives created by the remuneration system. The risk committee must, without prejudice to the tasks of the remuneration committee, examine whether incentives provided by the remuneration system take into consideration risk, capital, liquidity and the likelihood and timing of earnings;
                    (d) Approve the remuneration package and amounts for each approved person and material risk-taker, as well as the total variable remuneration to be distributed based on the results of the performance evaluation system and taking account of total remuneration including salaries, fees, expenses, bonuses and other employee benefits;
                    (e) Regularly review remuneration outcomes, risk measurements, and risk outcomes for consistency with Board’s approved risk appetite;
                    (f) Question payouts for income that cannot be realised or whose likelihood of realisation remains uncertain at the time of payout;
                    (g) Recommend Board member remuneration based on their attendance and in compliance with the Commercial Companies Law;
                    (h) Evaluate practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain by means of both quantitative and qualitative key indicators. It must demonstrate that its decisions are consistent with the assessment of the licensee’s financial condition and future prospects; and
                    (i) Obtain feedback on performance evaluation of the Chief Risk Officer, Chief Internal Auditor, Head of Compliance, Head of Internal Shari’a Audit, Shari’a Officer from the designated Board committee responsible for oversight of these functions.
                    Added: April 2023

                • HC-3.7 HC-3.7 Nomination Committee

                  • HC-3.7.1

                    The nomination committee of the Bahraini conventional bank licensee must have at least three independent directors, or alternatively, three non-executive directors of whom the majority must be independent directors including its chairperson.

                    Added: April 2023

                  • HC-3.7.2

                    The committee should meet at least twice a year.

                    Added: April 2023

                  • HC-3.7.3

                    The nomination committee must, at minimum:

                    (a) Assess and recommend to the Board from time to time the changes that the committee considers desirable to the size of the Board, any Board committee or management structure;
                    (b) Regularly review the time commitment required from each non-executive director and require them to inform the committee before accepting any Board appointments to another company;
                    (c) Recommend to the Board persons qualified to become members of the Board of directors or CEO and his deputies, chief financial officer, chief operating officer, chief investment officer, chief banking officer, corporate secretary and any equivalent or other senior management positions that the Board determines are subject to its approval. The exceptions are the appointments of the chief internal auditor, chief risk officer and head of compliance who must be recommended by other committees as prescribed in this module;
                    (d) Assess the role and responsibilities of a Board member, the knowledge, experience and competence which the role requires;
                    (e) Assess the Board’s and senior management’s effectiveness;
                    (f) Recommend to the Board appropriate succession plans of approved persons within senior management;
                    (g) Recommend to the Board, and oversee the implementation of, appropriate personnel or human resource policies; and
                    (h) Recommend to the Board the prescribed title, authority, duties, accountability and internal reporting responsibilities for each approved person within senior management.
                    Added: April 2023

                • HC-3.8 HC-3.8 Corporate Governance Committee

                  • HC-3.8.1

                    The Bahraini conventional bank licensee must assign to one of its senior management the role of a corporate governance officer who is responsible for the tasks of verifying the bank's compliance with corporate governance rules and regulations.

                    Added: April 2023

                  • HC-3.8.2

                    The Board should establish a corporate governance committee for developing and recommending changes from time to time in the conventional bank licensee’s corporate governance policy framework. Such committee should have at least three directors of which the majority should be independent.

                    Added: April 2023

                  • HC-3.8.3

                    The corporate governance committee should:

                    (a) Oversee and monitor the implementation of the governance policy framework by working with the management and the Audit Committee; and
                    (b) Provide the Board of directors with reports and recommendations based on its findings in the exercise of its functions.
                    Added: April 2023

                  • HC-3.8.4

                    The responsibilities of the corporate governance officer may be assumed by the head of compliance and should include, at minimum:

                    (a) Coordinating and following up on the licensee’s compliance with corporate governance requirements;
                    (b) Ensuring that the corporate governance policies, their implementation and related internal controls are consistent with the regulatory and legal requirements;
                    (c) Working closely with the Board and/or the relevant Board committee to improve the governance framework of the licensee; and
                    (d) Reviewing the annual corporate governance disclosure to ensure that its contents are in conformity with the licensee’s internal policies and the CBB rulebook requirements.
                    Added: April 2023

              • HC-4 HC-4 Shareholders’ Meetings

                • HC-4.1 HC-4.1 Shareholders’ Meetings

                  • HC-4.1.1

                    Bahraini conventional bank licensees must comply with the following with respect to any shareholders’ meeting:

                    (a) Provide the draft agenda to the CBB, for its review and comment, at least 5 working days prior to communicating with the shareholders or publishing in the press;
                    (b) Ensure that CBB’s prior approval has been obtained for any agenda items which require CBB’s approval under relevant regulations, prior to the meeting taking place;
                    (c) Invite a representative of the CBB to attend the meetings at least 5 working days prior to the meeting taking place; and
                    (d) Submit to the CBB a copy of the minutes of the meeting within 15 calendar days of the meeting.
                    Added: April 2023

              • HC-5 HC-5 Group Structures

                • HC-5.1 HC-5.1 Governance of Group Structures

                  • HC-5.1.1

                    The Board of a Bahraini conventional bank licensee which acts as a parent must:

                    (a) Have the overall responsibility for the group and exercise adequate oversight over subsidiaries and overseas branches while respecting the independent legal and governance responsibilities that might apply to subsidiary Boards;
                    (b) Establish, subject to CBB’s approval, a group structure (including the legal entity and business structure) and a group corporate governance framework with clearly defined roles and responsibilities at both the parent bank’s and the subsidiaries’ level as may be appropriate based on the complexity, risks and significance of the subsidiaries;
                    (c) Set adequate and comprehensive criteria for composing Boards at subsidiaries’ level;
                    (d) Have a clear strategy and group policy for establishing new structures and legal entities, and ensure that they are consistent with the policies and interests of the group;
                    (e) Have sufficient resources at group and subsidiaries levels to monitor risks and compliance at the level of the group and its subsidiaries;
                    (f) Pay special attention and due care to any significant subsidiary based on its risk profile or systemic importance or due to its size relative to the parent bank;
                    (g) Assess and discuss material risks and issues that might affect the group and its subsidiaries and overseas branches;
                    (h) Establish effective group functions at the parent bank, including but not limited to, internal audit, compliance, risk management and financial controls to whom the relevant subsidiaries’ functions must report;
                    (i) Maintain an effective relationship, through the subsidiary Board or direct contact, with the regulators of all subsidiaries and overseas branches; and
                    (j) ensure that:
                    i. The group has appropriate policies and controls to identify and address potential intragroup conflicts of interest, such as those arising from intragroup transactions;
                    ii. The group is governed and operating under clear group strategies, business policies and specific set of group policies on risk management, internal audit, compliance and financial controls;
                    iii. There are no barriers to exchanging information between the subsidiaries and the parent bank and that there are robust systems in place to facilitate the exchange of information to enable the parent bank to effectively supervise the group and manage its risks; and
                    iv. Adequate authority is available to each subsidiary pursuant to local legislations.
                    Added: April 2023

                  • Subsidiaries’ Boards

                    • HC-5.1.2

                      Boards and senior management of subsidiaries of Bahraini conventional bank licensees must remain responsible for developing effective governance and risk management framework for their entities and must clearly understand the reporting obligations they have to the parent bank.

                      Added: April 2023

                    • HC-5.1.3

                      The strategy, business plan, policies, risk governance framework, corporate values and corporate governance framework of each subsidiary must align with group strategy and policies, and the subsidiary Board must make necessary adjustments where a group policy conflicts with an applicable legal or regulatory provision or prudential rule or would be detrimental to the sound and prudent management of the subsidiary.

                      Added: April 2023

                    • HC-5.1.4

                      Material risk-bearing subsidiaries and overseas branches must be captured by the bank-wide risk management system and must be part of the overall risk governance framework.

                      Added: April 2023

                  • Complex or Opaque Structures

                    • HC-5.1.5

                      The Board and senior management of the parent bank must be cognisant of the challenges arising from operating under complex or opaque structures, including special purpose vehicles, and must act to avoid or mitigate these by:

                      (a) Avoiding setting up complicated structures that lack economic substance or business purpose;
                      (b) Continually maintaining and reviewing appropriate policies, procedures and processes governing the approval and maintenance of those structures or activities, including fully vetting the purpose, the associated risks and the bank’s ability to manage those risks prior to setting up new structures and initiating associated activities;
                      (c) Having a centralised process for approving the creation of new legal entities and subsidiaries based on established criteria, including the ability to monitor and fulfil each entity’s regulatory, tax, financial reporting, governance and other requirements and for the dissolution of dormant subsidiaries;
                      (d) Establishing adequate policies, procedures and processes to identify and manage all material risks arising from these structures, including lack of management transparency, operational risks introduced by interconnected and complex funding structures, intragroup exposures, trapped collateral and counterparty risk, etc. The bank must only approve structures if the material risks can be properly identified, quantified, monitored and mitigated; and
                      (e) Ensuring that the activities, controls and structures are subject to periodic reviews by compliance, internal audit and risk management functions as well as external audit to ensure effectiveness and consistency with Board-approved strategy and policies.
                      Added: April 2023

              • HC-6 HC-6 Remuneration of Approved Persons and Material Risk-Takers

                • HC-6.1 HC-6.1 Remuneration of Approved Persons and Material Risk-Takers

                  • HC-6.1.1

                    All approved persons and material risk-takers must be remunerated fairly and responsibly. More specifically, the remuneration must be sufficient to attract, retain and motivate persons.

                    Added: April 2023

                  • HC-6.1.2

                    The performance evaluation and remuneration of senior management and staff of the conventional bank licensees must be based, among other factors, on their adherence to all relevant laws, regulations and CBB rulebook requirements, including but not limited to AML/CFT requirements in the FC module.

                    Added: April 2023

                  • HC-6.1.3

                    For approved persons and material risk-takers whose total annual remuneration (including all benefits) is in excess of BD100,000:

                    (a) An appropriate ratio between the fixed and variable components of total remuneration must be set to ensure that fixed and variable components of total remuneration are appropriately balanced and paid on the basis of individual, business-unit and bank-wide measures that adequately measure performance; and
                    (b) The variable proportion of remuneration must increase significantly along with the level of seniority and/or responsibility. More specifically:
                    i. at least 40% of the variable remuneration must be payable under deferral arrangements over a period of at least 3 years; and
                    ii. for the CEO, his deputies and the other 5 most highly paid business line employees, at least 60% of the variable remuneration must be payable under deferral arrangements over a period of at least 3 years.
                    Added: April 2023

                  • HC-6.1.4

                    As a minimum, 50% of total variable remuneration (including both the deferred and undeferred portions) must be awarded in shares or share-linked instruments or where appropriate, other non-cash instruments. The remaining portion of the deferred remuneration can be paid as cash remuneration vested over a minimum 3-year period.

                    Added: April 2023

                  • HC-6.1.5

                    Remuneration, based on both quantitative measures and human judgement, must be adjusted for all types and magnitudes of risks, including intangible and other risks managed by the approved person and material risk-taker, and remuneration outcomes must be symmetric with risk outcomes.

                    Added: April 2023

                  • HC-6.1.6

                    The mix of cash, equity and other forms of remuneration must be consistent with risk alignment. The mix will vary depending on the employee’s position and role and the licensee must document the rationale for its mix.

                    Added: April 2023

                  • HC-6.1.7

                    Employees’ incentive payments must be linked to the contribution of the individual and business to such performance.

                    Added: April 2023

                  • HC-6.1.8

                    Remuneration systems must link the size of the bonus pool to the overall performance of the licensee.

                    Added: April 2023

                  • HC-6.1.9

                    Awards in shares or share-linked instruments must be subject to a minimum share retention policy of 6 months from the time the shares are awarded, unless the licensee’s policy requires a longer period.

                    Added: April 2023

                  • HC-6.1.10

                    The only instance where deferred remuneration can be paid out before the end of the vesting period is in the case of the death of the employee where the beneficiaries would receive any unpaid deferred remuneration.

                    Added: April 2023

                  • HC-6.1.11

                    Licensees must not provide any form of guaranteed variable remuneration as part of the overall remuneration package. Exceptional minimum variable remuneration must only occur in the context of hiring new staff and limited to the first year.

                    Added: April 2023

                  • HC-6.1.12

                    For Bahraini conventional bank licensees, where fixed or variable remuneration include common shares, licensees must limit the shares awarded to an annual aggregate limit of 10% of the total issued shares outstanding of the licensee, at all times.

                    Added: April 2023

                  • HC-6.1.13

                    For Bahraini conventional bank licensees, all share incentive plans must be approved by the shareholders.

                    Added: April 2023

                  • HC-6.1.14

                    Approved persons and other staff of risk management, financial controls, internal audit, operations, internal Shari’a audit, Shari’a coordination and implementation, AML/ CFT, compliance, human resources, information technology and legal functions must be remunerated based principally on the achievement of the objectives and targets of their functions. As such the mix of fixed and variable remuneration for these functions’ personnel must be skewed toward fixed remuneration.

                    Added: April 2023

                  • HC-6.1.15

                    The size of the variable remuneration pool and its allocation within the licensee must not compromise the financial soundness of the licensee and must take into account the full range of current and potential risks, including:

                    (a) The cost and quantity of capital required to support the risks taken;
                    (b) The cost and quantity of the liquidity risk assumed in the conduct of business; and
                    (c) Consistency with the timing and likelihood of potential future revenues incorporated into current earnings.
                    Added: April 2023

                  • HC-6.1.16

                    Existing contractual payments related to a termination of employment must be re-examined and kept in place only if there is a clear basis for concluding that they are aligned with long-term value creation and prudent risk-taking. Prospectively, any such payments must be related to performance achieved over time and designed in a way that does not reward failure.

                    Added: April 2023

                  • HC-6.1.17

                    Licensees must have an appropriate compliance mechanism to ensure that their employees commit themselves not to use personal hedging strategies or remuneration- and liability-related insurance to undermine the risk alignment effects embedded in their remuneration arrangements.

                    Added: April 2023

                  • HC-6.1.18

                    Bonuses must either be reduced or be deferred in the event of poor licensee, divisional or business unit performance. Subdued or negative financial performance of the licensee must lead to contraction of the licensee’s total variable remuneration, taking into account both current remuneration and reductions in payouts of amounts previously earned, including through malus and clawback arrangements. Recognition of staff who have achieved their targets or better, may take place by way of deferred compensation, which may be paid once the licensee’s performance improves.

                    Added: April 2023

                  • HC-6.1.19

                    If the licensee and/or relevant line of business is incurring losses in any year during the vesting period, any unvested portions must be subject to malus. Accrual and deferral of variable remuneration does not oblige the licensee to pay the variable remuneration, particularly when the anticipated outcome has not materialised.

                    Added: April 2023

                  • HC-6.1.20

                    Approved persons, including those appointed as members of the Board of special purpose vehicles or other operating companies, are not permitted to take any benefits (commission, fees, shares, consideration in kind, or other remuneration or incentives in respect of the performance of the project or investment) from any projects or investments which are managed by the conventional bank licensee or promoted to its customers or potential customers except for Board related remuneration linked to their fiduciary duties to the investors of the project/investment.

                    Added: April 2023

                  • HC-6.1.21

                    Remuneration of non-executive directors must not include performance-related elements such as grants of shares, share options or other deferred stock-related incentive schemes, bonuses, or pension benefits.

                    Added: April 2023

                  • HC-6.1.22

                    If a senior manager is also a director, his remuneration as a senior manager must take into account compensation received in his capacity as a director.

                    Added: April 2023

              • HC-7 HC-7 Senior Management

                • HC-7.1 HC-7.1 Senior Management

                  • HC-7.1.1

                    The Board must establish an adequate organisational structure that promotes accountability and transparency and facilitates effective decision-making and good governance throughout the licensee. This includes clarity on the role, authority and responsibility of the various positions within senior management, including that of the CEO.

                    Added: April 2023

                  • HC-7.1.2

                    Senior management must:

                    (a) Be selected through an appropriate promotion or recruitment process which considers the qualifications and competencies required for the position in question;
                    (b) Have the necessary experience, competencies, personal qualities and integrity to manage the businesses and employees under their supervision;
                    (c) Be subject to regular training to maintain and enhance their competencies and stay up to date on developments relevant to their areas of responsibility;
                    (d) Assess the training needs of staff across all levels throughout the organisation taking into account the existing skills and competencies and laws and regulations and ensure that such training is provided by competent and skilled personnel (whether internal or external);
                    (e) Act within the scope of their responsibilities which must be clearly defined;
                    (f) Independently assess and question the policies, processes and procedures of the licensee, with the intent to identify and initiate management action on issues requiring improvement;
                    (g) Not interfere in the independent duties of the risk management, compliance and internal audit functions;
                    (h) Carry out and manage the licensee’s activities in compliance with all laws and regulations, and in a manner consistent with the business strategy, risk appetite, business plans and remuneration and other policies approved by the Board;
                    (i) Have a robust governance framework for all management committees;
                    (j) Not primarily control the remuneration system in the licensee;
                    (k) Actively communicate and consult with the control functions on management’s major plans and activities so that the control functions can effectively discharge their responsibilities; and
                    (l) Provide the Board and its committees with timely, complete, accurate and understandable information and documents so that they are equipped for upholding their responsibilities, and keep them adequately informed and updated on a timely basis about material issues including:
                    i. Changes in the implementation of business strategy, risk strategy and risk appetite;
                    ii. The licensee’s performance and financial condition;
                    iii. Breaches of risk limits or regulations;
                    iv. Internal control failures, frauds and cyber-security incidents;
                    v. Legal or regulatory concerns;
                    vi. Customer complaints; and
                    vii. Issues raised as a result of the licensee’s whistleblowing policy.
                    Added: April 2023

                  • HC-7.1.3

                    Conventional bank licensee’s CEO and chief financial officer must state in writing to the audit committee and the Board that the conventional bank licensee’s interim and annual financial statements present a true and fair view, in all material respects, of the conventional bank licensee’s financial condition and results of operations in accordance with applicable accounting standards.

                    Added: April 2023

              • HC-8 HC-8 Risk Management Function

                • HC-8.1 HC-8.1 Risk Management Function

                  • HC-8.1.1

                    Conventional bank licensees must have an effective and independent risk management function commensurate with the bank’s size, complexity and risk profile, under the direction of a chief risk officer (CRO) or equivalent, with sufficient stature, independence and skilled resources.

                    Added: April 2023

                  • HC-8.1.2

                    Branches of foreign bank licensees have the choice of having an in-house risk management function in Bahrain, or subject to the CBB’s approval to outsource such role to their regional or head office.

                    Added: April 2023

                  • HC-8.1.3

                    The risk management function must:

                    (a) Be sufficiently independent of the business units, thus ensuring that it is not involved in revenue generation;
                    (b) Be responsible for overseeing risk-taking activities across the licensee and must have authority within the organisation to do so;
                    (c) Have procedures in place to identify and assess the possible increased reputational risk to the licensee if it offers products or carries out activities outside Bahrain;
                    (d) Have access to all business lines that have the potential to generate risk to the licensee as well as to relevant risk-bearing subsidiaries, associated companies and overseas branches;
                    (e) Challenge business units effectively regarding all aspects of risk arising from the licensee’s activities; and
                    (f) Have a sufficient number of employees who possess the requisite experience and qualifications, including market and product knowledge as well as command of risk disciplines, and are subject to regular training.
                    Added: April 2023

                  • HC-8.1.4

                    Key activities of the risk management function must include:

                    (a) Implementing an enterprise-wide risk governance framework that includes appropriate policies, procedures and limits;
                    (b) Identifying material individual, aggregate and emerging risks, including risks arising from potential mergers and acquisitions and hard to quantify risks, such as reputational risk;
                    (c) Regularly and on an ad-hoc basis, evaluating the risks faced by the licensee and its overall risk profile. The risk assessment process must include ongoing analysis of existing risks as well as the identification of new or emerging risks. The results of such assessments must be reported to both the Risk Committee and senior management;
                    (d) Ongoing monitoring of the risk-taking activities and risk exposures in line with the Board-approved risk policies and appetite;
                    (e) Establishing an early warning or trigger system for breaches of the licensee’s risk appetite or limits;
                    (f) Using risk measurement and modelling techniques in addition to qualitative risk analysis and monitoring;
                    (g) Evaluating possible ways to mitigate risk exposures;
                    (h) Reporting regularly to the risk committee and senior management on risks, including but not limited to, material exemptions and risk-mitigating actions;
                    (i) Regularly comparing actual performance against risk estimates (i.e. Backtesting) to assist in judging the accuracy and effectiveness of the risk management process and making necessary adjustments; and
                    (j) Challenging decisions that give rise to material risk.
                    Added: April 2023

                  • HC-8.1.5

                    Licensees must have adequate risk management and approval processes for new or expanded products or services, lines of business and markets, outsourcing arrangements as well as for large and complex transactions. If such processes are not in place, a new product, service, business line or third-party relationship or major transaction must be delayed. There must also be a process to assess risk and performance relative to initial projections and to adapt the risk management treatment accordingly as the business matures. The risk management function must provide input on risks as part of such processes and on the outsourcer’s ability to manage risks and comply with legal and regulatory obligations. Such processes must entail the following:

                    (a) A full assessment of risks under a variety of scenarios as well as an assessment of potential shortcomings in the ability of the licensee’s risk management and internal controls to effectively manage associated risks; and
                    (b) An assessment of the extent to which the licensee’s risk management, legal and regulatory compliance, information technology, internal control and business functions have adequate tools and the expertise necessary to measure and manage related risks.
                    Added: April 2023

                  • HC-8.1.6

                    Licensees must appoint a chief risk officer (CRO) or equivalent with an overall responsibility for the licensee’s risk management function.

                    Added: April 2023

                  • HC-8.1.7

                    The CRO must:

                    (a) Be actively engaged, together with management, in monitoring performance relative to risk-taking and risk limit adherence;
                    (b) Manage and participate in key decision-making processes (e.g. Strategic planning, capital and liquidity planning, new products and services, compensation design and operation);
                    (c) Be independent and have duties distinct from other executive function. This means that he must not have managerial or financial responsibility or approval authority related to any business lines or revenue-generating functions, and there must be no “dual hatting”, i.e. other approved persons within senior management must not serve as the CRO.
                    (d) Have access to any information necessary to perform his duties;
                    (e) Report directly to the risk committee without impediment, and administratively to the CEO;
                    (f) Have the ability to interpret and articulate risk in a clear and understandable manner and to effectively engage the risk committee and senior management in a constructive dialogue on key risk issues;
                    (g) Meet regularly with the non-executive directors, the board or its risk committee without executive directors and the CEO being present;
                    (h) Keep the risk committee and senior management apprised of the assumptions used in and potential shortcomings of the licensee’s risk models and analyses;
                    (i) Consistently remind all staff, through a regular process, under the sponsorship of the CEO, of the risk management requirements to ensure a common understanding of these requirements across the licensee; and
                    (j) Ensure that:
                    i. Risk reporting to the risk committee is carefully designed to convey bank-wide, individual portfolio and other risks in a concise and meaningful manner. Reporting must accurately communicate risk exposures and results of stress tests or scenario analyses and must provoke a robust discussion of, for example, the bank’s current and prospective exposures (particularly under stressed scenarios), risk/return relationships and risk appetite and limits. Reporting must also include information about the external environment to identify market conditions and trends that may have an impact on the bank’s current or future risk profile;
                    ii. Material risk-related ad-hoc information that requires immediate decisions or reactions is promptly presented to senior management and, as appropriate, the risk committee, the responsible officers and, where applicable, the heads of control functions so that suitable measures and activities can be initiated at an early stage; and
                    iii. The licensee has accurate internal and external data to be able to identify, assess and mitigate risks.
                    Added: April 2023

              • HC-9 HC-9 Compliance

                • HC-9.1 HC-9.1 Compliance

                  • HC-9.1.1

                    The Board must:

                    (a) Oversee the management of the licensee’s compliance risk;
                    (b) Establish an independent compliance function and approve an appropriate compliance framework for the licensee based on its size and complexity of its operations;
                    (c) Set priorities for the management of its compliance risk in a way that is consistent with its risk management strategy and structures;
                    (d) Not outsource the compliance function; and
                    (e) Approve the licensee’s compliance policy for identifying, assessing, monitoring, reporting and advising on compliance risk.
                    Added: April 2023

                  • HC-9.1.2

                    The compliance function and the internal audit function must be separate.

                    Added: April 2023

                  • HC-9.1.3

                    The Board, Audit Committee or the designated Board committee and senior management must:

                    (a) Ensure that, based on an agreed remedial action plan, all compliance findings are resolved within a reasonable period of time to be set based on level and magnitude of risk;
                    (b) Not restrict the compliance function from reporting any irregularities or breaches that are identified as a result of its work or investigations, and must ensure that such reporting can be done without fear of retaliation or disfavour from management, board members or other staff members;
                    (c) Ensure that the head of compliance and his staff are not placed in a position where there is a possible conflict of interest between their compliance responsibilities and any other responsibilities they may have;
                    (d) Not consider the compliance function as a cost center; instead it should be viewed as an activity that helps the licensee avoid enforcement action for non-compliance, enhances the licensee’s reputation and promotes the right environment for better financial performance; and
                    (e) Ensure the compliance function’s right to:
                    i. Have unrestricted access to any records or files necessary to carry out its responsibilities, and the corresponding duty of licensee staff to co-operate in supplying this information;
                    ii. Conduct investigations of possible breaches of the applicable laws, regulations and the compliance policy; and
                    iii. Appoint, subject to audit committee’s approval, outside experts to perform a specific task, if appropriate.
                    Added: April 2023

                  • HC-9.1.4

                    Licensees must appoint a head of compliance with overall responsibility for the licensee’s compliance function.

                    Added: April 2023

                  • HC-9.1.5

                    In banking groups:

                    (a) The audit committee and senior management, with assistance of the group head of compliance, must ensure that adequate resources, commensurate with the scale and complexity of operations, are assigned for compliance activities at the head office, subsidiaries and overseas branches; and
                    (b) The group head of compliance must ensure that:
                    i. Adequate reports and information are received from subsidiaries and overseas branches on compliance related issues and must report the same to the audit committee; and
                    ii. It conducts annual compliance testing on subsidiaries and overseas branches whose total revenue represents 20% or more of the group’s total revenue and every two years for other overseas operations.
                    Added: April 2023

                  • HC-9.1.6

                    Subject to the CBB’s approval, the role of head of compliance may be combined with the head of risk if the size and nature of the conventional bank licensee justify the same.

                    Added: April 2023

                  • HC-9.1.7

                    The head of compliance must:

                    (a) Report to the Audit Committee or the designated Board committee and administratively to the CEO. In the case of branches of foreign bank licensees, the reporting must be to the Group or Regional Head of Compliance and administratively to the CEO/GM of the branch;
                    (b) Establish the operating compliance procedures and processes for identifying, assessing, monitoring, reporting and advising on compliance risk;
                    (c) Establish written guidance to the licensee’s staff on the appropriate implementation of laws and regulations;
                    (d) Conduct, under the sponsorship of the CEO, awareness sessions for the licensee’s staff on compliance policy requirements and issues; and
                    (e) Report to the Audit Committee:
                    i. On a quarterly basis, the licensee’s management of its compliance risk, in such a manner as to assist committee members to make an informed judgment on whether the licensee is managing its compliance risk effectively; and
                    ii. Immediately any material compliance failures as they arise (e.g. failures that may attract a significant risk of legal or regulatory sanctions, material financial loss, or loss of reputation).
                    Added: April 2023

                  • HC-9.1.8

                    The compliance function must:

                    (a) Have a formal status with sufficient authority within the licensee;
                    (b) Carry out its responsibilities under a risk-based compliance programme that sets out its planned activities, such as the implementation and review of specific policies and procedures, compliance risk assessment and compliance testing;
                    (c) Assess in cooperation with the relevant functions, in case of new regulations, the appropriateness of the licensee’s relevant policies as well as the compliance policy and related procedures and processes. It must promptly follow up regarding any identified deficiencies, and, where necessary, formulate proposals for amendments in cooperation with the relevant functions;
                    (d) On a proactive basis, identify, measure, document and assess the compliance risks associated with the licensee’s business activities including the development of new products and business practices, proposed establishment of new types of business or customer relationships, or material changes in the nature of such relationships. If the licensee has a new products and services committee, the compliance function staff must be represented on the committee;
                    (e) Monitor and test compliance by performing sufficient and representative compliance testing. The results of such testing must be reported to the Audit Committee;
                    (f) Advise the audit committee and senior management on all relevant laws, regulations and standards in all jurisdictions in which the licensee conducts its business and inform them on developments on the subject;
                    (g) Provide to the CBB a compliance assessment report on every application/request for approval to the CBB confirming that all related legal and regulatory requirements pertaining to the request have been thoroughly checked, including the impact of such request on the licensee’s financial position and compliance status, and a reference must be made to any previously approved arrangements by the CBB. In cases where the requests have a potential financial impact on the licensee, a report from the financial control function in consultation with external auditors must also be submitted as part of the compliance assessment report, whereas in case of any legal implication of such a request a legal opinion on the matter must be submitted;
                    (h) Act as a contact point within the licensee for compliance queries from staff members; and
                    (i) Have sufficient and appropriate resources to carry out its functions effectively, commensurate with the size and complexity of the licensee.
                    Added: April 2023

                  • HC-9.1.9

                    The compliance function staff must:

                    (a) Have the necessary qualifications, experience and professional and personal qualities to enable them to carry out their specific duties;
                    (b) Have a sound understanding of applicable laws, regulations and standards and their practical impact on the licensee’s business activities and operations; and
                    (c) Be subject to regular and systematic training to remain up-to-date with developments in laws, regulations and standards.
                    Added: April 2023

                  • HC-9.1.10

                    The CBB may at its own discretion communicate directly with the Head of Compliance to discuss issues of material concerns related to compliance risk.

                    Added: April 2023

              • HC-10 HC-10 Internal Audit

                • HC-10.1 HC-10.1 Internal Audit

                  • HC-10.1.1

                    Conventional bank licensees must establish an effective and independent internal audit function (IAF).

                    Added: April 2023

                  • HC-10.1.2

                    The Audit Committee remains ultimately responsible for the IAF regardless of whether internal audit activities are outsourced.

                    Added: April 2023

                  • HC-10.1.3

                    The Board, Audit Committee and senior management must:

                    (a) Promote a strong and robust internal control environment within the licensee;
                    (b) Provide the IAF staff full and unconditional access to all files, records, data, documents, systems, properties, subsidiaries and overseas branches of the licensee;
                    (c) Require that all internal audit findings and recommendations are resolved within a reasonable period of time to be set based on level and magnitude of risk;
                    (d) Allocate sufficient annual budget to support the IAF’s activities and plans; and
                    (e) Inform the IAF of new developments, initiatives, projects, products and operational changes.
                    Added: April 2023

                  • HC-10.1.4

                    All Bahraini conventional bank licensees must have an internal audit charter which must be drawn up and reviewed annually by the head of internal audit and approved by the Board or Audit Committee. It must be available to all internal stakeholders, and to external stakeholders in case of a listed bank.

                    Added: April 2023

                  • HC-10.1.5

                    The internal audit charter must establish, at a minimum:

                    (a) The IAF’s standing within the licensee, its authority, responsibilities and relations with other control functions in a manner that promotes the effectiveness of the function;
                    (b) The purpose and scope of the IAF;
                    (c) The obligation of the internal auditors to communicate the results of their engagements and a description of how and to whom this must be done (reporting line);
                    (d) The criteria for when and how the IAF may outsource some of its engagements to external experts;
                    (e) The terms and conditions according to which the IAF can be called upon to provide consulting or advisory services or to carry out other special tasks without creating a conflict with its core function;
                    (f) The responsibility and accountability of the head of internal audit;
                    (g) The requirement to comply with the international standard on internal audit issued by The Institute of Internal Auditor; and
                    (h) Procedures for the coordination of the IAF with the external auditor.
                    Added: April 2023

                  • HC-10.1.6

                    The IAF must:

                    (a) Be independent of all functions;
                    (b) Have sufficient standing and authority within the licensee;
                    (c) Have sufficient skilled resources to be able to judge outcomes and make an impact at the highest level of the organization;
                    (d) Be able to perform its assignments on its own initiative in all areas and functions of the licensee based on the audit plan established by the head of the IAF and approved by the audit committee;
                    (e) Be free to report its findings and assessments internally;
                    (f) Independently review and evaluate the effectiveness and efficiency of all functions, internal controls, risk management, internal risk and finance models, governance framework, policies, procedures, systems and processes, including the licensee’s outsourced activities and its subsidiaries (including SPVs) and local and overseas branches, and must ensure adequate coverage of matters of regulatory interest within the audit plan;
                    (g) Develop an independent and informed view of the risks faced by the licensee based on its access to all licensee records and data, its enquiries and its professional competence;
                    (h) Discuss its views, findings and conclusions directly with the audit committee and, if necessary, with the board of directors at their routine quarterly meetings; and
                    (i) Not be involved in designing, selecting, implementing or operating specific internal control measures. However, the independence of the IAF must not prevent senior management from requesting input from the IAF on matters related to risk and internal controls. Nevertheless, the development and implementation of internal controls must remain the responsibility of management.
                    Added: April 2023

                  • HC-10.1.7

                    Licensees must appoint a head of internal audit who shall:

                    (a) Report directly to the Audit Committee and administratively to the CEO;
                    (b) Demonstrate appropriate leadership and have the necessary personal characteristics and professional skills to fulfil his responsibility for maintaining the function’s independence and objectivity;
                    (c) Inform senior management of all significant findings so that timely corrective actions can be taken, and subsequently, he must follow up with senior management on the outcome of those corrective measures;
                    (d) Report quarterly to the Audit Committee the status of pending findings;
                    (e) Arrange appropriate ongoing training for the internal audit staff to meet the growing technical complexity of the conventional bank licensee’s activities and the increasing diversity of tasks that need to be undertaken as a result of the introduction of new products and processes and other developments in the financial sector;
                    (f) Establish an annual internal audit plan approved by the audit committee. The plan must be based on a robust risk assessment, including direct or indirect input from the board, audit committee and senior management;
                    (g) Develop and maintain appropriate tools to assess the quality of the IAF; and
                    (h) Define, in a banking group structure, the group’s internal audit strategy, determine the organisation of the internal audit function both at the parent’s and the subsidiary’s level (in consultation with these entities’ respective audit committees and in accordance with local laws) and formulate the internal audit principles, the audit methodology and quality assurance measures. He must also determine the audit scope for every internal audit exercise, by the parent’s internal audit function, for every subsidiary on an annual basis in compliance with local regulations and incorporate local knowledge and experience.
                    Added: April 2023

                  • HC-10.1.8

                    The head of IAF should, whenever practicable and without jeopardising competence and expertise, periodically rotate internal audit staff within the internal audit function.

                    Added: April 2023

                  • HC-10.1.9

                    The CBB may at its own discretion communicate directly with the head of the IAF to discuss issues of material concerns related to risks, compliance and internal controls.

                    Added: April 2023

                  • HC-10.1.10

                    Internal audit reports must be provided to the audit committee without management filtering.

                    Added: April 2023

                  • HC-10.1.11

                    All internal audit staff must:

                    (a) Apply the care and skills expected of a reasonably prudent and competent professional. Due professional care does not imply infallibility. Internal auditors having limited competence and experience in a particular area must be appropriately supervised by more experienced staff;
                    (b) Avoid conflicts of interest. Internal auditors appointed from within the licensee must not engage in auditing activities for which they have had previous responsibility before a one year “cooling off” period has elapsed;
                    (c) Act with integrity (being straightforward, honest and truthful);
                    (d) Be diligent in the protection of information acquired in the course of their duties and must not use it for personal gain or malicious action;
                    (e) Adhere to the code of ethics of the licensee, the institute of internal auditors and any other relevant professional or standard setting body;
                    (f) Collectively be competent to examine all areas in which the licensee operates; and
                    (g) Adhere to international professional standards established by the institute of internal auditors.
                    Added: April 2023

          • Part Two: Branches of Foreign Banks

            • HC-C Scope of Application (Branches of Foreign Banks)

              • HC-C.1 Scope of Application

                • HC-C.1.1

                  This chapter applies to branches of foreign bank licensees who should satisfy the CBB that equivalent or similar arrangements are in place at either the branch or the parent entity level, and that such arrangements provide for effective high-level controls over activities conducted by the branch, commensurate with the size, complexity, nature and the risk profile of the branch. If the branch is unable to satisfy the CBB that the governance arrangements are equivalent, the CBB will assess the potential impact of risks and require that the licensee satisfies that compensating alternative arrangements are in place to address any risks relevant to the Bahrain operations.

                  Added: January 2024

            • HC-11 Responsibilities, Corporate Culture and Values

              • HC-11.1 Overall Responsibilities, Corporate Culture and Values

                • HC-11.1.1

                  The licensee must have in place:

                  (a) A sound and proper corporate and risk culture and values;
                  (b) Strategy, business plan and budget;
                  (c) An appropriate framework of governance and risk management, inclusive of risk appetite, policies, procedures, systems and internal controls which must be reviewed in case a major new business activity is considered, or in case of material changes to the licensee’s size, complexity, business strategy, markets or regulatory requirements, or the occurrence of a major failure of controls;
                  (d) Adequate processes to ensure full compliance with the requirements of the CBB Law, other relevant laws and the pertinent rulebooks;
                  (e) A robust finance function responsible for accounting and financial data;
                  (f) Properly positioned risk management, compliance and internal audit functions which are adequately staffed and resourced and carry out their responsibilities independently, objectively and effectively;
                  (g) An effective and transparent relationship with the CBB;

                  (h) An appropriate code of conduct/ethics that must:

                  i. outline the acceptable practices that all senior management and other staff must follow in performing their duties, and the unacceptable practices/conduct that must be avoided;
                  ii. include the corporate values that create expectations that the business must be conducted in a legal, professional and ethical manner, and oversee the adherence to such values by senior management and other employees;
                  iii. promote risk awareness within a strong risk culture, that does not support risk-taking beyond the risk appetite and risk limits of the licensee, and that all employees are responsible for ensuring that the licensee operates within the established risk appetite and risk limits;
                  iv. ensure that the code, corporate values and professional standards it sets, together with supporting policies, are adequately communicated throughout the licensee; and
                  v. ensure that all senior management and other staff are aware that appropriate disciplinary or other actions will follow unacceptable behaviour, practices and transgressions.

                  (i) An approved and well communicated whistleblowing policy and adequate procedures and processes, consistent with applicable laws. Such policy must encourage employees to communicate, confidentially and without the risk of reprisal, legitimate concerns about illegal, unethical or questionable practices, and must include the escalation process of material concerns to the CBB. The CEO of the Branch must:

                  i. have oversight of the whistleblowing policy mechanism and ensure that senior management addresses legitimate issues that are raised;
                  ii. take responsibility for ensuring that staff who raise concerns are protected from detrimental treatment or reprisals, and that their rights are not undermined;
                  iii. approve and oversee how and by whom legitimate material concerns shall be investigated and addressed such as by an objective and independent internal or external body, senior management; and
                  iv. ensure that, after verifying the validity of the allegations, the person responsible for any misconduct is held accountable and is subjected to an appropriate disciplinary measure.

                  (j) A conflict of interest policy on identifying and managing potential conflicts of interest related to all approved persons. The policy must include:

                  i. An approved person’s duty to:

                  1. Avoid, to the extent possible, activities that could create conflicts of interest or the appearance of conflicts of interest. An approved person shall be considered to have a “personal interest” in a transaction with a company if they themselves, or a member of their family (i.e. spouse, father, mother, sons, daughters, brothers or sisters), or another company of which they are a director or controller, are a party to the transaction or have a material financial interest in the transaction or are expected to derive material personal benefit from the transaction (transactions and interests which are de minimis in value should not be included);
                  2. Promptly disclose any matter that may result, or has already resulted, in a conflict of interest;
                  3. Abstain from getting involved in or voting on any matter where they may have a conflict of interest or where their objectivity or ability to properly fulfil duties to the licensee may be otherwise compromised. Any decision to enter into a transaction in which an approved person appears to have a material conflict of interest must be formally approved by the Regional Office or Head Office;
                  4. Act with honesty, integrity and care for the best interest of the licensee and its stakeholders;
                  5. Not use properties of the licensee for their personal needs;
                  6. Not misuse or misappropriate the licensee’s assets or resources;
                  7. Not disclose confidential information of the licensee or use it for their personal profit or interest;
                  8. Make every practicable effort to arrange their personal and business affairs to avoid a conflict of interest with the licensee;
                  9. Not take business opportunities of the licensee for themselves; and
                  10. Not compete in business with the licensee or serve the licensee’s interest in any transaction with a company in which they have a personal interest.
                  ii. Examples of where conflict of interest may arise when serving as an approved person;
                  iii. A rigorous review and approval process for approved persons to follow before they engage in certain activities so as to ensure that such activity will not create a conflict of interest;
                  iv. Adequate requirements that transactions with related parties must be made on an arm’s length basis;
                  v. Sufficient restrictions on and/or a robust and transparent process for the employment of relatives of approved persons;
                  vi. Requirements for properly managing and disclosing conflict of interest that cannot be prevented;
                  vii. Requirements for all approved persons to annually declare in writing all their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager or other form of significant participation) to the Regional Office or Head Office;
                  viii. The way in which the Licensee will deal with any non-compliance with the policy; and
                  ix. The CEO/General Manager of the licensee must disclose to the Regional Office or Head Office on an annual basis those individuals who are occupying controlled functions and who are relatives of any approved persons within the licensee.
                  Added: January 2024

              • HC-11.2 Senior Management

                • HC-11.2.1

                  The licensee must have an adequate organisational structure that promotes accountability and transparency and facilitates effective decision-making and good governance. This includes clarity on the role, authority and responsibility of the various positions within senior management, including that of the CEO.

                  Added: January 2024

                • HC-11.2.2

                  Senior management must:

                  (a) be selected through an appropriate promotion or recruitment process which considers the qualifications and competencies required for the position in question;
                  (b) have the necessary experience, competencies, personal qualities and integrity to manage the business and the employees under their supervision;
                  (c) be subject to regular training to maintain and enhance their competencies and stay up to date on developments relevant to their areas of responsibility;
                  (d) assess the training needs of staff across all levels throughout the organisation taking into account the existing skills, competencies, laws and regulations and ensure that such training is provided by competent and skilled personnel (whether internal or external);
                  (e) act within the scope of their responsibilities which must be clearly defined;
                  (f) independently assess and question the policies, processes and procedures of the licensee, with the intent to identify and initiate management action on issues requiring improvement;
                  (g) not interfere in the independent duties of the risk management, compliance and internal audit functions;
                  (h) carry out and manage the licensee’s activities in compliance with all laws and regulations, and in a manner consistent with the business strategy, risk appetite, business plan and policies approved by the Regional Office/Head Office;
                  (i) have a robust governance framework for all management committees;
                  (j) not primarily control the remuneration system within the licensee;
                  (k) actively communicate and consult with the control functions on management’s major plans and activities so that the control functions can effectively discharge their responsibilities; and

                  (l) provide the Regional Office/Head Office with timely, complete, accurate and understandable information and documents so that they are equipped for upholding their responsibilities, and keep them adequately informed and updated on a timely basis about material issues including:

                  i. Changes in the implementation of business strategy, risk strategy and risk appetite;
                  ii. The licensee’s performance and financial condition;
                  iii. Breaches of risk limits or regulations;
                  iv. Internal control failures, frauds and cyber-security incidents;
                  v. Legal or regulatory concerns;
                  vi. Customer complaints; and
                  vii. Issues raised as a result of the licensee’s whistleblowing policy.
                  Added: January 2024

                • HC-11.2.3

                  The licensee’s CEO and Chief Financial Officer must state in writing to the Regional Office/Head Office that the licensee’s interim (if any) and annual financial statements present a true and fair view, in all material respects, of the licensee’s financial condition and results of operations in accordance with applicable accounting standards.

                  Added: January 2024

              • HC-11.3 Other Governance Requirements

                • HC-11.3.1

                  Branches of foreign bank licensees are required to comply with chapters HC-6, HC-8, HC-9 and HC-10 of part 1 of this Module.

                  Added: January 2024

        • AU AU Auditors and Accounting Standards

          • AU-A AU-A Introduction

            • AU-A.1 AU-A.1 Purpose

              • AU-A.1.1

                This Module presents requirements that have to be met by conventional bank licensees with respect to the appointment of external auditors. This Module also sets out certain obligations that external auditors have to comply with, as a condition of their appointment by conventional bank licensees.

                October 07

              • AU-A.1.2

                This Module is issued under the powers given to the Central Bank of Bahrain ('CBB') under Decree No. (64) of 2006 with respect to promulgating the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). It supplements Article 61 of the CBB Law, which requires licensees to appoint an external auditor acceptable to the CBB.

                October 07

              • Legal Basis

                • AU-A.1.3

                  This Module contains the CBB's Directive (as amended from time to time) relating to auditors and accounting standards used by conventional bank licensees, and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to all conventional bank licensees.

                  Amended: January 2011
                  October 2007

                • AU-A.1.4

                  For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                  October 07

            • AU-A.2 AU-A.2 Module History

              • AU-A.2.1

                This Module was first issued as Module AU (Audit Firms) in July 2004, as part of the first release of Volume 1 (conventional banks) of the CBB Rulebook. It was subsequently reissued in full in July 2006 (and renamed 'Auditors and Accounting Standards').

                October 07

              • AU-A.2.2

                The reissued Module was one of several Modules modified to reflect the introduction of the CBB's new integrated license framework. Although the new framework did not change the substance of the requirements contained in this Module, the Module was re-issued in order to simplify its drafting and layout and align it with equivalent Modules in other Volumes of the CBB Rulebook.

                October 07

              • AU-A.2.3

                This Module is dated July 2006. Pages that are subsequently changed in this Module are updated with the end-calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

                October 07

              • AU-A.2.4

                When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

                October 07

              • AU-A.2.5

                A list of changes made to this Module is provided below:

                Module Reference Change Date Description of Changes
                Whole Module July 2006 Module renamed as Module AU (Auditors and Accounting Standards). Text redrafted but substance of requirements left unchanged.
                AU-A.1 10/2007 New Rule AU-A.1.3 introduced, categorising this Module as a Directive.
                AU-1.2 10/2007 Rule AU-1.2.3 redrafted to clarify reporting obligation.
                AU-1.5 10/2007 Paragraphs AU-1.5.4 and AU-1.5.6 updated to reflect CBB Law requirements on auditor independence.
                AU-3.1 01/2009 Paragraph AU-3.1.1 updated in respect of agreed upon procedures report for review of PIR by external auditors.
                AU-5 01/2009 New Chapter inserted for the role of the reporting accountant.
                AU-5.1 10/2009 Clarification of fee arrangements for reporting accountants.
                AU-A.1.3 01/2011 Clarified legal basis.
                AU-1.1, AU-1.2, AU-1.5, AU-2.1, AU-3 and AU-5 01/2011 Various minor amendments made for consistency in formatting
                AU-3.5 01/2011 Added new Section on report on material differences to be in line with Volume 2.
                AU-3.3.2 04/2011 Added cross reference to Module FC and clarified due date of report.
                AU-3.5.1 04/2011 Corrected name of return.
                AU-3.2 10/2011 Clarification of existing requirement for the Agreed Upon Procedures Report and setting a deadline for the submission of the report.
                AU-5 10/2011 Chapter amended and content moved to Section BR-6.5 and retitled as Role of the Appointed Expert.
                AU-2.2.1 04/2012 Corrected cross reference.
                AU-1.3.1 07/2013 Removed potential exemption regarding audit partner rotation.
                AU-3.2.1 07/2013 Removed potential exemption for external auditor to review published financial disclosures prior to their publication.
                AU-3.3.1 07/2013 Clarified that an approved consultancy firm can also provide the report on compliance with financial crime rules required under Section FC-4.3.
                AU-4.1.2 07/2013 Corrected typo.
                AU-4.1.3 07/2013 Changed Guidance to Rule.
                AU-3.6 01/2014 New Section added dealing with the report on compliance with remuneration rules.
                AU-3.5.1 04/2014 Removed reference to monthly statements of assets and liabilities.
                AU-3.7 04/2014 New Section added on the Report on Eligible Accounts for the Deposits/Unrestricted Investment Accounts Protection Funds
                AU-1.1.1A 07/2014 Added guidance clarifying the information required when seeking the CBB's approval for appointment or re-appointment of the external auditor.
                AU-3.6 07/2014 Where a conventional bank licensee has no approved persons or material risk-takers whose total annual remuneration is in excess of BD100,000, the report on compliance with remuneration rules need not be completed by the external auditor.
                AU-1.5.4 10/2014 Clarified wording of guidance.
                AU-3.1.3 04/2015 Existing exemptions in respect of PIR review will cease as at 31st December 2014 for all Bahraini conventional bank licensees.
                AU-3.6.1 07/2015 Clarified that the external auditor or an approved consultancy firm can also provide the report on the bank's compliance with the remuneration Rules outlined in Chapter HC-5.
                AU-3.2.4 01/2016 Aligned as per the requirements of Module BR.
                AU-3.2.3 07/2017 Amended agreed upon procedures report submission deadline.
                AU-1.5.1 04/2019 Deleted Paragraph on Financial Transactions with Auditor.
                AU-B.1.2 04/2020 Amended Paragraph.
                AU-1.1.4 04/2020 Amended Paragraph.
                AU-1.5.5 04/2020 Amended Paragraph.
                AU-3.2.1 04/2020 Amended Paragraph.
                AU-4.1.1 04/2020 Amended Paragraph.
                AU-3.3.2 07/2021 Amended Paragraph.
                AU-1.1.1 10/2022 Amended Paragraph on auditor’s appointment period.

          • AU-B AU-B Scope of Application

            • AU-B.1 AU-B.1 Conventional Bank Licensees

              • AU-B.1.1

                The contents of this Module – unless otherwise stated – apply to all conventional bank licensees.

                October 07

              • AU-B.1.2

                The contents of Chapters AU-1 to AU-4 apply to both Bahraini conventional bank licensees and branches of foreign bank licensees.

                Amended: April 20
                Added: October 07

            • AU-B.2 AU-B.2 Auditors

              • AU-B.2.1

                Certain requirements in this Module indirectly extend to auditors, by virtue of their appointment by conventional bank licensees. Auditors appointed by conventional bank licensees must be independent (cf. Sections AU-1.4 and AU-1.5). Auditors who resign or are otherwise removed from office are required with their licensees to inform the CBB in writing of the reasons for the termination of their appointment (cf. Sections AU-1.2). Other requirements are contained in Sections AU-1.3 (Audit partner rotation) and AU-3 (Auditor reports).

                October 07

          • AU-1 AU-1 Auditor Requirements

            • AU-1.1 AU-1.1 Appointment of Auditor

              • AU-1.1.1

                Conventional bank licensees must obtain prior written approval from the CBB before appointing or re-appointing their auditor, within 4 months of their financial year-end.

                Amended: October 2022
                Amended: January 2011
                October 2007

              • AU-1.1.1A

                When seeking the CBB's approval for the appointment or re-appointment of the external auditor, the request for approval should specify the name of the audit firm, the name of the responsible partner, as well as the year which the responsible partner was initially appointed by the conventional bank licensee.

                Added: July 2014

              • AU-1.1.2

                As the appointment of auditors normally takes place during the course of the firm's annual general meeting, conventional bank licensees should notify the CBB of the proposed agenda for the annual general meeting in advance of it being circulated to shareholders. The CBB's approval of the proposed auditor does not limit in any way shareholders' rights to subsequently reject the Board's choice.

                Amended: January 2011
                October 2007

              • AU-1.1.3

                The CBB, in considering the proposed (re-) appointment of an auditor, takes into account the expertise, resources and reputation of the audit firm, relative to the size and complexity of the licensee. The CBB will also take into account the track record of the audit firm in auditing conventional bank licensees within Bahrain; the degree to which it has generally demonstrated independence from management in its audits; and the extent to which it has identified and alerted relevant persons of significant matters. Finally, the CBB will also consider the audit firm's compliance with applicable laws and regulations (including legislative Decree No. 26 of 1996; the Ministry of Industry and Commerce's Ministerial Resolution No. 6 of 1998; and relevant Bahrain Stock Exchange regulations).

                October 07

              • AU-1.1.4

                In the case of branches of foreign bank licensees, the CBB will also take into account who acts as the auditor of the parent firm. As a general rule, the CBB does not favour different parts of a banking firm or group having a different auditor.

                Amended: April 2020
                Amended: January 2011
                Added: October 2007

            • AU-1.2 AU-1.2 Removal or Resignation of Auditor

              • AU-1.2.1

                Conventional bank licensees must notify the CBB as soon as they intend to remove their auditor, or if their auditor intends to resign, with an explanation of their decision, or as soon as their auditor resigns.

                Amended: January 2011
                October 2007

              • AU-1.2.2

                Conventional bank licensees must ensure that a replacement auditor is appointed (subject to the CBB approval as per Section AU-1.1), as soon as reasonably practicable after a vacancy occurs, but no later than three months.

                October 07

              • AU-1.2.3

                In accordance with the powers granted to CBB under Article 63 of the CBB Law, auditors of conventional bank licensees and their licensees must inform the CBB in writing, should they resign or their appointment as auditor be terminated, within 30 calendar days, of the event occurring, setting out the reasons for the resignation or termination.

                October 07

            • AU-1.3 AU-1.3 Audit Partner Rotation

              • AU-1.3.1

                Conventional bank licensees must ensure that the audit partner responsible for their audit does not undertake that function more than five years in succession.

                Amended: July 2013
                October 07

              • AU-1.3.2

                Conventional bank licensees must notify the CBB of any change in audit partner.

                October 07

            • AU-1.4 AU-1.4 Auditor Independence

              • AU-1.4.1

                Article 61(d) of the CBB Law imposes conditions for the auditor to be considered independent. Before a conventional bank licensee appoints an auditor, it must take reasonable steps to ensure that the auditor has the required skill, resources and experience to carry out the audit properly, and is independent of the licensee.

                October 07

              • AU-1.4.2

                For an auditor to be considered independent, it must, among other things, comply with the restrictions in Section AU-1.5.

                October 07

              • AU-1.4.3

                If a conventional bank licensee becomes aware at any time that its auditor is not independent, it must take reasonable steps to remedy the matter and notify the CBB of the fact.

                October 07

              • AU-1.4.4

                If in the opinion of the CBB, independence has not been achieved within a reasonable timeframe, then the CBB may require the appointment of a new auditor.

                October 07

            • AU-1.5 AU-1.5 Licensee/Auditor Restrictions

              • [This Subsection was deleted in April 2019].

                • AU-1.5.1

                  [This Paragraph was deleted in April 2019].

                  Deleted: April 2019
                  Amended: January 2011
                  October 2007

              • Outsourcing to Auditor

                • AU-1.5.2

                  Section OM-3.7 generally prohibits conventional bank licensees from outsourcing their internal audit function to the same firm that acts as their external auditor. However, the CBB may allow short-term outsourcing of internal audit operations to a conventional bank licensee's external auditor, to meet unexpected urgent or short-term needs (for instance, on account of staff resignation or illness). Any such arrangement will normally be limited to a maximum period of one year and is subject to the CBB prior approval.

                  Amended: January 2011
                  October 2007

              • Other Relationships

                • AU-1.5.3

                  Conventional bank licensees and their auditor must comply with the restrictions contained in Article 217 (c) of the Commercial Companies Law (Legislative Decree No. (21) of 2001), as well as in Article 61(d) of the CBB Law.

                  Amended: January 2011
                  October 2007

                • AU-1.5.4

                  Article 217(c) of the Commercial Companies Law prohibits an auditor from (i) being the chairman or a member of the Board of Directors of the company he/she audits; (ii) holding any managerial position in the company he/she audits; and (iii) acquiring any shares in the company he/she audits, or selling any such shares he/she may already own, during the period of his audit. Article 61(d) of the CBB Law prohibits an auditor from (i) being the chairman or a member of the Board of Directors of the company he/she audits; (ii) holding any managerial position in the company he/she audits; and (iii) acquiring any shares in the company he/she audits, or selling any such shares he/she may already own, during the period of his audit. Furthermore, the auditor must not be a relative (up to the second degree) of a person assuming management or accounting duties in the company.

                  Amended: October 2014
                  October 07

                • AU-1.5.5

                  The restrictions in Paragraph AU-1.5.3 apply to branches of foreign bank licensees as well as Bahraini conventional bank licensees.

                  Amended: April 2020
                  Amended: October 2011
                  Added: October 2007

                • AU-1.5.6

                  A partner, Director or manager on the engagement team of auditing a conventional bank licensee may not serve on the Board or in a controlled function of the licensee, for two years following the end of their involvement in the audit, without prior authorisation of the CBB.

                  October 07

                • AU-1.5.7 [deleted]

                  [This Guidance was deleted in January 2011].

              • Definition of 'Auditor'

                • AU-1.5.8

                  For the purposes of Section AU-1.5, 'auditor' means the partners, Directors and managers on the engagement team responsible for the audit of the conventional bank licensee.

                  October 07

          • AU-2 AU-2 Access

            • AU-2.1 AU-2.1 CBB Access to Auditor

              • AU-2.1.1

                Conventional bank licensees must waive any duty of confidentiality on the part of their auditor, such that their auditor may report to the CBB any concerns held regarding material failures by the conventional bank licensee to comply with the CBB requirements.

                Amended: January 2011
                October 2007

              • AU-2.1.2

                The CBB may, as part of its on-going supervision of conventional bank licensees, request meetings with a licensee's auditor. If necessary, the CBB may direct that the meeting be held without the presence of the licensee's management or Directors.

                Amended: January 2011
                October 2007

            • AU-2.2 AU-2.2 Auditor Access to Outsourcing Providers

              • AU-2.2.1

                Rule OM-3.5.1 (c) on outsourcing agreements between conventional bank licensees and outsourcing providers requires licensees to ensure that their internal and external auditors have timely access to any relevant information they may require to fulfil their responsibilities. Such access must allow them to conduct on-site examinations of the outsourcing provider, if required.

                Amended: April 2012
                October 07

          • AU-3 AU-3 Auditor Reports

            • AU-3.1 AU-3.1 Review of Quarterly Prudential Information Returns

              • AU-3.1.1

                Conventional bank licensees must arrange for their auditor to review the licensee's quarterly Prudential Information Returns to the CBB, prior to their submission, unless otherwise exempted in writing by the CBB. The review must be made in the form of an Agreed Upon procedures Report (as outlined in BR-3).

                Amended January 2011
                Amended January 2009
                October 2007

              • AU-3.1.2

                Conventional bank licensees are required to submit a quarterly Prudential Information Return (PIR). Conventional bank licensees may apply in writing to CBB for an exemption from the requirement that the PIR be reviewed by the licensee's external auditor: this exemption would normally only be given where the licensee had established a track record of accurate and timely reporting, and there were no other supervisory issues of concern. Further details on the CBB's reporting and related requirements, including the precise scope of the auditor's review and attestation, are contained in Module BR (The CBB Reporting).

                Amended: January 2011
                October 2007

              • AU-3.1.3

                For Bahraini conventional bank licensees, all existing exemptions in respect of PIR review as at 31st December 2014 will cease.

                Added: April 2015

            • AU-3.2 AU-3.2 Review of Financial Disclosures

              • AU-3.2.1

                Conventional bank licensees that are required to publish financial disclosures in accordance with Chapters PD-2 and PD-3 must arrange for their external auditor to review these prior to their publication.

                Amended: July 2013
                Amended: January 2011
                October 2007

              • AU-3.2.2

                Chapter PD-2 requires branches of foreign bank licensees operating as retail banks to publish on a semi-annual basis summary information on their balance sheet and profit and loss account, in the same format as their annual audited accounts. Chapter PD-3 requires all locally incorporated conventional bank licensees to publish quarterly financial statements, in accordance with International Accounting Standard 34 (Interim Financial Reporting).

                Amended: April 20
                Added: October 07

              • AU-3.2.3

                Locally incorporated banks must arrange for their external auditor to review the annual disclosures required in Module PD, Section PD-1.3 and Chapter PD-6, prior to their submission to the CBB or their publication. This review must be in the form of an agreed- upon procedures report (see also PD-A.2.4). The report must be submitted to the CBB within 4 months of the year end of the concerned bank (see also Paragraph BR-1.1.3).

                Amended: July 2017
                Added: October 2011

              • AU-3.2.4

                Locally incorporated banks must arrange for their external auditor to review the disclosures in the half-yearly financial statements required by Module PD, Paragraph PD-3.1.6 prior to their submission to the CBB or their publication. This review must be in the form of an agreed upon procedure report. This report must be submitted to the CBB within 2 months of the end of the half-year reporting period of the concerned bank (see also Section BR-2.2).

                Amended: January 2016
                Added: October 2011

            • AU-3.3 AU-3.3 Report on Compliance with Financial Crime Rules

              • AU-3.3.1

                Conventional bank licensees must arrange for their external auditor or a consultancy firm approved by the CBB as per Paragraphs FC-4.3.2 and FC-4.3.2A, to report on the licensee's compliance with the requirements contained in Module FC (Financial Crime), at least once a year.

                Amended: July 2013
                Amended: January 2011
                October 2007

              • AU-3.3.2

                The report specified in Rule AU-3.3.1 must be in the form agreed by the CBB, and must be submitted to the Compliance Directorate at the CBB by the 30th of June of the following year (See Paragraph FC-4.3.5).

                Amended: July 2021
                Amended: April 2011
                Added: October 07

              • AU-3.3.3

                The context to the above requirement can be found in Section FC-4.3.

                October 07

            • AU-3.4 AU-3.4 Review and Validation of Internal Models

              • AU-3.4.1

                Conventional bank licensees seeking the CBB approval for their use of internal models for the calculation of regulatory capital requirements, must arrange for their external auditor to validate the soundness of the model concerned. This external review must be undertaken at least once a year, unless otherwise exempted in writing by the CBB.

                Amended: January 2011
                October 2007

              • AU-3.4.2

                Before granting its approval for Bahraini conventional banks to use internal models for the measurement of market risk in the context of regulatory capital calculations, the CBB requires such models to be validated by both the internal and external auditors of the bank (see Chapter CA-9). The CBB will review the validation procedures performed by the internal and external auditors, and may independently carry out further validation procedures.

                Amended: January 2011
                October 2007

              • AU-3.4.3

                The specific requirements and procedures for external validation of models are contained in Section CA-9.8.

                October 07

              • AU-3.4.4

                Exemptions from the external validation requirement are normally only given where a track record of satisfactory validations has been developed over several years, and where the CBB has no other material supervisory concerns regarding the licensee concerned.

                October 07

            • AU-3.5 AU-3.5 Report on Material Differences

              • AU-3.5.1

                Conventional bank licensees must arrange for their external auditor to provide to the CBB explanations for any material differences in data reported in the bank's audited or reviewed accounts and in the Prudential Information Returns (PIR).

                Amended: April 2014
                Amended: April 2011
                Added: January 2011

            • AU-3.6 AU-3.6 Report on Compliance with Remuneration Rules

              • AU-3.6.1

                Unless specifically excluded in accordance with Paragraph AU-3.6.3, conventional bank licensees must arrange for their external auditor or a consultancy firm approved by the CBB as per Paragraph BR-4A.3.2, to report on the bank's compliance with the requirements contained in Chapter HC-5, at least once a year.

                Amended: July 2015
                Amended: July 2014
                Added: January 2014

              • AU-3.6.2

                The report specified in Rule AU-3.6.1 must be in the form agreed by the CBB, and must be submitted by the bank to the supervisory point of contact at the CBB when the audited financial statements are submitted, i.e. within 3 months of the bank's year end (See Section BR-4A.3).

                Amended: July 2014
                Added: January 2014

              • AU-3.6.3

                Where a conventional bank licensee has no:

                (a) Approved persons; or
                (b) Material risk-takers

                whose total annual remuneration (including all benefits) is in excess of BD100,000, Paragraph AU-3.6.1 does not apply. In this instance, an annual notification must be sent to the CBB once it is determined that this situation applies.

                Added: July 2014

            • AU-3.7 AU-3.7 Report on Eligible Accounts for the Deposits/Unrestricted Investment Accounts Protection Funds

              • AU-3.7.1

                Conventional bank licensees must arrange for their external auditor to confirm the accuracy of the data reported on the Eligible accounts report for the deposits/unrestricted investment account protection funds (Appendix BR-16) as required under Paragraph BR-1.4.2.

                Added: April 2014

              • AU-3.7.2

                The report from the external auditor required under Paragraph AU-3.7.1 must be submitted to the CBB at the same time as the due date for Appendix BR-16, that is, two months after the financial year end.

                Added: April 2014

          • AU-4 AU-4 Accounting Standards

            • AU-4.1 AU-4.1 General Requirements

              • AU-4.1.1

                Conventional bank licensees must comply with International Financial Reporting Standards / International Accounting Standards.

                October 07

              • AU-4.1.2

                Branches of foreign bank licensees that do not, at the parent company level, apply IFRS/IAS are still required under Paragraph AU-4.1.1 to produce pro-forma accounts for the Bahrain branch in conformity with these standards. Where this requirement is difficult to implement, the overseas conventional bank licensee should contact the CBB in order to agree a solution.

                Amended: April 2020
                Amended: July 2013
                Added: October 07

              • AU-4.1.3

                Paragraph AU-4.1.1 requires conventional bank licensees that maintain Islamic 'windows' or units to apply relevant AAOIFI Financial Accounting Standards, depending on the type of Islamic finance contracts entered into. In particular, attention is drawn to AAOIFI Financial Accounting Standard 18, 'Islamic Financial Services Offered by Conventional Financial Institutions'.

                Amended: July 2013
                October 07

          • AU-5 AU-5 Role of External Auditor as Appointed Expert

            • AU-5.1 AU-5.1 General Requirements

              • AU-5.1.1

                In accordance with Articles 114 and 121 of the CBB Law, the CBB may appoint appointed experts to undertake on-site examinations or report by way of investigations on specific aspects of a bank's business. External auditors may be called upon to be appointed experts and should be aware of their role in that capacity by referring to Section BR-6.5.

                [The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].

                Amended October 2011
                Added January 2009

              • AU-5.1.2

                The purpose of the contents of this chapter is to set out the roles and responsibilities of reporting accountants when appointed pursuant to Article 114 of the CBB Law (see EN-7.1.1). This Article empowers the CBB to assign some of its officials or others to inspect licensees' or listed companies' businesses.

                Added January 2009

              • AU-5.1.3

                The CBB uses its own inspectors to undertake on-site examinations of licensees as an integral part of its regular supervisory efforts. In addition, the CBB may commission reports on matters relating to the business of licensees in order to help it assess their compliance with CBB requirements, as contained in Article 114 of the CBB Law. Such inspections may be carried out either by the CBB's own officials, by duly qualified "Reporting Accountants" appointed for the purpose by the CBB, or a combination of the two. Article 111 requires licensees to make available to the CBB's inspectors, their books and other records, and to provide all relevant information within the time limits deemed reasonable.

                Amended January 2011
                Added January 2009

              • AU-5.1.4

                Banks must provide all relevant information and assistance to reporting accountants on demand as required by Articles 111 and 114 of the CBB Law. Failure by licensees to cooperate fully with the CBB's inspectors or reporting accountants, or to respond to their examination reports within the time limits specified, will be treated as demonstrating a material lack of cooperation with the CBB which will result in other enforcement measures being considered, as described elsewhere in EN Module. This rule is supported by Article 114(a) of the CBB Law.

                Amended January 2011
                Added January 2009

              • AU-5.1.5

                Article 163 of the CBB Law provides for criminal sanctions where false or misleading statements are made to the CBB or any person /reporting accountant appointed by the CBB to conduct an inspection on the business of the licensee or the listed company.

                Amended January 2011
                Added January 2009

              • AU-5.1.6

                The CBB will not, as a matter of general policy, publicise the appointment of reporting accountants, although it reserves the right to do so where this would help achieve its supervisory objectives. Both the reporting accountants and the CBB are bound to confidentiality provisions restricting the disclosure of confidential information with regards to any such information obtained in the course of the investigation.

                Added January 2009

              • AU-5.1.7

                Unless the CBB otherwise permits, reporting accountants should not be the same firm appointed as external auditors of the bank.

                Amended January 2011
                Added January 2009

              • AU-5.1.8

                Reporting accountants will be appointed in writing, through an appointment letter, by the CBB. In each case, the CBB will decide on the range, scope and frequency of work to be carried out by reporting accountants.

                Amended January 2011
                Added January 2009

              • AU-5.1.9

                Reporting accountants will report directly to and be responsible to the CBB in this context and will specify in their report any limitations placed on them in completing their work (for example due to the relevant bank's group structure). The report produced by the reporting accountants is the property of the CBB (but is usually shared by the CBB with the firm concerned). The cost of the reporting accountant's work must be borne by the licensee concerned.

                Amended January 2011
                Amended October 2009
                Added January 2009

              • AU-5.1.10

                Compliance by reporting accountants with the contents of this chapter will not, of itself, constitute a breach of any other duty owed by them to a particular bank (i.e. create a conflict of interest).

                Added January 2009

              • AU-5.1.11

                The CBB may appoint one or more of its officials to work on the reporting accountants' team for a particular bank.

                Amended January 2011
                Added January 2009

            • AU-5.2 AU-5.2 The Required Report

              [The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].

              • AU-5.2.1

                Commissioned reporting accountants would normally be required to report on one or more of the following aspects of a bank's business:

                (a) Accounting and other records;
                (b) Internal control systems;
                (c) Returns of information provided to the CBB;
                (d) Operations of certain departments; and/or
                (e) Other matters specified by the CBB.
                Amended January 2011
                Added January 2009

              • AU-5.2.2

                Reporting accountants will be required to form an opinion on whether, during the period examined, the bank is in compliance with the relevant provisions of the CBB Law and the CBB's relevant requirements, as well as other requirements of Bahrain Law and, where relevant, industry best practice locally and/or internationally.

                Amended January 2011
                Added January 2009

              • AU-5.2.3

                The reporting accountants' report must follow the format set out in Appendix AU 1.

                Amended January 2011
                Added January 2009

              • AU-5.2.4

                Unless otherwise directed by the CBB or unless the circumstances described in section AU 5.3 apply, the report should be discussed with board of directors and/or senior management in advance of its being sent to the CBB.

                Amended January 2011
                Added January 2009

              • AU-5.2.5

                Where the report is qualified by exception, the report should clearly set out the risks which the bank runs by not correcting the weakness, with an indication of the severity of the weakness should it not be corrected. Reporting accountants will be expected to report on the type, nature and extent of any weaknesses found during their work, as well as the implications of a failure to address and resolve such weaknesses.

                Added January 2009

              • AU-5.2.6

                If the reporting accountants conclude, after discussing the matter with the bank, that they will give a negative opinion (as opposed to one qualified by exception) or that the issue of the report will be delayed, they must immediately inform the CBB in writing giving an explanation in this regard.

                Amended January 2011
                Added January 2009

              • AU-5.2.7

                The report should be completed, dated and submitted, together with any comments by directors or management (including any proposed timeframe within which the bank has committed to resolving any issues highlighted by the report), to the CBB within the timeframe applicable.

                Amended January 2011
                Added January 2009

            • AU-5.3 AU-5.3 Other Notifications to the CBB

              [The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].

              • AU-5.3.1

                Reporting accountants should communicate to the CBB, during the conduct of their duties, any reasonable belief or concern they may have that any of the requirements of the CBB, including the criteria for licensing a bank (see Module LR), are not or have not been fulfilled, or that there has been a material loss or there exists a significant risk of material loss in the concerned bank, or that the interests of customers are at risk because of adverse changes in the financial position or in the management or other resources of a bank. Notwithstanding the above, it is primarily the bank's responsibility to report such matters to the CBB.

                Amended January 2011
                Added January 2009

              • AU-5.3.2

                The CBB recognises that reporting accountants cannot be expected to be aware of all circumstances which, had they known of them, would have led them to make a communication to the CBB as outlined above. It is only when reporting accountants, in carrying out their duties, become aware of such a circumstance that they should make detailed inquiries with the above specific duty in mind.

                Amended January 2011
                Added January 2009

              • AU-5.3.3

                If reporting accountants decide to communicate directly with the CBB in the circumstances set out in paragraph AU 5.3.1 above, they may wish to consider whether the matter should be reported at an appropriate senior level in the bank at the same time and whether an appropriate senior representative of the bank should be invited to attend the meeting with the CBB.

                Amended January 2011
                Added January 2009

            • AU-5.4 AU-5.4 Permitted Disclosure by the CBB

              [The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].

              • AU-5.4.1

                Information which is confidential and has been obtained under, or for the purposes of, this chapter or the CBB Law may only be disclosed by the CBB in the circumstances permitted under the Law. This will allow the CBB to disclose information to reporting accountants to fulfil their duties. It should be noted, however, that reporting accountants must keep this information confidential and not divulge it to a third party except with the CBB's permission and/or unless required by Bahrain Law.

                Amended January 2011
                Added January 2009

            • AU-5.5 AU-5.5 Trilateral Meeting

              [The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].

              • AU-5.5.1

                The CBB may, at its discretion, call for a trilateral meeting(s) to be held between the Central Bank and representatives of the relevant bank and the reporting accountants. This meeting will provide an opportunity to discuss the reporting accountants' examination of, and report on, the bank.

                Amended January 2011
                Added January 2009

        • GR GR General Requirements

          • GR-A GR-A Introduction

            • GR-A.1 GR-A.1 Purpose

              • Executive Summary

                • GR-A.1.1

                  The General Requirements Module presents a variety of different requirements that are not extensive enough to warrant their own stand-alone Module, but for the most part are generally applicable. These include general requirements on books and records; on the use of corporate and trade names; and on controllers. Each set of requirements is contained in its own Chapter: a table listing these and their application to licensees is given in Chapter GR-B.

                  October 07

              • Legal Basis

                • GR-A.1.2

                  This Module contains the Central Bank of Bahrain's ('CBB') Regulation No.(31) of 2008 and Directive (as amended from time to time) governing bank control and general requirements and is issued under the powers available to the CBB under Articles 38 and 52 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Module also contains requirements pertaining to controllers as prescribed under Resolution No.(43) of 2011 governing the conditions of granting a license for the provision of regulated services and is issued under the powers available to the CBB under Article 44(c). The requirements of Resolution No.(33) for the year 2012 with respect to the issuance of the Regulation setting the procedures for processing applications of banks to transfer financial services business in the Kingdom of Bahrain are included in Chapter GR-4. The Regulation, Resolutions and Directive in this Module are applicable to all conventional bank licensees.

                  Amended: October 2012
                  Amended: October 2011
                  Adopted: January 2011

                • GR-A.1.3

                  For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                  Adopted: January 2011

            • GR-A.2 GR-A.2 Module History

              • Evolution of Module

                • GR-A.2.1

                  This Module was first issued in July 2006, with immediate effect, as a new Module aimed at aligning the structure and contents of Volume 1 with other Volumes of the CBB Rulebook. All subsequent changes to this Module are annotated with the end-calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

                  Amended: January 2014
                  October 07

                • GR-A.2.2

                  The October 2007 version incorporates the requirements relating to controllers, previously contained in Chapter HC-2 of the High-Level Controls Module. It also expands on certain requirements contained in the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).

                  October 07

                • GR-A.2.3

                  A list of recent changes made to this Module is detailed in the table below:

                  Module Ref.Change DateDescription of Changes
                  GR-4, GR-5.4, GR-710/2007Administrative changes due to implementation of CBB Law. Revised notification deadlines etc.
                  GR-110/2007This Chapter has been relocated to OM Module.
                  GR-810/2007CBB Fees Chapter has been transferred to Module LR.
                  GR-504/2008New notification and approval requirements in respect of "Controllers"
                  GR-5.301/2010Revised approval threshold for controllers which are financial institutions.
                  GR01/2011Various minor amendments to ensure consistency in CBB Rulebook.
                  GR-A.1.2 and A.1.301/2011Added legal basis.
                  GR-3.1.104/2011Clarified Rule pertaining to announcement of dividend.
                  GR-4.1204/2011Deleted reference to outsourcing.
                  GR-4.107/2011Regulation under consultation.
                  GR-A.1.2 and GR-5.3.5A10/2011New reference added to reflect the issuance of Resolution No.(43) of 2011, and reference made to controllers.
                  GR-3.110/2011Clarified guidance Paragraphs on CBB's non-objection for dividends.
                  GR-5.2.210/2011Clarified the definition of "associate".
                  GR-710/2011Chapter redrafted to be consistent with other Volumes of the CBB Rulebook.
                  GR-5.3.807/2012Percentage amended to be consistent with Paragraph GR-5.3.5.
                  GR-A.1.210/2012Updated legal basis.
                  GR-410/2012Amended to reflect the issuance of Resolution No.(33) of 2012.
                  GR-4.2.301/2013Specified timeline for CBB preliminary assessment.
                  GR-5.4.1 and GR-5.4.304/2013Changed Rules to Guidance.
                  GR-507/2013Changes made to be in line with Regulation No.(31) for the year 2008.
                  GR-A.2.101/2014Deleted repetitive sentence.
                  GR-7.1.1210/2016Added additional requirements for cessation of business to be in line with all Volumes.
                  GR-5.1.701/2017Consistency of notification timeline rule on Controllers with other Volumes of the CBB Rulebook.
                  GR-4.2.607/2017Corrected cross reference.
                  GR-3.1.310/2017Amended paragraph and changed from Guidance to Rule.
                  GR-604/2019Added new Section on Open Banking.
                  GR-B.1.204/2020Amended Paragraph.
                  GR-B.1.304/2020Amended Paragraph.
                  GR-2.1.204/2020Amended Paragraph.
                  GR-4.1.504/2020Amended Paragraph.
                  GR-4.3.2 (d)04/2020Amended sub-Paragraph.
                  GR-5.1.104/2020Amended Paragraph.
                  GR-5.1.1004/2020Amended Paragraph.
                  GR-7.1.404/2020Amended Paragraph.
                  GR-7.1.1204/2020Amended Paragraph.
                  GR-901/2021Added a new Chapter on Prepaid Cards.
                  GR-507/2021Deleted Chapter and superseded by Resolution No. 16 of 2021.
                  GR-6.1.307/2021Amended Paragraph.
                  GR-6.1.507/2021Amended Paragraph.
                  GR-6.1.707/2021Amended Paragraph.
                  GR-6.1.807/2021Added a new Paragraph on access to customer information and data.
                  GR-6.2.107/2021Amended Paragraph.
                  GR-6.2.307/2021Amended Paragraph.
                  GR-6.2.607/2021Amended Paragraph.
                  GR-6.3.807/2021Paragraph moved to GR-6.1.7.
                  GR-6.3.1207/2021Amended Paragraph.
                  GR-6.3.1307/2021Amended Paragraph.
                  GR-6.3.1407/2021Amended Paragraph.
                  GR-6.3.1507/2021Amended Paragraph.
                  GR-6.4.107/2021Amended Paragraph.
                  GR-6.4.207/2021Amended Paragraph.
                  GR-6.507/2021Deleted Section.
                  GR-2.1.101/2022Amended Paragraph.
                  GR-6.1.504/2022Amended Paragraph on MCCs.
                  GR-6.1.804/2022Amended Paragraph on payment data provided including MCCs.
                  GR-6.2.504/2022Amended Paragraph on Bahrain Open Banking Framework Developer Portal.
                  GR-307/2023Amended Chapter on Dividends and Profit Repatriation.
                  GR-301/2024Amended Chapter on Dividends and Profit Repatriation.
                  GR-6.1.305/2024Amended Paragraph on access grant to PISPs and AISPs.
                  GR-6.1.805/2024Amended Paragraph on sharing information of customer account activity with PISPs and AISPs.
                  GR-6.1.8A05/2024Added a new Paragraph on access timeline.
                  GR-6.3.1305/2024Amended Paragraph on customer security measures.
                  GR-6.4.105/2024Amended Paragraph on banks consistency with security guidelines.
                  GR-6.4.1A05/2024Added a new Paragraph on sharing customer information compliance.

              • Superseded Requirements

                • GR-A.2.4

                  This Module supersedes:

                  Circular / other reference Provision Subject
                  Module LR (April 2006 version) LR-6: Record-keeping Keeping Record-keeping keeping requirements were moved to GR-1, and edited down to simplify and avoid duplication of record-keeping keeping requirements contained in Module FC.
                  Module HC (April 2006 version) HC-2: 'Fit and Proper Requirement' Requirements relating to controllers were moved to GR-5. Remaining 'fit and proper' elements regarding Directors and key employees of licensees were retained in HC-2, in a re-drafted form.
                  October 07

          • GR-B GR-B Scope of Application

            • GR-B.1 GR-B.1 Conventional Bank Licensees

              • License Categories

                • GR-B.1.1

                  The requirements in Module GR (General Requirements) apply to both retail and wholesale conventional bank licensees.

                  October 07

              • Bahraini and Branches of Foreign Bank Licensees

                • GR-B.1.2

                  The scope of application of Module GR (General Requirements) is as follows:

                  Chapter Bahraini bank licensees Branches of foreign bank licensees
                  GR-2 Applies to the whole bank. Applies to the Bahrain branch only.
                  GR-3 Applies to the whole bank. Doesn't apply.
                  GR-4 Applies to the whole bank. Applies to the Bahrain branch only.
                  GR-5 Applies to the whole bank. Applies to the whole bank..
                  GR-6 Applies to the retail bank. Applies to all Banks.
                  GR-7 Applies to the whole bank. Applies to the Bahrain branch only.
                  Amended: April 2020
                  Amended: April 2019
                  Amended: December 2018
                  Added: October 07

                • GR-B.1.3

                  In the case of Bahraini bank licensees, certain requirements apply to the whole bank, irrespective of the location of its business; other requirements apply only in respect to business booked in Bahrain. In the case of branches of foreign bank licensees, the requirements of Module GR mostly only apply to business booked in the Bahrain branch.

                  Amended: April 2020
                  Amended: April 2019
                  Added: October 07

          • GR-1 [This Chapter has been relocated to Module OM.]

          • GR-2 GR-2 Corporate and Trade Names

            • GR-2.1 GR-2.1 Vetting of Names

              • GR-2.1.1

                Licensees must obtain CBB’s prior written approval for any change in their legal name. Licensees must notify the CBB of any change in their corporate name at least one week prior to effecting the proposed change.

                Amended: January 2022
                Added: October 07

              • GR-2.1.2

                GR-2.1.1 applies to branches of foreign bank licensees only with respect to their Bahrain branch.

                Amended: April 2020
                Added: October 07

              • GR-2.1.4

                In approving a corporate or trade name, the CBB seeks to ensure that it is sufficiently distinct as to reduce possible confusion with other unconnected businesses, particularly those operating in the financial services sector. The CBB also seeks to ensure that names used by unregulated subsidiaries do not suggest those subsidiaries are in fact regulated.

                October 07

          • GR-3 GR-3 Dividends and Profit Repatriation

            • GR-3.1 GR-3.1 CBB Approval on Dividends

              • GR-3.1.1

                Bahraini conventional bank licensees must obtain CBB’s prior approval for any proposed cash or stock dividend before any public announcements or the Annual General Meeting.

                Amended: July 2023
                Amended: April 2011
                October 2007

              • GR-3.1.2

                [This Paragraph was deleted in July 2023].

                Deleted: July 2023
                Amended: October 2011
                October 07

              • GR-3.1.3

                For the purpose of Paragraph GR-3.1.1conventional bank licensees must:

                (a) Submit the following: 

                (i) The intended percentage and amount of proposed dividends;

                (ii) The impact of proposed dividends on: 

                (a) Capital Adequacy Ratio (CAR), Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), and Leverage Ratio (LR) showing the ratios before and after the proposed dividends;
                (b) The cash flow position and shareholders’ equity level before and after the proposed dividends;
                (iii) Stress testing results evidencing that the proposed dividends would not lead to any breach of the regulatory requirements (CAR, LCR, NSFR and LR) in the last financial year and the next two years under normal and stressed scenarios.
                (b) Satisfy the CBB of the adequacy of impairment provisions during the review of the annual/interim financial statements;
                (c) Ensure that any unrealized gains arising from assets or liabilities fair value assessment are excluded from net income in the determination of the proposed dividends, given that CBB does not permit distribution of unrealised profit;
                (d) Ensure that the amount of realised profits included in the retained earnings as at the year-end is sufficient to cover the proposed dividend amount; and
                (e) Ensure that any negative fair value on assets held at amortised cost do not have any material adverse impact on the capital and liquidity positions where such assets may need to be liquidated before maturity to satisfy any financial obligations, including deposit withdrawals.
                Amended: January 2024
                Amended: July 2023
                Amended: October 2017
                Amended: October 2011
                October 07

            • GR-3.2 Repatriation of Profits by Retail Branches of Foreign Banks

              • GR-3.2.1

                Retail branches of foreign banks must comply with the following when repatriating profits to Head Office:

                (a) The gearing ratio stipulated in Paragraph CA-15.7.6 after repatriation;
                (b) Satisfy the CBB of the adequacy of impairment provisions during the CBB’s review of the annual financial statements;
                (c) Ensure that any unrealized gains arising from assets or liabilities fair value assessment are excluded from net income in the determination of the repatriation;
                (d) Ensure that the amount of realised profits included in the retained earnings (unremitted profits due to head office) as at the year-end is sufficient to cover the proposed profit repatriation amount; and
                (e) Ensure that any negative fair value on assets held at amortised cost do not have any material adverse impact on the capital and liquidity positions where such assets may need to be liquidated before maturity to satisfy any financial obligations, including deposit withdrawals.
                Amended: January 2024
                Added: July 2023

          • GR-4 GR-4 Business Transfers

            • GR-4.1 GR-4.1 CBB Approval

              • GR-4.1.1

                In accordance with the CBB Governor's Resolution No.(33) for the year 2012 issued pursuant to Article 66 of the CBB Law, a conventional bank licensee (transferor) must seek prior written approval from the CBB before transferring any regulated banking service to a person (transferee), except in the following circumstances:

                (a) Where the transferred business is limited to the assets and/or liabilities of the transferor and does not include any regulated banking services; or
                (b) Where the regulated service transferred accounts for less than 5% of the transferor's total assets and/or liabilities as recorded in the unconsolidated balance sheet of the financial quarter preceding the date of the transfer of business application.
                Added: October 2012

              • GR-4.1.2

                For purposes of Paragraph GR-4.1.1 (a), a business transfer refers to a transfer of the rights and obligations of one conventional bank licensee to a third party, so that the customers continue to be subject to the same terms and conditions as those originally agreed.

                Added: October 2012

              • GR-4.1.3

                In instances where Subparagraph GR-4.1.1(b) applies, conventional bank licensees must notify the CBB before transferring any regulated banking service to a transferee one month prior to the transfer taking place.

                Added: October 2012

              • GR-4.1.4

                Rule GR-4.1.1 is intended to apply to circumstances where a bank wishes to transfer all or part of its business (examples: credit card business, asset management business) to a third party, or is undertaking winding up proceedings.

                Added: October 2012

              • GR-4.1.5

                In the case of a Bahraini conventional bank licensee, Chapter GR-4 applies to its assets and liabilities booked in Bahrain. In the case of branches of foreign bank licensees, Chapter GR-4 applies only to assets and liabilities booked in the bank's Bahrain branch.

                Amended: April 2020
                Added: October 2012

            • GR-4.2 GR-4.2 Procedure with Respect to Applications

              • GR-4.2.1

                Conventional bank licensees wishing to transfer banking business in the Kingdom must apply to the Executive Director of Banking Supervision by submitting an application form along with the supporting documents as specified by the CBB (see Part B, Supplementary Information, Appendix GR-1). Unless otherwise directed by the CBB, the application must provide:

                (a) Full details of the business to be transferred including a detailed list of all liabilities or assets that will be transferred;
                (b) The rationale for the proposed transfer;
                (c) If applicable, an assessment of the impact of the transfer on any customers directly affected by the transfer, and any mitigating factors or measures;
                (d) If applicable, an assessment of the impact of the transfer on the transferor's remaining business and customers; and
                (e) Evidence that the proposed transfer has been duly authorised by the transferor (such as a certified copy of a Board resolution approving the transfer).
                Added: October 2012

              • GR-4.2.2

                Banks intending to apply to transfer a regulated service are advised to contact the CBB at the earliest possible opportunity, in order that the CBB may determine the nature and level of any documentation and/or the need for an auditor or other expert opinion to be provided. The CBB will grant its permission where the transfer will have no negative impact on the financial soundness of the bank, and does not otherwise compromise the interests of the bank's depositors and creditors. In all cases, the CBB will only grant its permission where the institution acquiring the regulated service holds the appropriate regulatory approvals and is in good regulatory standing.

                Added: October 2012

              • Preliminary Assessment

                • GR-4.2.3

                  The CBB will make a preliminary assessment of whether the proposed transfer is of a type that could be considered for approval or not based on the receipt of the documents referred to in Paragraph GR-4.2.1. If rejected, the applicant will be informed accordingly. The CBB will approve/reject the transfer of business application form after the submission of all necessary documents within 14 calendar days of the date where all documents have been submitted.

                  Amended: January 2013
                  Added: October 2012

              • Publication of the Transfer of Business Application

                • GR-4.2.4

                  In instances where the CBB is in favor of the transfer requested, and in accordance with Article 66(c) of the CBB Law, the transfer of business application will be published by the CBB in the Official Gazette and in two daily newspapers in the Kingdom of Bahrain (one in Arabic and one in English). The CBB notice will include a statement that written representations concerning the transfer of business application may be sent to the CBB within three months from the date of publication.

                  Added: October 2012

                • GR-4.2.5

                  If the liabilities are located in a jurisdiction outside Bahrain, the CBB may also publish such notice in the jurisdiction in which the risk is situated.

                  Added: October 2012

                • GR-4.2.6

                  In all cases, the costs of publication of the notices referred to in Paragraphs GR-4.2.4 and GR-4.2.5 must be met by the transferor.

                  Amended: July 2017
                  Added: October 2012

            • GR-4.3 GR-4.3 Determination of Application

              • GR-4.3.1

                The CBB will consider an application under Paragraph GR-4.2.1 if it is satisfied that:

                (a) Any objections received to the application to transfer the business following its publication in the Official Gazette and in two daily newspapers in the Kingdom of Bahrain (one in Arabic and one in English) as required under Article 66(d) have been reviewed and resolved by the CBB;
                (b) Except in so far as the CBB has otherwise directed, a copy of the notice has been sent to every affected customer and every other person who claims an interest in an asset or liability included in the proposed transfer (and has given written notice of his claim to the transferor);
                (c) Copies of a statement, approved by the CBB, setting out particulars of the transfer, have been available for inspection at one or more places in Bahrain for at least 30 days, from the date of publication of the notice specified in Paragraph GR-4.2.3; and
                (d) Where the proposed transfer includes any contract where the risk is situated in a jurisdiction other than Bahrain, a statement, approved by the CBB, setting out particulars of the transfer, has been available for inspection at one or more places in that jurisdiction for at least 30 days, starting with the date of publication of the notice specified in Paragraph GR-4.2.3.
                Added: October 2012

              • GR-4.3.2

                The CBB will not approve the transfer, under the terms of Paragraph GR-4.2.1, unless it is satisfied that:

                (a) The transferee is authorised to carry on regulated banking services in Bahrain or (where relevant) is authorised or otherwise permitted to carry on regulated banking services in the jurisdiction where any overseas risks are situated;
                (b) Every transaction or account or relationship included in the transfer evidences a contract which was entered into before the date of the application;
                (c) The transferee possesses the necessary solvency required by the regulatory authorities to which he is subject to, after taking the proposed transfer into account;
                (d) Where transactions, accounts, or customer relationships are being transferred from a foreign branch of a Bahraini conventional bank licensee, or the transferee is a branch of a foreign bank licensee, the relevant overseas regulatory authority has been consulted about the proposed transfer, the law of that jurisdiction provides for the possibility of such a transfer, and the relevant supervisory authority in that jurisdiction has agreed to the transfer;
                (e) The transfer will not breach any applicable laws and regulations, and will not create any supervisory concerns;
                (f) The business transferred is not prohibited by the CBB; and
                (g) There are no material adverse consequences from the transfer on the transferee or the security of customers and creditors and their rights and obligations are protected.
                Amended: April 2020
                Added: October 2012

              • GR-4.3.3

                In assessing the criteria outlined in Paragraph GR-4.3.2, the CBB will, amongst other factors, take into account the financial strength of the transferee; its capacity to manage the business being transferred; its track record in complying with applicable regulatory requirements; and (where applicable) its track record in treating customers fairly. The CBB will also take into account the impact of the transfer on the transferor, and any consequences this may have for the transferor's remaining customers.

                Added: October 2012

              • GR-4.3.4

                The CBB will review the application and any other documents or information requested by the CBB taking into consideration any objections received and conditions stated in Article 66 (d) of the CBB law.

                Added: October 2012

              • GR-4.3.5

                The CBB reserves the right to impose additional requirements if, in the opinion of the CBB, additional requirements are necessary to protect customer interests. In all cases where additional requirements are imposed, the CBB shall state the reasons for doing so.

                Added: October 2012

              • GR-4.3.6

                The CBB will communicate its final decision to the transferor within 5 working days of the expiry of the period for submitting objections to the CBB (see Paragraph GR-4.2.4).

                Added: October 2012

            • GR-4.4 GR-4.4 CBB Decision

              • GR-4.4.1

                In accordance with Article 67 (d) of the CBB Law and Article 8 of the Regulation issued pursuant to Resolution No.(33) of 2012, the CBB's decision regarding the application for transfer made under Section GR-4.2, will be published as a notice in the Official Gazette and in two local newspapers (one in Arabic and one in English) and will come into effect from this date.

                Added: October 2012

              • GR-4.4.2

                If the liabilities are located in a jurisdiction outside Bahrain, the CBB may also publish such notice in the jurisdiction in which the risk is situated.

                Added: October 2012

              • GR-4.4.3

                The costs of publication of the notices referred to in Paragraphs GR-4.4.1 and GR-4.4.2 must be met by the transferor.

                Added: October 2012

              • GR-4.4.4

                Article 67(e) of the CBB Law notes that where the application for business transfer has been turned down by the CBB or includes restrictions, the applicant may appeal to a competent court within 30 calendar days from the date of publication referred to in Paragraph GR-4.4.1 .

                Added: October 2012

          • GR-5 Controllers

            [This Chapter was deleted in July 2021 and superseded by Resolution No. (16) of 2021 with respect to promulgating the Regulation Pertaining to Control in Banks]

          • GR-6 GR-6 Open Banking

            • GR-6.1 GR-6.1 Access to PISPs and AISPs

              • GR-6.1.1

                The CBB has recognised the need to revise its rules in keeping with the following changes at a systemic level, both globally and regionally:

                a) market growth in e-commerce activities;
                b) increased use of internet and mobile payments;
                c) consumer demand to increasingly use smart device based payment solutions;
                d) the developments in innovative technology; and
                e) a trend towards customers having multiple account providers.

                This section sets forth the rules applicable to conventional retail bank licensees with regards to the new category of ancillary service providers described below.

                Added: April 2019

              • GR-6.1.2

                The CBB has established a Directive contained in "Module OB: Open Banking" in Volume 5 of the CBB Rulebook that deals with a new sub category of ancillary service providers who, under the terms of the CBB license, may provide "payment initiation services" and/or "account information services". Such licensees are termed "payment initiation service providers" or PISPs and "account information service providers" or AISPs. Banks and other licensees which maintain a customer account is referred to in the CBB Rulebook Volume 5 as "licensees maintaining customer accounts".

                Added: April 2019

              • GR-6.1.3

                Conventional retail bank licensees must:

                (a) grant ancillary service providers of the types referred to in Paragraph AU-1.2.1 (f) and (g) of Rulebook Volume 5: Ancillary Service Providers Authorisation Module, access to customer accounts on an objective, non-discriminatory basis based on consents obtained from the customer (both natural and legal persons);
                (b) provide the criteria that the conventional retail bank licensees apply when considering requests pursuant to sub-paragraph (a) above for such access; and
                (c) ensure that those criteria are applied in a manner which ensures compliance with sub-paragraph (a) above while ensuring adherence to Law No 30 of 2018, Personal Data Protection Law (PDPL) issued on 12 July 2018.
                Amended: September 2024
                Amended: July 2021
                Added: April 2019

              • GR-6.1.4

                Access to customer accounts granted pursuant to Paragraph GR-6.1.3 must be sufficiently extensive to allow the AISP and PISP access in an unhindered and efficient manner.

                Added: April 2019

              • GR-6.1.5

                Access to customer accounts granted pursuant to Paragraph GR-6.1.3 shall mean that at customer's direction, the licensees are obliged to share without charging a fee, all information that has been provided to them by the customer and that which can be accessed by the customer in a digital form. The obligation should only apply where the licensee keeps that information in a digital form. Furthermore, the obligation should not apply to information supporting identity verification assessment; which the licensees should only be obliged to share with the customer directly, not a data recipient. The information accessed and shared shall include transaction data, relevant Merchant Category Code information and product and services data that banks are required to publicly disclose, such as price, fees, and other charges should be made publicly available under open banking. Fees may be charged by banks to AISPs for sharing 'Value Added Data' and 'Aggregated Data' are not required to be shared. Value added data or derived data results from material enhancement by the application of insights, analysis, or transformation on customer data by the licensee. Aggregated data refers to data which is aggregated across the licensee’s customer segments for the purpose of analysis.

                Amended: April 2022
                Amended: July 2021
                Added: April 2019

              • GR-6.1.6

                If a conventional retail bank licensee refuses a request for access to such services or withdraws access to such services, it must seek approval of the CBB in a formal communication which must contain the reasons for the refusal or the withdrawal of access and contain such information as the CBB may direct. The CBB shall approve the request if it is satisfied that the impact of not giving access is minimal. If the request is rejected, the conventional retail bank licensee must adhere to the direction provided by the CBB.

                Added: April 2019

              • GR-6.1.7

                Conventional retail bank licensees must comply with each of the following requirements:

                (a) provide access to the same information from designated customer accounts made available to the customer when directly requesting access to the account information, provided that this information does not include sensitive payment data (such as customer security credentials or other personalised data, the holding of which or the use of which is not authorised by the customer; and data which may be used by the holder for unauthorised, fraudulent, illegal or activity or transactions);
                (b) provide, immediately after receipt of the payment order, the same information on the initiation and execution of the payment transaction provided or made available to the customer when the transaction is initiated directly by the latter;
                (c) upon request, immediately provide PISPs with a confirmation whether the amount necessary for the execution of a payment transaction is available on the payment account of the payer. This confirmation must consist of a simple ‘yes’ or ‘no’ answer.
                Added: July 2021

              • GR-6.1.8

                For the purposes of this Chapter, conventional retail bank licensees must provide access to and share information and data pertaining to customer account activity, including the Merchant Category Code information relevant to the payments from the customer account, and balances of individuals (natural persons) covering a period of 12 full months or 365 days at the time of access to the AISPs in respect of the following services/products offered by the licensee:

                (a) Savings accounts;
                (b) Current accounts;
                (c) Term and call deposits;
                (d) Foreign currency accounts;
                (e) Unrestricted investment accounts;
                (f) Restricted investment accounts;
                (g) Mortgage/housing finance products;
                (h) Auto loans;
                (i) Consumer loans/financing;
                (j) Overdrafts (personal);
                (k) Credit and charge cards;
                (l) Electronic wallets and prepaid cards; and
                (m) Other accounts which are accessible to the customer through e-banking portal or mobile device.
                Amended: September 2024
                Amended: April 2022
                Added: July 2021

              • GR-6.1.8A

                For the purposes of Paragraph GR-6.1.7, where conventional retail bank licensees have arrangements to provide access to information and data pertaining to account activity and balances of legal persons, they must provide relevant information covering a period of 12 full months, or 365 days at the time of access, to the AISPs in respect of the following services/products offered by the licensee:

                (a) Bank accounts including foreign currency denominated bank accounts;
                (b) Overdrafts;
                (c) Term and call deposits;
                (d) Treasury products;
                (e) Unrestricted investment accounts;
                (f) Restricted investment accounts;
                (g) Loan facilities*;
                (h) Trade finance facilities*;
                (i) Credit and charge cards;
                (j) Electronic wallets and prepaid cards; and
                (k) Other accounts which are accessible to the customer through e-banking portal or mobile device.

                * Including off-balance sheet commitments, guarantees and other lines of credit.

                Added: September 2024

            • GR-6.2 GR-6.2 Communication Interface for PISPs and AISPs

              • GR-6.2.1

                Conventional retail bank licensees that offer a customer account that is accessible online must have in place at least one interface which meets each of the following requirements:

                (a) AISPs and PISPs must identify themselves in sessions with conventional retail bank licensees;
                (b) AISPs and PISPs must communicate securely to request and receive information on one or more designated payment accounts and associated payment transactions; and
                (c) PISPs must communicate securely to initiate a payment order from the payer's payment account and receive information on the initiation and the execution of payment transactions.
                Amended: July 2021
                Added: April 2019

              • GR-6.2.2

                Conventional retail bank licensees must establish the interface(s) referred to in Paragraph GR-6.2.1 by means of a dedicated interface.

                Added: April 2019

              • GR-6.2.3

                For the purposes of authentication of the customer, the interfaces referred to in paragraph GR-6.2.1 must allow AISPs and PISPs to rely on the authentication procedures provided by the conventional retail bank licensee to the customer. In particular, the interface must meet all of the following requirements:

                (a) process for instructing and authentication by the conventional retail bank licensee;
                (b) establishing and maintaining authentication of communication sessions between the conventional retail bank licensee, the AISP, the PISP and the customer(s); and
                (c) ensuring the integrity and confidentiality of the personalised security credentials and of authentication codes transmitted by or through the AISP or the PISP.
                Amended: July 2021
                Added: April 2019

              • GR-6.2.4

                Conventional retail bank licensees must ensure that their interface(s) follows standards of communication which are agreed by the CBB and that the protocols are technology neutral. They must ensure that the technical specifications of the interface are documented and are made available to AISPs and PISPs when requested.

                Added: April 2019

              • GR-6.2.5

                Conventional retail bank licensees must establish and make available a testing facility, in accordance with the operational guidelines included in the Bahrain Open Banking Framework (see Section 4.1) to authorised AISPs and PISPs, companies operating in the CBB’s Regulatory Sandbox as open banking service providers and AISPs/PISPs granted in-principle confirmation to proceed with the CBB’s licensing process. No sensitive information must be shared through the testing facility. Licensees must display a link to the testing facility on their website.

                Amended: April 2022
                Added: April 2019

              • GR-6.2.6

                Conventional retail bank licensees must ensure that the dedicated interface established for the AISPs and PISPs offers the same level of availability and performance, including support, as well as the same level of contingency measures, as the interface made available to the customer for directly accessing its payment account online.

                Amended: July 2021
                Added: April 2019

              • GR-6.2.7

                For the purposes of GR-6.2.6, the following requirements apply:

                (a) Conventional retail bank licensees must monitor the availability and performance of the dedicated interface and make the resulting statistics available to the CBB upon their request;
                (b) where the dedicated interface does not operate at the same level of availability and performance as the interface made available to the conventional retail bank licensee's customer when accessing the payment account online, the bank must report it to the CBB and must restore the level of service for the dedicated interface without undue delay and take the necessary action to avoid its reoccurrence.
                (c) The report referred to in (b) above must include the causes of the deficiency and the measures adopted to re-establish the required level of service; and
                (d) AISPs and PISPs making use of the dedicated interface offered by conventional retail bank licensees must also report to the CBB any deficiency in the level of availability and performance required of the dedicated interface.
                Added: April 2019

              • GR-6.2.8

                Conventional retail bank licensees must include in the design of dedicated interface, a strategy and plans for contingency measures in the event of an unplanned unavailability of the interface and systems breakdown. The strategy must include communication plan to inform the relevant AISP/PISP making use of the dedicated interface in the case of breakdown, measures to bring the system back to 'business as usual' and a description of alternative options AISPs and PISPs may make use of during the unplanned downtime.

                Added: April 2019

            • GR-6.3 GR-6.3 Security of Communication Sessions and Authentication

              • GR-6.3.1

                Conventional retail bank licensees must ensure that communication sessions with PISPs and AISPs including merchants, relies on each of the following:

                (a) a unique identifier of the session;
                (b) security mechanisms for the detailed logging of the transaction, including transaction number, timestamps and all relevant transaction data;
                (c) timestamps which must be based on a unified time-reference system and which must be synchronised according to an official time signal.
                Added: April 2019

              • GR-6.3.2

                Conventional retail bank licensees must ensure secured identification when communicating with AISPs and PISPs.

                Added: April 2019

              • GR-6.3.3

                Conventional retail bank licensees must ensure that, when exchanging data via the internet, with PISPs and AISPs, secure encryption is applied between the communicating parties throughout the respective communication session in order to safeguard the confidentiality and the integrity of the data, using strong and widely recognised encryption techniques.

                Added: April 2019

              • GR-6.3.4

                PISPs and AISPs must keep the access sessions offered by conventional retail bank licensees as short as possible and they must actively terminate the session as soon as the requested action has been completed.

                Added: April 2019

              • GR-6.3.5

                When maintaining parallel network sessions with the PISPs and AISPs, conventional retail bank licensees must ensure that those sessions are securely linked to relevant sessions established in order to prevent the possibility that any message or information communicated between them could be misrouted.

                Added: April 2019

              • GR-6.3.6

                Conventional retail bank licensees' sessions with PISPs and AISPs must contain unambiguous reference to each of the following items:

                (a) the customer and the corresponding communication session in order to distinguish several requests from the same customer;
                (b) for payment initiation services, the uniquely identified payment transaction initiated;
                (c) for confirmation on the availability of funds, the uniquely identified request related to the amount necessary for the execution of the transaction.
                Added: April 2019

              • GR-6.3.7

                Conventional retail bank licensees must ensure that where they communicate personalised security credentials and authentication codes, these are not readable by any staff at any time.

                Added: April 2019

              • GR-6.3.8

                [This Paragraph was moved to GR-6.1.7].

                Amended: July 2021
                Added: April 2019

              • GR-6.3.9

                In case of an unexpected event or error occurring during the process of identification, authentication, or the exchange of the data elements, the conventional retail bank licensees must send a notification message to the relevant PISP or AISP which explains the reason for the unexpected event or error.

                Added: April 2019

              • GR-6.3.10

                Where the conventional retail bank licensee offer a dedicated interface, it must ensure that the interface provides for notification messages concerning unexpected events or errors to be communicated by any PISP or AISP that detects the event or error to the other licensees participating in the communication session.

                Added: April 2019

              • GR-6.3.11

                Conventional retail bank licensees must provide access to information from customer accounts to AISPs whenever the customer requests such information.

                Added: April 2019

              • Secure authentication

                • GR-6.3.12

                  Conventional retail bank licensees must have in place a strong customer authentication process and ensure the following:

                  (a) no information on any of the elements of the strong customer authentication can be derived from the disclosure of the authentication code;
                  (b) it is not possible to generate a new authentication code based on the knowledge of any other code previously generated; and
                  (c) the authentication code cannot be forged.

                   

                  Amended: July 2021
                  Added: April 2019

                • GR-6.3.13

                  Conventional retail bank licensees must adopt security measures that meet the following requirements for payment transactions:

                  (a) the authentication code generated must be specific to the amount of the payment transaction and the payee agreed to by the payer when initiating the transaction;
                  (b) the authentication code accepted by the licensee maintaining customer account corresponds to the original specific amount of the payment transaction and to the payee agreed to by the payer;
                  (c) a SMS message must be sent to the customer (or through alternative means of communication for legal persons) upon accessing the online portal or application and when a transaction is initiated; and
                  (d) any change to the amount or the payee must result in the invalidation of the authentication code generated.
                  Amended: September 2024
                  Amended: July 2021
                  Added: April 2019

              • Independence of elements of strong authentication

                • GR-6.3.14

                  Conventional retail bank licensees must establish adequate security features for customer authentication including the use of the following three elements:

                  (a) an element categorised as knowledge (something only the user knows), such as length or complexity of the pin or password;
                  (b) an element categorised as possession (something only the user possesses) such as algorithm specifications, key length and information entropy, and
                  (c) for the devices and software that read, elements categorised as inherence (something the user is), i.e. algorithm specifications, biometric sensor and template protection features.
                  Amended: July 2021
                  Added: April 2019

                • GR-6.3.15

                  Conventional retail bank licensees must ensure that the elements referred to in Paragraph GR-6.3.14 are independent, so that the breach of one does not compromise the reliability of the others, in particular, when any of these elements are used through a multi-purpose device, i.e. a device such as a tablet or a mobile phone which can be used for both giving the instruction to make the payment and for being used in the authentication process. The CBB will consider exempting from a 3 factor authentication on a case to case basis provided that the licensee is able to demonstrate to CBB that it has established robust controls to mitigate the relevant key risks.

                  Amended: July 2021
                  Added: April 2019

            • GR-6.4 GR-6.4 Standards for Program Interfaces and Communication

              • GR-6.4.1

                Conventional retail bank licensees must adhere to the Operational Guidelines, Security Standards and Guidelines, Open Banking Application Program Interface (API) Specifications and Customer Journey Guidelines included in Bahrain Open Banking Framework, “BOBF” (see CBB website) for the use cases defined in the BOBF. Where licensees have arrangements to share customer account information or allow for payment initiation services with AISPs/PISPs for use cases not defined in BOBF, they must ensure that the API Specifications, Customer Journeys and Operational Guidelines are consistent with the Security Standards and Guidelines in BOBF.

                Amended: September 2024
                Amended: July 2021
                Added: April 2019

              • GR-6.4.1A

                Conventional retail bank licensees, when sharing account information or for payment initiation services related to legal persons, must agree the API Specifications, Customer Journeys and Operational Guidelines with the relevant AISP/PISP and the legal person. The arrangements in this respect must consider the rights, obligations and accountability of all parties, including, but not limited to, conditions relating to customer consents, authentication, authorisation, errors or omissions, downtime, fraud, data security and confidentiality and dispute resolution.

                Added: September 2024

              • GR-6.4.2

                Conventional retail bank licensees must ensure that compliance with standards and guidelines specified in Paragraph GR-6.4.1 is subject to independent review and tests, including testing in a test environment., by an independent consultant upon implementation.

                Amended: July 2021
                Added: April 2019

              • GR-6.4.3

                To remain technologically neutral the technical standards adopted by conventional retail bank licensees must not require a specific technology to be adopted by AISPs or PISPs. Authentication codes must be based on solutions such as generating and validating one-time passwords, digital signatures or other cryptographically underpinned validity assertions using keys and/or cryptographic material stored in the authentication elements, as long as the security requirements are fulfilled.

                Added: April 2019

            • GR-6.5 GR-6.5 [This Section was deleted in July 2021]

              • GR-6.5.1

                [This Paragraph was deleted in July 2021].

                Deleted: July 2021
                Added: April 2019

          • GR-7 GR-7 Cessation of Business

            • GR-7.1 GR-7.1 CBB Approval

              • GR-7.1.1

                As specified in Article 50 of CBB Law, a conventional bank licensee wishing to cease to provide or suspend any or all of the licensed regulated services, completely or at any of its branches, must obtain prior written approval from the CBB, setting out how it proposes to do so and, in particular, how it will treat any deposits that it holds.

                Amended: October 2011
                October 07

              • GR-7.1.2

                [This Paragraph was deleted in October 2011].

                Deleted: October 2011
                October 07

              • GR-7.1.3

                If the conventional bank licensee wishes to liquidate its business, the CBB will revise its license to restrict the firm from entering into new business. The licensee must continue to comply with all applicable CBB requirements until such time as it is formally notified by the CBB that its obligations have been discharged and that it may surrender its license.

                October 07

              • GR-7.1.4

                In the case of a Bahraini conventional bank licensee, Chapter GR-7 applies both to its business booked in Bahrain and the licensee's overseas branches. In the case of branches of foreign bank licensees, Chapter GR-7 applies only to business booked in the licensee's Bahrain branch.

                Amended: April 2020
                Added: October 2011

              • GR-7.1.5

                Licensees seeking to obtain the CBB's permission to cease business must apply to the CBB in writing, in the form of a formal request together with supporting documents. Unless otherwise directed by the CBB, the following information/documentation must be provided in support of the request:

                (a) Full details of the business to be terminated;
                (b) The rationale for the cessation;
                (c) How the conventional bank licensee proposes to cease business;
                (d) Notice of an extraordinary shareholder meeting setting out the agenda to discuss and approve the cessation, and inviting the CBB for such meeting;
                (e) Evidence that the proposed cessation has been duly authorised by the conventional bank licensee (such as a certified copy of a Board resolution approving the cessation);
                (f) Formal request to the CBB for the appointment of a liquidator acceptable to the CBB;
                (g) A cut-off date by which the conventional bank licensee will stop its operations;
                (h) If the conventional bank licensee wishes to cease its whole business, confirmation that the conventional bank licensee will not enter into new business with effect from the cut-off date;
                (i) If applicable, an assessment of the impact of the cessation on any customers directly affected by the cessation, and any mitigating factors or measures; and
                (j) If applicable, an assessment of the impact of the cessation on the conventional bank licensee's remaining business and customers, and any mitigating factors or measures.
                Added: October 2011

              • GR-7.1.6

                Conventional bank licensees intending to apply to cease business are advised to contact the CBB at the earliest opportunity, prior to submitting a formal application, in order that the CBB may determine the nature and level of documentation to be provided and the need for an auditor or other expert opinion to be provided to support the application. The information/documentation specified in Paragraph GR-7.1.5 may be varied by the CBB, depending on the nature of the proposed cessation, such as the materiality of the business concerned and its impact on customers.

                Added: October 2011

              • GR-7.1.7

                Approval to cease business will generally be given where adequate arrangements have been made to offer alternative arrangements to any affected customers. The CBB's approval may be given subject to any conditions deemed appropriate by the CBB. In all cases where additional requirements are imposed, the CBB shall state the reasons for doing so.

                Added: October 2011

              • GR-7.1.8

                A conventional bank licensee in liquidation must continue to meet its contractual and regulatory obligations to depositors, other clients and creditors.

                Amended: October 2011
                October 07

              • GR-7.1.9

                [This Paragraph was deleted in October 2011].

                Deleted: October 2011
                Amended: January 2011
                October 07

              • GR-7.1.10

                [This Paragraph was deleted in October 2011].

                Deleted: October 2011
                October 07

              • GR-7.1.11

                [This Paragraph was deleted in October 2011].

                Deleted: October 2011
                October 07

              • GR-7.1.12

                Upon satisfactorily meeting the requirements set out in GR-7.1.4, the conventional bank licensee must surrender the original license certificate issued by the Licensing Directorate at the time of establishment, and submit confirmation of the cancellation of its commercial registration from the Ministry of Industry, Commerce and Tourism.

                Amended: April 2020
                Added: October 2016

          • GR-8 CBB Fees

            [This Chapter has been transferred to Module LR.]

            October 07

          • GR-9 GR-9 Prepaid Cards

            • GR-9.1 GR-9.1 General Requirements

              • GR-9.1.1

                Conventional retail bank licensees must place any prepaid card which is inactive for a period of six months on the “dormant” list.

                Added: January 2021

      • Business Standards

        • BC BC Business and Market Conduct

          • BC-A BC-A Introduction

            • BC-B BC-B Provision of Financial Services on a Non-discriminatory Basis

              • BC-B.1 BC-B.1 Provision of Financial Services on a Non-discriminatory Basis

                • BC-B.1.1

                  Conventional Bank Licensees must ensure that all regulated financial services are provided without any discrimination based on gender, nationality, origin, language, faith, religion, physical ability or social standing.

                  Added: October 2020

              • BC-A.1 BC-A.1 Purpose

                • BC-A.1.1

                  This Module contains requirements that have to be met by conventional bank licensees with regards to their dealings with customers. The Rules contained in this Module aim to ensure that conventional bank licensees deal with their clients in a fair and open manner, and address their customers' information needs.

                  October 07

                • BC-A.1.2

                  The Rules build upon several of the Principles of Business (see Module PB (Principles of Business)). Principle 1 (Integrity) requires conventional bank licensees to observe high standards of integrity and fair dealing, and to be honest and straightforward in their dealings with customers. Principle 3 (Due skill, care and diligence) requires conventional bank licensees to act with due skill, care and diligence when acting on behalf of their customers. Principle 7 (Client Interests) requires conventional bank licensees to pay due regard to the legitimate interests and information needs of their customers, and to communicate with them in a fair and transparent manner.

                  October 07

                • BC-A.1.3

                  This Module also provides support for certain aspects relating to business and market conduct in the Bahrain Commercial Companies Law of 2001 (as amended).

                  October 07

                • Legal Basis

                  • BC-A.1.4

                    This Module contains the Central Bank of Bahrain's ('CBB') Directive (as amended from time to time) on business conduct by conventional bank licensees, and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 (CBB Law). The directive in this Module is applicable to all conventional bank licensees.

                    Amended: January 2011
                    October 07

                  • BC-A.1.5

                    For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                    October 07

              • BC-A.2 BC-A.2 Scope of Application and Key Requirements

                • BC-A.2.1

                  This Module applies to all conventional bank licensees unless indicated otherwise. The provisions of this Module do not apply to overseas branches and subsidiaries unless clearly stated otherwise.

                  October 07

                • BC-A.2.2

                  The remainder of this Module covers the following activities by conventional bank licensees:

                  (a) Promotion of financial products and services (Chapter BC-1);
                  (b) Code of Conduct for bank dealers and foreign exchange dealers (Chapter BC-2);
                  (c) Client confidentiality (Chapter BC-3);
                  (d) Customer account services and charges (Chapter BC-4);
                  (e) Dishonoured cheques (Chapter BC-5);
                  (f) ATMs and charges for their use (Chapter BC-6);
                  (g) Margin Trading system (Chapter BC-7);
                  (h) Investment Business related activities (Chapter BC-8);
                  (i) Customer Complaints Procedures (Chapter BC-9); and
                  (j) Measures and Procedures for Services Provided to Disabled Customers by Bahraini Retail Banks (Chapter BC-10).
                  Amended: April 2016
                  Amended: October 2011
                  Amended: January 2011
                  Amended: April 2008
                  October 07

              • BC-A.3 BC-A.3 Module History

                • BC-A.3.1

                  This Module was first issued in July 2004 by the BMA, as part of the conventional principles volume. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

                  October 07

                • BC-A.3.2

                  When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

                  October 07

                • BC-A.3.3

                  The most recent changes to this Module are detailed in the table below:

                  Summary of Changes

                  Module Ref.Change DateDescription of Changes
                  BC-4.101/01/05New minimum balance and charges regulations.
                  BC-4.701/10/05Streamlined notification requirements regarding new products.
                  BC-701/04/06Margin trading rules and guidance.
                  BC-A.110/2007New Rule BC-A.1.4 introduced, categorising this Module as a Directive.
                  BC-804/2008New conduct of business requirements for Investment Business
                  BC-4.904/2008New requirement to comply with Code of Best Practice on Consumer Credit and Charging.
                  BC-7.207/2009Removal of numerical restrictions related to margin trading requirement.
                  BC-8.5.1710/2010Clarified the wording of Rule by replacing the term "legal" with "licensing".
                  BC-A.1.401/2011Clarified legal basis.
                  BC-1.1.1301/2011Corrected reference to Ministry of Industry and Commerce.
                  BC-801/2011Changes made to reflect new definitions related to licensed exchange(s).
                  BC-1.1.1104/2011Clarified retention period of records for promotional schemes.
                  BC-3.1.1 and BC-4.3.104/2011Minor amendments to clarify Rules.
                  BC-A.2.210/2011Added new Section to list of activities covered by this Module.
                  BC-4.7.310/2011Deleted Paragraph. Reduced notification requirements on new or expanded products and facilities.
                  BC-4.8.210/2011Updated name of Ministry of Justice and Islamic Affairs.
                  BC-4.1010/2011Added new Section on transaction advice.
                  BC-8.11 and BC-910/2011Replaced Section BC-8.11 dealing with complaints and added Chapter BC-9 Customer Complaints Procedures in line with results of consultation and made it applicable to all regulated banking services.
                  BC-901/2012Minor corrections to correct typos and clarify language.
                  BC-9.3.901/2012Paragraph deleted as it repeats what is in Paragraph BC-9.3.7.
                  BC-6.1.604/2012Cross reference added.
                  BC-6.1.10 and BC-6.1.1104/2012Rule clarified and split into one Rule and one Guidance Paragraphs.
                  BC-8.2.104/2012Corrected cross reference.
                  BC-1.207/2012Added Section on Advertisements for retail banking products and services
                  BC-4.307/2012Corrected cross reference.
                  BC-8.5.12A07/2012Added guidance to clarify promotion material from banks.
                  BC-9.1.3A07/2012Added guidance on the appointment of the customer complaints officer.
                  BC-1.1.210/2012Added cross reference to advertising requirements under Section BC-1.2.
                  BC-4.310/2012Section amended to reflect outcome of consultation on disclosure of interest/profit rate fees and charges by retail banks.
                  BC-4.810/2012Amended to make Rules clearer.
                  BC-6.1.210/2012Clarified process for applications for the installation of off-site ATMs.
                  BC-4.401/2013This Section was deleted and requirements are now covered under Section FC-1.6.
                  BC-1.2.204/2013Corrected cross reference.
                  BC-4.3.204/2013Clarified Rule on instances when customers must be kept informed of charges.
                  BC-8.9.14 and BC-8.9.16(e)(v)04/2013Clarified Rules on allocations.
                  BC-9.707/2013Additional details provided on reporting of complaints.
                  BC-4.2.1510/2013Corrected cross-reference.
                  BC-5.310/2013Updated penalty charges on dishonoured cheques.
                  BC-6.301/2014Added new Section on local ATM network charges.
                  BC-4.1104/2014Added new Section on donations to NGO accounts.
                  BC-4.1210/2015Added new Section on credit check reports.
                  BC-A.2.2, and BC-1004/2016Added new Section on Measures and Procedures for Services Provided to Disabled Customers by Bahraini retail banks.
                  BC-6.304/2016Amendment to local ATM charges.
                  BC-6.1.607/2016Deleted reference to Ministry of Interior.
                  BC-4.710/2016Clarified Rules on notification for new or changes to customer products and facilities.
                  BC-4.10.110/2016Amendment to Transaction Advice
                  BC-4.10.210/2016Deleted Paragraph
                  BC-7.2.510/2016Rectified term 'Credit Reference Bureau'
                  BC-5A01/2017Added new Section on Return Policy – Post-Dated Cheques
                  BC-10.1, BC-10.2 and BC-10.304/2017Amended Paragraphs to clarify applicability of Rules.
                  BC-5.3.107/2017Amended Paragraph to include penalty charges on returned cheques for the reason of Insufficient Funds.
                  BC-4.104/2018Deleted Section on "Minimum Balance and Charges on Savings Accounts".
                  BC-4.1304/2018Added new Section on "Fees and Charges for Services Provided to Individuals".
                  BC-5.3.204/2018Deleted Paragraph on "Dishonoured Cheques".
                  BC-6.204/2018Deleted Section on "GCC ATM Network Charges".
                  BC-6.304/2018Deleted Section on "Local ATM Network Charges".
                  BC-4.1410/2018Added a new Section on Fees and Charges for Services Provided to Companies under Formation.
                  BC-1110/2018Added a new Chapter on Financial Advice Programme.
                  BC-4.3.2201/2019Amended Paragraph on disclosure of charges by retail banks.
                  BC-4.3.2401/2019Amended Paragraph on disclosure to individual customers.
                  BC-4.3.25A01/2019Added a new Paragraph on rounding off in transactions.
                  BC-4.13.201/2019Added a new Paragraph on waived fees and charges.
                  BC-4.1507/2019Added a new Section on Interest on Credit Card Transactions.
                  BC-4.1610/2019Added a new Section on Interest on Credit Facilities.
                  BC-6.110/2019Deleted Section.
                  BC-10.2.201/2020Amended Paragraph.
                  BC-4.1704/2020Added a new Section on Blocking Customer Accounts.
                  BC-9.3.1504/2020Amended Paragraph adding reference to CBB consumer protection.
                   04/2020Amended Paragraph adding reference to CBB consumer protection.
                  BC-9.7.1 - BC-9.7.304/2020Amended Paragraph adding reference to CBB consumer protection.
                  BC-B10/2020Added a new Chapter on Provision of Financial Services on a Non-discriminatory Basis.
                  BC-4.1810/2020Added a new Section on Fund Transfers by Customers of Payment Service Providers (PSP).
                  BC-4.1904/2021Added a new Section on ‘Merchant Fees on Payments to Zakat and Charity Fund’.
                  BC-1.2.107/2021Deleted Paragraph.
                  BC-1.2.207/2021Deleted Paragraph.
                  BC-4.3.607/2021Amended Paragraph.
                  BC-1.101/2022Added new enhanced Section on Promotions.
                  BC-1.201/2022Added new enhanced Section on Advertisements.
                  BC-4.2001/2022Added a new Section on Dormant Accounts and Unclaimed Balances.
                  BC-11.1.301/2022Deleted Paragraph.
                  BC-2.8.204/2022Deleted Subparagraph (b).
                  BC-4.20.707/2022Amended Paragraph on dormant accounts activity.
                  BC-11.1.107/2022Amended Paragraph on the Financial Advice Program (FAP).
                  BC-4.2101/2024Added a new Section on Insurance cover on loans.

                • Effective Date and Evolution of the Module

                  • BC-A.3.4

                    Prior to the Rulebook, the CBB had issued various circulars representing regulations covering different aspects of Business and Market Conduct. The contents of this Module are effective from the date depicted in the original circulars listed below or from the dates indicated in Paragraph BC-A.3.3 above:

                    Circular Ref. Date of Issue Module Ref. Circular Subject
                    EDBC/73/96 1 May 1996 BC-1.1 Explanatory note on the promotion of Banking and Financial Products.
                    BS.C7/91/442 10 Sep 1991 BC-1.1 Promotion of Banking Services.
                    85/25 2 May 1985 BC-2 Code of Conduct for Foreign Exchange Dealers and Brokers.
                    83/5 10 Apr 1983 BC-3 Disclosure of Information about Individual Accounts.
                    BS/11/2004 10 Aug 2004 BC-4.1 Min balances and savings accounts.
                    BS.C7/90/34 31 Jan 1990 BC-4.2 Dinar Certificates of Deposits.
                    EDBO/51/02 2 Apr 2002 BC-4.3 Charges to Customers.
                    BC/5/00 8 Mar 2000 BC-4.4 Accounts held for Clubs and Societies.
                    BSD(111)/94/157 24 Sep 1994 BC-4.5 Fees on Current Accounts.
                    BC/2/01 3 Mar 2001 BC-4.6 Brokerage Fees in Bahrain.
                    ODG/145/92 18 Aug 1992 BC-4.7 New products in the Retail Banking Field.
                    EDBO/46/03 8 Apr 2003 BC-4.8 Inheritance — Financial Procedures.
                    EDBO/27/96 25 Sep 1996 BC-5.1 Regulation for "Dishonoured Cheques".
                    OG/399/94 28 Nov 1994 BC-5.2 Returned Cheques.
                    EDBO/49/01 6 May 2001 BC-5.3 Penalty Charges on Returned Cheques.
                    BC/8/98 24 May 1998 BC-6.1 Off-site ATMs.
                    EDBO/45/02 13 Mar 2002 BC-6.2 GCC ATM Network Charges.
                    BC/15/99 17 Jul 1999 BC-7.1 Margin Trading.
                    EDBS/KH/C/73/2018 22 Nov 2018 BC-4.3.25A Rounding off in Transactions.
                    Amended: January 2019
                    Amended: October 2010
                    October 07

            • BC-1 BC-1 Promotion of Financial Products and Services

              • BC-1.1 BC-1.1 Promotions

                • Introduction

                  • BC-1.1.1

                    The purpose of the content of this Section is to set out requirements pertaining to the promotion of financial services and products offered in/from Bahrain by conventional retail bank licensees. For the purposes of this Section, promotions mean all types of promotional campaigns, competitions, merchant discount schemes/loyalty programmes or other schemes of similar nature offered to customers or prospective customers by means of incentives etc.

                     

                    Amended: January 2022
                    Added: October 07

                     

                  • BC-1.1.2

                    Conventional retail bank licensees must ensure that all the following requirements are met with regards to promotion of products or services:

                    (a) They do not involve a breach of Bahrain law or any other relevant applicable law or regulation;
                    (b) All documentation concerning promotions is in a language necessary for customers to fully understand and appreciate the products or services;
                    (c) Customers to whom promotions are directed must enjoy equal opportunity in terms of access to, and treatment within such schemes;
                    (d) The communication concerning promotions must be clear, concise, truthful, unambiguous and complete to enable customers to make a fully informed decision; and
                    (e) Where the promotion involves communication of earnings potential or benefits associated with the products or services promoted, all costs, charges or levies and risks are also disclosed.

                     

                    Amended: January 2022
                    Amended: October 2012
                    Amended: January 2011
                    Added: October 07

                  • BC-1.1.3

                    Licensees using character-limited media (e.g. social media platforms such as Instagram, Facebook etc.) as a means of promoting complex features of financial products or services should provide a reference or link to more comprehensive information available elsewhere.

                     

                    Amended: January 2022
                    Amended: January 2011
                    Added: October 07

                  • BC-1.1.4

                    Conventional retail bank licensees must ensure that the following requirements are met with regards to raffles/lotteries:

                    (a) Adequate systems and documented procedures are in place that describe the checks and balances to ensure fair play, impartiality and the inclusion of eligible participants as well as for informing participants of the results of a raffle/lottery without delay;
                    (b) They are subject to the rules and requirements (including prior authorisation/approval) laid down by the Ministry of Industry, Commerce and Tourism;
                    (c) The raffle draw date of the announced prize/incentive/campaign is disclosed in advance to the public and that other subsequent announced prize/incentive/campaign follow the same approach. Raffle dates must not be postponed unless a valid reason is stated/indicated;
                    (d) The winner(s) report includes the winner's name, CPR number, mobile number and the number of chances (e.g. tickets/ certificates) in the draw;
                    (e) Each draw of the raffle/lottery held as part of the bank’s promotional scheme is independently verified and monitored/witnessed by the bank’s internal auditor and, additionally, draws involving prizes of BD 10,000 or above in aggregate must be independently verified and monitored/witnessed by the bank’s external auditors;
                    (f) An annual check and a comprehensive audit on the “raffle draw” system is conducted by the external IT auditor. In addition, a detailed report in this regard from such auditor must be submitted to the CBB within 3 months from year-end and a copy is sent to the consumer protection department in the Ministry of Industry, Commerce and Tourism; and
                    (g) The internal auditor periodically reviews, at least annually, all promotions, raffles/lotteries in addition to the systems, procedures, processes and related operational risks.

                     

                    Amended: January 2022
                    Amended: April 2008
                    Added: October 07

                • General Requirements

                  • BC-1.1.5

                    The requirements of Paragraph BC-1.1.4 do not apply to promotions or giveaways generally offered and selected through draws to customers on an ad hoc basis (at no cost to the customer, implicit or otherwise). In such cases, there is no direct link between the acquisition of the products or services by the customers and the periodic raffle draw/lotteries.

                     

                    Amended: January 2022
                    Amended: April 2011
                    Added: April 08

                  • BC-1.1.6

                    While there is to be no formal restriction on the types of incentive which may be used by institutions, care should be taken to ensure that promotional schemes do not negatively affect the integrity, reputation, good image and standing of Bahrain and/or its financial sector, and do not detrimentally affect Bahrain's economy.

                    Amended: April 08
                    October 07

                  • BC-1.1.7

                    Bearing in mind the reputation of, and the requirement to develop, the financial sector in Bahrain, as well as the need to act at all times in the best interests of the customer, banks need to take adequate care to ensure that promotional schemes do not unreasonably divert the attention of the public from other important considerations in choosing a bank or a banking/financial product.

                    Amended: April 08
                    October 07

                  • BC-1.1.8

                    All documentation concerning promotional schemes should be in Arabic and English and, if relevant, any other language necessary for customers to fully understand and appreciate their terms and conditions. Such terms and conditions, including any related advertising, need to be clear, concise, truthful, unambiguous and complete so as to enable customers to make a fully informed decision.

                    Amended: April 08
                    October 07

                  • BC-1.1.9

                    Customers to whom promotional schemes are directed should enjoy equal opportunity in terms of access to, and treatment within, such schemes.

                    Amended: April 08
                    October 07

                  • BC-1.1.10

                    No costs (including funding costs), charges or levies associated with promotional schemes should be concealed from prospective customers.

                    Amended: April 08
                    October 07

                  • BC-1.1.11

                    All material related to promotional schemes, particularly where raffles/lotteries etc. are concerned, must be maintained for a minimum period of 5 years (see Paragraph OM-7.3.4).

                    Amended: April 2011
                    Amended: April 08
                    October 07

                  • BC-1.1.12

                    Any raffles/lotteries etc. held as part of promotional schemes should be independently monitored (e.g. by the institution's external auditor) and adequate systems put in place to ensure fair play and impartiality.

                    Amended: April 08
                    October 07

                  • BC-1.1.13

                    An appropriate system must also exist for informing participants of the results of a raffle/lottery without delay. Institutions must note that raffles/lotteries etc. may be subject to rules and requirements (including prior authorisation/approval) laid down by the Ministry of Industry and Commerce.

                    Amended: April 2011
                    Amended: January 2011
                    Amended: April 08
                    October 07

                  • BC-1.1.14

                    Banks may use small 'gifts' as an inducement to members of the public to use banks' services, provided such gifts are offered on a general basis and have a low monetary value.

                    Amended: April 08
                    October 07

                  • BC-1.1.15

                    Due note should be taken of the overriding provisions of Bahrain (and any other relevant) law in relation to institutions' duties to customers to the extent (if any) that promotional schemes might impact on such duties.

                    Amended: January 2011
                    Amended: April 08
                    October 07

              • BC-1.2 BC-1.2 Advertisements

                • BC-1.2.1

                  Conventional retail bank licensees must allow a means for customers to opt-out from receiving promotional or advertisement material through email, SMS, WhatsApp or other communication means should such customers want to opt-out. The opt-out can be in writing or electronically.

                   

                  Amended: January 2022
                  Deleted: July 2021
                  Added: July 2012

                • BC-1.2.2

                  The CBB may, at its discretion, require the licensee to withdraw the advertisement or any material thereof, if it believes that the advertisement is not compliant with the requirements of this Module or that it has a negative impact on the financial sector or on the society.

                   

                  Amended: January 2022
                  Deleted: July 2021
                  Amended: April 2013
                  Added: July 2012

                • BC-1.2.3

                  Conventional retail bank licensees must ensure that advertisements:

                  a) Are clear, fair, accurate and not misleading;
                  b) Are simple to understand and presented in a way that is likely to be understood by the average person to whom it is directed;
                  c) Clearly state what the letters stand for if acronyms are used (for e.g. APR);
                  d) Font size for all advertisements must be clear and readable, including footnotes;
                  e) Terms and conditions are easily accessible by customers;
                  f) Any concessionary offer/promotion in an advertisement contains the validity period of such offer/promotion;
                  g) Clearly present any comparison or contrast (if any) in a fair and balanced way. Such comparison or contrast must be meaningful and presented in general terms, i.e. banks must avoid making direct comparisons of their products with those of their competitors;
                  h) Are publicly announced by the licensee only;
                  i) Clearly state the name of the bank, bank logo, and contact details;
                  j) The name of the product and its details are clear to the customers;
                  k) Include a proper link to the terms and conditions including fees and charges;
                  l) Include a statement that the bank is licensed by CBB as a conventional retail bank licensee; and
                  m) Do not make use of the name of CBB in any advertisement in such a way that would indicate endorsement or approval of its products or services.

                   

                  Added: January 2022

                • BC-1.2.4

                  Conventional retail bank licensees must ensure that advertisements do not:

                  a) Include the expression ‘interest free’ or any similar expression when there is implicit interest embedded in the product or service;
                  b) Include the descriptions of product or service as ‘free’ or ‘with no cost’ or any similar expression if any type of fee would be imposed;
                  c) Include the descriptions of feature of a product or service as ‘guaranteed’ or ‘secured’ or use a similar expression unless the bank communicates all the necessary information, and present that information with sufficient clarity and prominence to make the use of that term fair, clear and not misleading;
                  d) Contain any statement such as “the best in”, “the most competitive”, “the best rate in”, “the first in”, ‘the highest’ or ‘the lowest’ or ‘the best’ in the market unless it is fully supported by evidential documents;
                  e) Emphasise any potential benefits of a product or service without also giving a fair and prominent indication of any relevant risks; and
                  f) Disguise, omit, diminish or obscure important information, statements or warnings.

                   

                  Added: January 2022

                • Digital Advertisements

                  • BC-1.2.5

                    Conventional retail bank licensees must ensure that each digital advertisement through the internet/social media (e.g. Twitter, Instagram, WhatsApp, Facebook, web page, etc.) complies with the requirements in this Section.

                     

                    Added: January 2022

                  • BC-1.2.6

                    Where a licensee publishes customer feedback/review on the internet/social media, it must display both positive and negative feedback/review.

                     

                    Added: January 2022

            • BC-2 BC-2 Code of Conduct for Bank Dealers and Foreign Exchange and Money Brokers in the Foreign Currency and Deposit Markets

              • BC-2.1 BC-2.1 Introduction

                • BC-2.1.1

                  The Code of Conduct, which is prepared in cooperation with the Bankers' Society of Bahrain and foreign exchange brokers, provides rules in respect of certain kinds of practice which experience has shown may cause difficulty and may jeopardise the good standing of the Bahrain market. Management of banks and money brokers are responsible for ensuring that their institutions are in full compliance with the Code.

                  October 07

                • BC-2.1.2

                  Every broker and dealer shall at all times comply with the criteria in respect to market practice, integrity and conduct. Failure to comply with such criteria will be regarded as a serious offence by the CBB, which reserves the right to investigate any complaints brought to its attention. All participants should adhere to the spirit as well as to the letter of the Code.

                  October 07

              • BC-2.2 BC-2.2 Market Terminology and Definitions

                • BC-2.2.1

                  The use of generally accepted precise terminology should reduce misunderstandings and frustration, and to this end Appendix BC-5 sets out, without claiming to be exhaustive, accepted market terminology and definitions.

                  October 07

                • BC-2.2.2

                  For the purpose of this Chapter, the following definitions apply:

                  (a) 'Broker' means a money and foreign exchange broker who is authorised by the CBB to operate in Bahrain;
                  (b) 'Principal' means a party undertaking a transaction through a broker; and
                  (c) 'Bank' means any institution holding a banking license.
                  Amended: April 2011
                  October 07

              • BC-2.3 BC-2.3 Confidentiality and Market Practice

                • BC-2.3.1

                  Confidentiality is vital for the preservation of a reputable and efficient market. Accordingly, the exchange of confidential information in respect of third parties is forbidden.

                  October 07

                • BC-2.3.2

                  The rules which follow are not intended to define exhaustively the obligations of dealers and brokers but set down specific ways in which confidentiality should be safeguarded and operations should be conducted:

                  (a) Use of phrases and terms likely to identify the name of the principal should be avoided at all times;
                  (b) In foreign exchange transactions brokers should not disclose the name of the principal until the deal is being closed.
                  A broker asking for a specific support price should be prepared to qualify the principal in terms of geographical location, by country or by region when the broker genuinely believes it will enable business to be concluded satisfactorily to the benefit of both broker and principal;
                  (c) In deposit transactions, brokers should not disclose the name of the borrower until the broker is satisfied that the potential lender seriously intends to do business. Once a lender has asked for the identity of the borrower ('Who pays?'), the lender is committed to do business at the rate quoted with an acceptable name, until the lending bank takes the broker 'off' or puts himself under reference. In the event of the first disclosed name being unacceptable to the lender, the lender will be prepared to check other acceptable names provided that such names are shown to the lender by the broker within a reasonable amount of time, which should be stipulated if necessary;
                  (d) In the deposit market, banks should whenever possible give brokers prior indication of those categories of principals and of any centres and areas with which they would be unwilling to do business, in order that the smooth operation of markets be facilitated and frustration be minimized. Lenders should indicate the amounts they are prepared to place with particular categories of borrower. Brokers should classify bids with an indication of the type and quality of names they are in a position to pass;
                  (e) Practices whereby banks reject a succession of names in order to assess the market and brokers offer banks deals which have no chance of being concluded, merely in order to establish their interest, are totally unacceptable;
                  (f) A principal is urged whenever possible to specify to a broker the rate, the amount, the currency, and the period of his requirements. The principal shall be willing to deal in a marketable amount with acceptable names and shall remain bound so to deal at the quoted rate unless either:
                  (i) The broker is informed otherwise at the time of acceptance; or
                  (ii) A time limit was placed (for example, 'Firm for one minute only').
                  A broker who quotes a firm rate without qualification shall be prepared to deal at the rate, in a marketable amount. A broker, if quoting only the basis of one or two names, shall qualify his quotation, e.g., 'one small offeror – only two names paying'. The broker should indicate whether prices are firm or simply for guidance and, if requested by the principal, should be willing to indicate the amount involved. Further he should confirm with banks at reasonable intervals that their interest is still firm.
                  It is the responsibility of the principal to ensure the broker is made aware of any circumstances which materially affect the validity of the order placed with the broker.
                  (g) A principal, by selecting to 'put a broker on', is deemed to have a serious intention of completing business, and should allow the broker sufficient time to quote the principal's interest to a potential counterparty with a view to doing business. In quantifying a 'sufficient time' factors such as the currency, market conditions and communication systems employed, should be taken into account;
                  (h) A broker is held responsible for advising a principal on every occasion that his deposit rates are being checked by a potential counterparty. This action should help minimise the occasional difficulties that arise when a principal 'takes a broker off' simultaneously to having his prices checked.
                  Whenever possible and subject to market conditions, a bank in the deposit market should, before he 'takes a broker off' either a single order or several orders, check whether the broker is already committed to deal on his behalf;
                  (i) 'Under reference' orders placed by banks with brokers without having first being placed as 'firm', are to be discouraged. Firm orders which are later qualified by a request to 'put me under reference' indicate a principal's weakening desire to conclude business with that broker. 'Under reference' orders should not be left with a broker for more than a few minutes. A principal must ensure that the broker has the opportunity frequently to check the validity of an 'under reference' order;
                  (j) No person may visit the dealing room of any broker or any bank except with the consent of a Manager or Director of that institution. A broker shall not in any circumstances permit any visitors from a bank to deal for his bank in the dealing room of that broker;
                  (k) Management of banks should issue clear directions to staff on the monitoring, control and recording of 'after hours' dealing from premises other than bank dealing rooms. All deals of this kind must be properly authorised and confirmed;
                  (l) A bank dealer shall not apply unfair pressure upon a broker to pass information which it would be improper for the broker to pass. Unfair pressure would for example include a statement made in any form that a failure to co-operate would lead to reduction in the business given by the principal or by other principals to the broker;
                  (m) A principal should not place an order with a broker solely with the intention of finding out the name of a counterparty, who can be contacted directly with a view to concluding further deals;
                  (n) Management of banks and brokers should lay down clear directions to staff on the extent to which dealing in foreign exchange or deposits for personal accounts is permitted. Any such dealing must be strictly controlled;
                  (o) Care should be taken over the positioning of 2-way loudspeakers in dealing rooms; and
                  (p) Brokers and dealers should inform each other if conversations are being recorded. The use of such equipment is encouraged as a sensible means of enabling any subsequent disputes and differences to be settled.
                  Amended: April 2011
                  October 07

              • BC-2.4 BC-2.4 Passing of Details

                • BC-2.4.1

                  The passing and recording of details form an essential part of the transaction and the possibility of errors and misunderstanding is increased by delay and by the passing of details in batches. Brokers should pass details verbally, and principals should be prepared to receive them, normally within a few minutes after deals have been concluded.

                  October 07

                • BC-2.4.2

                  When arranging and passing details on forward contracts in foreign exchange, banks and brokers must ensure that the rate applied to the spot end of the transaction bears a close relationship to the spot rate at the time the deal was concluded.

                  October 07

              • BC-2.5 BC-2.5 Confirmations

                • BC-2.5.1

                  Written confirmation by a broker is the final check on the details of the transaction. The handling of confirmations must take account of the desire of brokers to have a realistic time-limit placed on their liability for differences. There is an obligation on recipients to check such confirmations. Initial confirmations should be sent out by telex without delay, and at the latest by close of business on the same working day. They should be followed up by written confirmation, normally hand-delivered and receipted before close of business on the following working day.

                  October 07

                • BC-2.5.2

                  Banks must check all confirmations carefully upon receipt so that discrepancies shall be quickly revealed and differences minimised. Principals shall also make enquiries of brokers about particular confirmations which have not been received within an appropriate time (as above) or about any changes in contract terms.

                  October 07

                • BC-2.5.3

                  In the case of deals where a bank pays against telex confirmation, the broker remains liable for differences until receipt of written confirmation is provided by the bank.

                  October 07

              • BC-2.6 BC-2.6 Differences and Disputes

                • BC-2.6.1

                  The majority of differences payable by brokers arise from errors occurring in payment or repayment instructions. They also arise from a broker, having in good faith indicated a firm rate, being unable to substantiate his quotation.

                  October 07

                • BC-2.6.2

                  Any differences deemed payable by a broker to a bank (or by a bank to a broker) should be settled as soon as possible. The parties should provide each other with documents, setting out the exact details of and circumstances surrounding the deal.

                  October 07

                • BC-2.6.3

                  It is acknowledged that differences are sometimes paid by 'points'. The management of broking firms should always ensure that this practice is strictly controlled and monitored.

                  October 07

                • BC-2.6.4

                  All differences settled by direct payment should be advised in writing by the broker to the Director of Reserve Management, CBB, (copied to the Bank) indicating the amount paid and the other party's name. The CBB reserves the right to ask for further information at its discretion.

                  October 07

              • BC-2.7 BC-2.7 Conduct

                • BC-2.7.1

                  The CBB will regard any breaches of the rules stated below regarding gifts, favours, betting and entertainment unacceptable.

                  October 07

                • Gifts and Favours

                  • BC-2.7.2

                    No broker, including management, employees and other persons acting on their behalf, shall offer or give inducements to dealing room personnel of a bank. No gifts or favours whatsoever shall be so given unless the broker is satisfied that the person responsible for dealing operations in the bank concerned has been informed of the nature of the gift or favour.

                    October 07

                  • BC-2.7.3

                    Employees of banks shall not solicit inducements from brokers, nor shall they receive unsolicited gifts or favours from brokers without informing the person responsible for dealing operations in the bank concerned of the nature of such gifts or favours.

                    October 07

                • Bets

                  • BC-2.7.4

                    The making or arranging of bets between brokers and bank dealers is totally unacceptable.

                    October 07

                • Entertaining

                  • BC-2.7.5

                    It shall be the responsibility of management in both banks and brokers to ensure that entertainment offered in the course of business does not exceed reasonable limits and does not infringe standards of propriety and decency.

                    October 07

              • BC-2.8 BC-2.8 Responsibility

                • BC-2.8.1

                  Brokers shall be responsible for ensuring that:

                  (a) Their principals understand fully the limitations of the brokers' responsibilities for business and market conducted;
                  (b) All their principals understand that they are required to conform, where appropriate, to the Code of Conduct;
                  (c) Their staff carrying out transactions on behalf of principals are adequately trained both in the practices of the market-place and in the firm's responsibilities to principals; and
                  (d) The CBB is notified of any changes in broking staff, in accordance with CBB requirements.
                  October 07

                • BC-2.8.2

                  Bankers shall be responsible for ensuring that:

                  (a) Their dealing staff are adequately trained and supervised in the practices of the market (the requirement of this Code of Conduct should be fully understood by all staff involved in foreign exchange and currency deposit operations);
                  (b) [This Subparagraph was deleted in April 2022];
                  (c) Their staff understand that the ultimate responsibility for assessing the creditworthiness of a borrower or lender lies with the bank and not the broker;
                  (d) Brokerage is normally payable at the end of the month in which the money passes, or otherwise by special arrangement; and
                  (e) There is no pressure on brokers to reduce charges below the approved minimum rates.
                  Amended: April 2022
                  October 07

              • BC-2.9 BC-2.9 Market Regulations – Foreign Exchange

                • Currencies

                  • BC-2.9.1

                    A broker will, in response to an enquiry from any bank, make known the currencies which it elects to quote and to make a service in.

                    October 07

                  • BC-2.9.2

                    Each broker shall provide, on request by a bank taking a service, general market information on all currencies handled (whether for the time being active or not) by that broker.

                    October 07

                • Brokerage

                  • BC-2.9.3

                    Brokers shall comply with the minimum scales of brokerage charges (see Section BC-4.6) agreed in consultation with the Bankers' Society Council from time to time, or laid down by the CBB.
                    In cases where there is no established minimum scale of brokerage charges, no deals shall be transacted until a rate has been agreed. Rates of brokerage in these cases should be agreed in advance, and only by Directors or senior managers on each side, and in no event by the dealers themselves.

                    October 07

                  • BC-2.9.4

                    Put-through deals may be net of brokerage.

                    October 07

                  • BC-2.9.5

                    Brokerage should be expressed in US dollars.

                    October 07

              • BC-2.10 BC-2.10 Market Regulations – Currency Deposits

                • Brokerage

                  • BC-2.10.1

                    Brokers shall comply with the minimum scales of brokerage charges (see Section BC-4.6) agreed in consultation with the Bankers' Society Council from time to time, or laid down by the CBB. In cases where there is no established minimum scale of brokerage charges, no deals shall be transacted until a rate has been agreed. Rates of brokerage in these cases should be agreed in advance, and only by Directors or senior managers on each side, and in no event by the dealers themselves.

                    October 07

                  • BC-2.10.2

                    Calculation of brokerage on all currency deposits shall be worked out on a 360-day year, or a 365-day year, according to normally accepted market practice. For example, Sterling and Kuwaiti Dinars are on a 365-day year basis, and US dollars and Saudi Riyals are on a 360-day year basis.

                    October 07

                • Brokers' confirmations and statements should express brokerage in US dollars.

                  • BC-2.10.3

                    In a forward-forward deposit (e.g. one month against six months) the brokerage to be charged shall be on the actual intervening period (i.e. in the above example - five months).

                    October 07

                  • BC-2.10.4

                    Put-through deals may be net of brokerage.

                    October 07

              • BC-2.11 BC-2.11 Market Discipline

                • BC-2.11.1

                  As part of its responsibility for supervising the conduct of brokers and dealers in the foreign exchange and currency markets, the CBB may, at its discretion:

                  (a) Investigate any complains concerning the conduct of brokers and dealers;
                  (b) Investigate possible breaches of this Code by brokers and banks; and/or
                  (c) Take such further action as it considers appropriate, in the light of all the relevant facts.
                  Amended: January 2011
                  October 07

              • BC-2.12 BC-2.12 Adjustment of Value Dates in Case of Unexpected Banking Closing Dates

                • BC-2.12.1

                  Spot transactions and outrights:

                  (a) Original agreed upon value date for identical currency sold and purchased: extension of value date to next possible value date for both currencies; and
                  (b) Original agreed upon value date for non-identical currency sold and purchased (for instance, Friday for US Dollars and Saturday for Gulf Currencies): as unexpected banking closing days for non-Middle Eastern currencies are unlikely - value of non-Gulf currencies unchanged and value of Gulf currency on the next working day, adjusting spot or outright rate taking into account interest rate difference between the two currencies.
                  For pure outrights it would be advisable to adopt same system as for swaps; however, implied swap difference is not visible or identical for both parties.
                  •   It can be assumed that, if the above rule would cause substantial losses for one party, dealers will re-negotiate a new rate, on a case-by case basis; if no agreement can be reached, the CBB - as final arbitrator - will fix the interest rates, prevailing at that time, which will be used to calculate the points difference, with which the outright rate will be adjusted.

                  It is possible that payment instructions for counter-currency are already sent out and cannot be cancelled; in that case the paying party should be entitled to the proceeds of the unexpected use of funds by the receiving party.

                  Amended: April 2011
                  October 07

                • BC-2.12.2

                  Deposits:

                  (a) Maturing on unexpected closing day(s): Extending deposit to next possible value date; interest to be calculated in the extended period at original agreed upon interest rate;
                  (b) Starting on unexpected closing day(s) and maturing after unexpected closing day(s): Starting date will be extended to next possible value date without altering maturing date; interest to be calculated on the shortened period at the originally agreed upon interest rate; and
                  (c) Starting on unexpected closing day(s) and maturing before or on next possible value date: Cancellation of deal:
                  1. If payment instructions are already sent out by lender and can only be executed on next possible value date, and cannot be cancelled, borrower ensures repayment will be done on the same next possible value date. If in that case borrower cannot repay because of deadline of receiving instructions by correspondent on same next possible value day, parties negotiate a new deal starting at value date of payment by lender and maturing according to new deal.
                  2. If payment instructions are already sent out by lender for capital and by borrower for capital and interest both payments will be executed at same next possible value date, lender should refund to borrower unearned interest.
                  Amended: April 2011
                  October 07

                • BC-2.12.3

                  Swaps:

                  (a) Maturing on unexpected closing day(s): Extending swap to next possible value date for both currencies, adjusting swap difference according to formula - swap difference divided by original number of days and multiplied by new number of days;
                  (b) Starting on unexpected closing day(s) and maturing after unexpected closing day(s): Starting date for both currencies would be extended to next possible value date for both currencies without altering maturing date, adjusting swap difference according to Formula under Paragraph BC-2.12.3(a); and
                  (c) Starting on unexpected closing day(s) and maturing before or on next possible value date: Deals are cancelled.

                  If starting or maturing date of original swap under Paragraph BC-2.12.1 or Paragraph BC-2.12.2 is substantially different, per currency swap difference has to be recalculated in mutual agreement between the dealers;

                  •   It is possible that payment instructions for counter currency are already sent out and cannot be cancelled - in that case paying party should be entitled to the proceeds of the unexpected use of funds by the receiving party;
                  •   It is possible that payment instructions for Gulf currencies are already sent out and cannot be cancelled - in these cases rules according to Paragraph BC-2.12.2(c)-1 and Paragraph BC-2.12.2(c)-2 should be applied.
                  Amended: April 2011
                  Amended: January 2011
                  October 07

            • BC-3 BC-3 Client Confidentiality

              • BC-3.1 BC-3.1 Disclosure of Information about Individual Accounts

                • BC-3.1.1

                  In accordance with Article 117 of the CBB Law, banks must not publish or release information to third parties concerning the accounts or activities of their individual customers, unless:

                  (a) Such information is requested by the CBB or by an order from the Courts;
                  (b) The release of such information is approved by the customer concerned; or
                  (c) It is in compliance with the provision of the law or any international agreements to which the Kingdom is a signatory.
                  Amended: April 2011
                  October 07

            • BC-4 BC-4 Customer Account Services and Charges

              • BC-4.1 BC-4.1 Minimum Balance and Charges on Savings Accounts [This Section was deleted in April 2018]

                • BC-4.1.1

                  [This paragraph was deleted in April 2018].

                  Deleted: April 2018
                  October 07

                • BC-4.1.2

                  [This paragraph was deleted in April 2018].

                  Deleted: April 2018
                  October 07

              • BC-4.2 BC-4.2 Dinar Certificates of Deposits – Rules

                • BC-4.2.1

                  The purpose of the contents of this Section is to set out rules governing the issue of Dinar Certificates of Deposit by retail bank licensees.

                  October 07

                • BC-4.2.2

                  For the purpose of this Section, 'Dinar Certificates of Deposit' are financial instruments payable in Bahrain Dinars. They must be negotiable – in accordance with the Law of Commerce (No. 7) of 1987 – and must satisfy the conditions set out in this Section.

                  October 07

                • Issue

                  • BC-4.2.3

                    Dinar Certificates of Deposit may be issued only by retail bank licensees and must be payable at their offices in Bahrain.

                    October 07

                  • BC-4.2.4

                    Retail bank licensees may issue Certificates of Deposit to both resident and non-resident customers and to other banks inside and outside Bahrain.

                    October 07

                  • BC-4.2.5

                    Retail bank licensees may not issue Certificates of Deposit until they receive the necessary funds.

                    October 07

                • Denominations

                  • BC-4.2.6

                    Certificates of Deposit may be issued for any amount subject only to a minimum denomination of BD 30,000.

                    October 07

                • Maturities

                  • BC-4.2.7

                    Certificates of Deposit may be issued for any maturity between 183 days (6 months) and 5 years.

                    October 07

                • Interest Rates

                  • BC-4.2.8

                    The interest rates on Certificates of Deposit may be freely agreed between banks and their counterparties at the time of issue.

                    October 07

                  • BC-4.2.9

                    Interest may be payable by agreement at a fixed or floating rate. In the case of a floating interest rate, the formula for revising the rate must be specified at the time of issue.

                    October 07

                  • BC-4.2.10

                    Interest may be payable at maturity or on earlier dates specified at the time of issue.

                    October 07

                  • BC-4.2.11

                    As an alternative to paying interest, Certificates of Deposit may be issued (like Treasury bills) at a discount to their face value (the repayment amount).

                    October 07

                  • BC-4.2.12

                    Interest and discounted values should be calculated on the basis of a 360 day year.

                    October 07

                • Negotiability

                  • BC-4.2.13

                    In view of their negotiability, Certificates of Deposit may be freely traded between banks, and between banks and customers. Issuing banks are permitted to re-purchase their own Certificates.

                    October 07

                • Safe Custody

                  • BC-4.2.14

                    Although it is not obligatory, holders of Certificates of Deposit are advised to keep these certificates with a bank for safe custody and to handle them with care at all times.

                    October 07

                • Reserve Ratio

                  • BC-4.2.15

                    Outstanding Certificates of Deposit are subject to reserve requirements in accordance with the provisions set out under Section BR-4.1.

                    Amended: October 2013
                    October 07

                • Other Conditions

                  • BC-4.2.16

                    Banks must not describe deposit receipts, confirmations and other non-negotiable documents relating to ordinary deposits as 'Certificates of Deposit' and must not include such liabilities among Certificates of Deposit in their monthly statistical reports (also see Module BR).

                    October 07

                  • BC-4.2.17

                    In their statistical reports (also see Module BR), banks should always classify their outstanding Certificates of Deposit according to the type of customer (e.g. resident etc.) to whom they were first issued.

                    October 07

              • BC-4.3 BC-4.3 Disclosure of Charges by Retail Banks

                • BC-4.3.1

                  In order to improve retail customer awareness and enhance transparency of retail banks charging structures, all retail banks must display in a prominent position, in Arabic and in English, by notice in their banking halls (both head offices and branches), a list of all applicable charges.

                  Amended: October 2012
                  Amended: April 2011
                  October 07

                • BC-4.3.2

                  Retail banks must also ensure that each customer is in receipt of their current list of charges, by enclosing such a list with account statements and displaying such charges on their websites. The list must specify standard charges and commissions that will be applied by the retail bank to individual services and transactions and to specific areas of business. Such notification must be made in instances where there are changes in the fees or when new fees are introduced.

                  Amended: April 2013
                  Amended: October 2012
                  October 2007

                • Credit Agreements

                  • BC-4.3.4

                    For the purpose of this Section, the following definitions apply:

                    (a) Credit agreement – Means all instalment financing agreements and lease agreements, as well as credit cards, overdraft, revolving and other types of credit offered to retail customers;
                    (b) Customer – Means both the debtor and the guarantor (if any) and/or any potential debtor or guarantor;
                    (c) Conspicuous notice – Means a written statement in both Arabic and English languages which is easily visible and legible and displayed in all retail banks' premises open to the public (head offices and branches), and via means such as websites, newspapers and other press notices;
                    (d) Nominal annual rate – Means the interest rate charged to the customer, calculated by dividing the amount of the total interest by the amount of the funds provided to the customer and excluding any other charges, the results of which is divided by the number of years of the term of the credit agreement;
                    (e) Outstanding credit amount – Means the amount outstanding under a credit agreement representing the amount of funds provided to the customer and any other charges that are included as part of the principal amount to be repaid by the customer over the duration of the agreement less any repayment made related to the principal amount at a specified date;
                    (f) Principal – Means the amount of credit received plus any other charges, the total of which is subject to interest; and
                    (g) Retail customers – Means a natural person.
                    Added: October 2012

                  • BC-4.3.3

                    A retail bank must make available, at their premises, information leaflets containing information on the key products and services in respect of all credit agreements including:

                    (a) The Annual Percentage Rate (APR) as defined in Paragraph BC-4.3.10, for instalment financing facilities only; and
                    (b) The annual interest rate on credit facilities (as referred to in Paragraph BC-4.3.14), commission, fees, one-off charges, expenses on behalf of third parties, exchange rates applied and any other charges.
                    Amended: October 2012
                    Amended: July 2012
                    Amended: April 2011
                    October 07

                • General Rules

                  • BC-4.3.5

                    Where a retail customer has a credit agreement with a retail bank, retail banks must:

                    (a) Duly inform their customers in accordance with this Module about the nature and the characteristics (including relevant risks) of the credit agreements and services offered by them, and about the terms and conditions governing such agreements;
                    (b) Periodically inform, in writing, their customers on the evolution and the terms of any credit agreement signed, throughout the duration of the contract (refer to Paragraphs BC-4.3.24 and BC-4.3.25);
                    (c) Respond in due time, to customers' requests for the provision of information and clarifications regarding the application of contractual terms (refer to Paragraphs BC-4.3.29 and BC-4.3.30);
                    (d) Appoint a customer complaints officer and publicise his/ her contact details (refer to Chapter BC-9 on Customer Complaints Procedures);
                    (e) Ensure the proper training of employees involved in interfacing and providing specific information to customers;
                    (f) Disclose information required in this document in both Arabic & English languages;
                    (g) Show clearly the APR for instalment facilities and the annual rate of interest for other credit facilities on the credit agreement application and 'key terms disclosure' document; and
                    (h) Disclose all information in a clear and readable form (refer to Paragraph BC-4.3.6).
                    Added: October 2012

                  • BC-4.3.6

                    Marketing of customer credit agreements, advertising and sales promoting credit agreements, irrespective of the media used (SMS, Internet, printed material, telephone solicitation) must be clear and understandable, must be true and not misleading and meet the basic customer information requirements as defined in this Module. Retail banks are also asked to take special care to ensure that the content of any advertising material does not mislead or deceive the public in any way.

                    Amended: July 2021
                    Added: October 2012

                  • BC-4.3.7

                    The use of "small print" to make potentially important information less visible is not compatible with good business conduct, and should be avoided.

                    Added: October 2012

                • Minimum Disclosure Requirements

                  • BC-4.3.8

                    Retail banks must make:

                    (a) Public disclosure regarding credit agreements; and
                    (b) Disclosures to individual customer(s), whether these be during the course of the initial negotiation of the credit agreement or during the term of the facility being offered.
                    Added: October 2012

                • Public Disclosure Requirements for all Credit agreements

                  • BC-4.3.9

                    The following public disclosures must be made by conspicuous notice for all types of credit agreements:

                    (a) Any obligation on the part of the customer to open a deposit account with the retail bank as a condition of granting the credit agreement;
                    (b) Any late payment charges;
                    (c) The level of fees for any special services rendered, or one-off expenses, as well as any amount collected by retail banks on behalf of third parties;
                    (d) Any fees or charges payable under any linked or mandatory contract entered into as a condition for the granting of the credit agreement, such as payment protection insurance; and
                    (e) Any other charges not included above.
                    Added: October 2012

                • Additional Public Disclosure for Instalment Financing Facilities

                  • BC-4.3.10

                    In addition to the requirements under Paragraph BC-4.3.9, retail banks must publicly disclose by conspicuous notice for instalment financing facilities:

                    (a) The current Annual Percentage Rate (APR) as calculated using the APR methodology in Paragraph BC-4.3.31. The APR displayed must be calculated based on the following scenarios. In case of consumer finance, amount borrowed is BD10,000 for a 7-year term and for housing facilities, BD100,000 for 25 years.
                    (b) The Annual Percentage Rate (APR), must be broken down as follows:
                    (i) The annual nominal interest rate payable on the instalment financing;
                    (ii) Administration/handling fees;
                    (iii) In the case of finance lease contracts/ijara or deferred purchase contracts, any fees for purchasing the asset; and
                    (iv) Any other mandatory charges (contingent costs are excluded); and
                    (c) The terms and conditions for early repayment, partial or full, of the credit agreement, or for any change in the terms and covenants of the credit agreement, as well as any relevant charges (where permitted) and the way in which these are calculated.
                    Added: October 2012

                  • BC-4.3.11

                    The APR is a standard measure that allows customers to compare total charges for instalment financing facilities on a like-for-like basis. The APR allows the customer to compare the total charge for credit over differing periods (e.g. – two versus three years) or offered by different retail banks with differing payment profiles and taking into account the payment of any other fees payable as a condition of the contract, such as administration fees or insurance premiums.

                    Added: October 2012

                  • BC-4.3.12

                    Any advertising through any media means of instalment financing facilities, offered by the retail banks must specify only the APR (including all fees and charges) and no other rates, i.e. nominal, base, flat or rates by any other names.

                    Added: October 2012

                  • BC-4.3.13

                    For the purposes of Paragraph BC-4.3.10, the disclosures can be provided as one APR or a range of APRs for retail banks that provide instalment financing to different segments and products. A retail bank may have different customer segments with different risk profiles, for whom the APR offered on the same product may vary. However, the disclosures must comply with the scenarios outlined in Subparagraph BC-4.3.10(a).

                    Added: October 2012

                • Additional Public Disclosure for Credit Agreements other than Instalment Financing Facilities

                  • BC-4.3.14

                    In addition to the requirements under Paragraph BC-4.3.9, retail banks must publicly disclose by conspicuous notice for Credit Agreements other than instalment financing facilities:

                    (a) For credit cards, the monthly and the annual rate of interest plus other fees and charges;
                    (b) For overdrafts, the annual rate of interest plus other fees and charges;
                    (c) For floating-rate credit agreements, the interest rate clearly defined on the basis of the relevant base rate, the periods during which this rate would apply, as well as information on key factors that could affect the total cost of the credit agreement; and
                    (d) For instances where the customer exceeds contractual credit lines, the terms and any relevant charges.
                    Added: October 2012

                  • BC-4.3.15

                    For credit agreements other than instalment financing facilities, any advertising through any media means must specify only the annual interest rate and other fees and charges.

                    Added: October 2012

                  • BC-4.3.16

                    For credit agreements other than instalment financing facilities, banks are prohibited from using the term APR in any advertising.

                    Added: October 2012

                • Disclosure to Individual Customers: Initial Disclosure Requirements of Key Terms

                  • BC-4.3.17

                    Retail banks must make clear to potential customers, prior to entering into a credit agreement, all relevant key terms of the agreement in the credit agreement application and 'key terms disclosure' document, in order for them to clearly understand the characteristics of the services and products on offer. Retail banks must also comply with the disclosure requirements under the "Code of Best Practice on Consumer Credit and Charging" (see Appendix CM-2).

                    Added: October 2012

                  • BC-4.3.18

                    The above "key terms disclosure" document must be summarised in plain English and Arabic. This document must be signed and dated by the customer(s) in duplicate as having been read and understood, prior to signing a credit agreement. One copy should be retained by the customer and the other must be retained by the retail bank in their customer file.

                    Added: October 2012

                  • BC-4.3.19

                    For credit agreements where a retailer extends credit to purchase goods or services by operating in agreement with retail banks, all conditions of the credit agreement must be disclosed in the credit agreement application and 'key terms disclosure' document, including when interest will begin to accrue, along with information on any indirect charges.

                    Added: October 2012

                  • BC-4.3.20

                    Credit agreements, referred to in Paragraph BC-4.3.19, must be finalised with an employee of the retail bank, whether located at the premises of the retailer or at the premises of the retail bank providing the credit. Interest must in no event be charged before the disbursement of funds.

                    Added: October 2012

                  • BC-4.3.21

                    Retail banks must inform the customers on the nature of their contractual relationship with the retail outlet and the customers' rights arising as a result of this relationship.

                    Added: October 2012

                  • BC-4.3.22

                    In addition to the initial disclosure of key terms noted in Paragraphs BC-4.3.17 to BC-4.3.21, the "key terms disclosure" document must at the time of signing the credit agreement, amongst other things, make clear:

                    (a) The detailed breakdown of the payments:
                    (i) The principal amount being borrowed, the interest per month and the maturity of the credit agreement;
                    (ii) The net amount provided to the customer after deducting or applying any upfront or other charges;
                    (iii) The total interest payments and principal repayment for the term of the credit agreement; and
                    (iv) The total administration/handling fees and any other fees and charges spread over the term of the credit agreement.
                    (b) The APR and the nominal annual rate as defined in Paragraphs BC-4.3.10 and BC-4.3.4(d) respectively;
                    (c) Whether the rate of interest is fixed or can be varied, and under what circumstances;
                    (d) The basis on which interest is charged (e.g. actual reducing balance) and applied to the account (e.g. monthly or quarterly compounding) and whether principal repayments are taken into account in the calculation, together with an illustration of the calculation method;
                    (e) The detailed costs associated with "top-ups" of credit agreements or other alternative arrangements for extending additional credit or early repayments, whether partial or full, of amounts due including the treatment of remaining interest and the payment of premium for insurance;
                    (f) Any late payment charges;
                    (g) The annual interest rate and credit limit being offered for credit agreements such as credit cards and overdrafts; and
                    (h) Any other charges related to the credit agreement not included above.
                    Amended: January 2019
                    Added: October 2012

                  • BC-4.3.23

                    Retail banks are free to design the layout and wording to be used in their 'key terms disclosure' document, as they see fit, providing they contain the information specified in Paragraph BC-4.3.22. The CBB will monitor compliance with the spirit as well as the letter of the requirements in this Chapter.

                    Added: October 2012

                • Disclosure to Individual Customers: During the Term of the Credit Agreement

                  • BC-4.3.24

                    Retail banks must, at the time of signing the credit agreement, give the clients information on the payment schedule of the credit agreement, including the breakdown of principal, interest and other charges per month for the whole life of the facility. Information must be given, free of charge, at least on a semi-annual basis, unless the period of debt servicing is shorter or where there exists a prior agreement on a more frequent basis.

                    Amended: January 2019
                    Added: October 2012

                  • BC-4.3.25

                    In addition to the requirements under Paragraph BC-4.3.24, when credit is granted through credit cards or overdraft facilities, monthly statements must be provided and include information on minimum payment.

                    Added: October 2012

                  • BC-4.3.25A

                    Retail bank licensees must, when billing their customers, reflect the card transactions without rounding off the amounts in Fils. Retail bank licensees must collaborate with acquirers and Visa/MasterCard network schemes to ensure that there is no rounding off in any transaction irrespective of the currency of the transaction.

                    Added: January 2019

                • Variation Disclosures Requirements

                  • BC-4.3.26

                    Retail banks must disclose to the customer in advance, either collectively or individually, all relevant changes or variations to a credit agreement. The circumstances in which a customer must be provided with variation disclosures are:

                    (a) If both the retail bank and customer agree to change the credit agreement; in this case, the customer must be provided in writing with full particulars of the change, at least seven calendar days before it takes effect; and
                    (b) If the credit agreement gives the retail bank power to vary fees or charges, the amount or timing of payments, the interest rate or the way interest is calculated, and the retail bank decides to exercise that power, the customer must be provided with full particulars of the change, including an updated schedule of the total interest payments and principal repayment for the remaining term of the credit agreement, at least thirty calendar days prior to the date the change takes effect. Such notice is to enable the customer to decide whether to accept the new terms or terminate the agreement by settling the outstanding credit amount, in accordance with relevant provisions therein, which must have been stated in a clear and understandable manner.
                    Added: October 2012

                  • BC-4.3.27

                    Any increase of the interest rate or the amount of any fee or charge payable under a credit agreement, must be disclosed publicly, by conspicuous notice, at least thirty calendar days prior to the date the change takes effect by:

                    (a) Displaying the information prominently at the retail bank's place of business; and
                    (b) Posting the information on the retail bank's website.
                    Added: October 2012

                  • BC-4.3.28

                    Any deferral of interest or principal announced by the retail bank must also take account of the APR methodology as shown in Paragraphs BC-4.3.31 to BC-4.3.33, and the new APR must be given to the client or made public in advertisements.

                    Added: October 2012

                • Request Disclosure

                  • BC-4.3.29

                    The retail bank must provide a reply to any request for disclosure within fifteen business days of receiving the request.

                    Added: October 2012

                  • BC-4.3.30

                    Disclosures requested by the customer may include but are not limited to any or all of the following information about a credit agreement:

                    (a) The effect of part prepayment on the customer's obligations;
                    (b) Full particulars of any changes to the agreement since it was made;
                    (c) The amount of any fee payable on part prepayment and how the fee will be calculated;
                    (d) The amount required for full prepayment on a specified date and how the amount will be calculated;
                    (e) The outstanding credit amount, including any outstanding interest charge (calculated at the date the disclosure statement is prepared);
                    (f) The amount of payments made or to be made or the method of calculating the amount of those payments;
                    (g) The number of payments made or to be made (if ascertainable);
                    (h) How often payments are to be made;
                    (i) The total amount of payments to be made under the agreement, if ascertainable; and
                    (j) A copy of any disclosure statement that was or should have been provided before the request was made.
                    Added: October 2012

                  • BC-4.3.31

                    The APR must be calculated using the following methodology:

                    K=m K'=m'
                    Σ   Ak
                    (1 + i) tk =  
                    Σ   A'k'
                    (1 + i) tk'  
                    K=1 K'=1
                    Added: October 2012

                  • BC-4.3.32

                    The meaning of letters and symbols used in the above formula are:

                    K is the number identifying a particular advance of credit;
                    K' is the number identifying a particular instalment;
                    Ak is the amount of advance K;
                    A'k' is the amount of instalment K;
                    Σ represents the sum of all the terms indicated;
                    m is the number of advances of credit;
                    m' is the total number of instalments;
                    tk is the interval, expressed in years between the relevant date and the date of advance K;
                    tk' is the interval expressed in years between the relevant date and the date of instalment K';
                    i is the APR, expressed as a decimal.
                    Added: October 2012

                  • BC-4.3.33

                    For the purpose of this Chapter, the 'relevant date' is the earliest identifiable date on which the borrower is able to acquire anything which is the subject of the agreement (e.g. delivery of goods), or otherwise the 'relevant date' is the date on which the credit agreement is made.

                    Added: October 2012

              • BC-4.4 BC-4.4 Accounts Held for Clubs and Societies in Bahrain [This Section was deleted in January 2013 as requirements are covered under Section FC-1.6]

                • BC-4.4.1

                  [This Paragraph was deleted in January 2013].

                  Deleted: January 2013

                • BC-4.4.2

                  [This Paragraph was deleted in January 2013].

                  Deleted: January 2013

                • BC-4.4.3

                  [This Paragraph was deleted in January 2013].

                  Deleted: January 2013

              • BC-4.5 BC-4.5 Current Accounts

                • BC-4.5.1

                  Retail bank licensees levying fees on their low-balance customer current accounts are required by the CBB to apply such fees to average balances when these fall below a prescribed level during a specified period.

                  Amended: January 2011
                  October 07

                • BC-4.5.2

                  In order to prevent incidences of returned cheques due to maintenance of low-balance current accounts, the banks may convert some low-balance and/or inactive current accounts to savings accounts.

                  October 07

              • BC-4.6 BC-4.6 Brokerage Fees

                • BC-4.6.1

                  The purpose of the contents of this Section is to set out the scale of brokerage fees effective for all banks in Bahrain.

                  October 07

                • BC-4.6.2

                  The scale of fees is the result of discussion and consultation between The Bankers' Society and the Bahrain Money Brokers.

                  October 07

                • BC-4.6.3

                  For the list of brokerage fees, see Appendix BC-6.

                  October 07

              • BC-4.7 BC-4.7 Notification to the CBB on Introduction of New or Changes to Customer Products and Facilities

                • BC-4.7.1

                  [This Paragraph was deleted in October 2016.]

                  Deleted: October 2016
                  Amended: October 2012
                  Amended: January 2011
                  October 07

                • BC-4.7.2

                  All retail banks licensed by the CBB are required to notify the CBB before the introduction of any new products or services or any changes in existing product/service. The CBB will respond to the concerned bank within one week of receipt of the notification if it has any observations on the new application.

                  Amended: October 2016
                  Amended: January 2011
                  October 07

                • BC-4.7.2A

                  The reference to changes to customer products refers to the structure, features, risk profile in terms and conditions in existing product/service refers to changes that will have an additional financial cost to the customers.

                  Added: October 2016

                • BC-4.7.3

                  [This Paragraph was deleted in October 2011].

                  Deleted: October 2011
                  Amended: April 2011
                  Amended: January 2011
                  October 07

              • BC-4.8 BC-4.8 Dealing with Inheritance Claims

                • BC-4.8.1

                  Licensees must ensure that no transfer of legal ownership of financial assets is made until they have sight of documentation (which must be duly copied for their records) from the Ministry of Justice and Islamic Affairs confirming the entitlement of a person or persons to inherit from the deceased. Such documentation must be complied with precisely. Particular care must be taken where minors (children) or other people lacking full legal capacity are named as inheritors.

                  Amended: October 2012
                  Amended: October 2011
                  Amended: January 2011
                  October 07

                • BC-4.8.2

                  Without prejudice to Paragraph BC-4.8.1, financial assets may be distributed to the order of an individual provided that individual is named in a mandate, duly certified by the Ministry of Justice and Islamic Affairs, as having the permission to act on behalf of all of the inheritors.

                  Amended: October 2012
                  Amended: October 2011
                  Amended: January 2011
                  October 07

              • BC-4.9 BC-4.9 Compliance with the Code of Best Practice on Consumer Credit and Charging

                • BC-4.9.1

                  Conventional bank licensees must comply with the Code of Best Practice on Consumer Credit and Charging as attached in Appendix CM-2 and the Investment Business Code of Practice requirements in this Chapter throughout the lifetime of their relationship with a customer.

                  Adopted: April 2008

                • BC-4.9.2

                  Conventional bank licensees must take responsibility for compliance with the above requirements by all persons carrying out regulated banking services on their behalf. Conventional bank licensees must put in place appropriate measures across all their business operations and distribution channels to ensure compliance with the requirements of the Code of Best Practice on Consumer Credit and Charging where relevant.

                  Adopted: April 2008

              • BC-4.10 BC-4.10 Transaction Advice

                • BC-4.10.1

                  All retail banks must provide at no charge, a transaction advice service for its customers (natural persons). This service information must be communicated through short message service (SMS) on all types of withdrawals/deductions from customer's account and any credit and pre-paid card transaction, including, but not limited to:

                  (a) ATM withdrawals;
                  (b) Internal and external transfers from the customer's account/credit and pre-paid cards;
                  (c) Withdrawals through a bank counter;
                  (d) Point of sale (POS) transactions;
                  (e) Any withdrawals and payments from the customer's account and credit and pre-paid-cards through mobile, internet or other electronic means;
                  (f) Any repayment of outstanding credit card balances; and
                  (g) Any other withdrawals or deductions from the customer's account and credit and pre-paid cards.
                  Amended: October 2016
                  October 2011

                • BC-4.10.2

                  [Deleted in October 2016 as per EDBS/KH/34/2016 letter dated 28th July 2016].

                  Deleted: October 2016
                  October 2011

              • BC-4.11 BC-4.11 Donations to NGO Accounts

                • BC-4.11.1

                  All retail banks must waive any administrative fees when transferring donated funds from the donor accounts to the accounts of NGOs registered with the Ministry of Social Development (MoSD), provided that a valid funds collection license is presented to the bank by the concerned NGO.

                  Added: April 2014

                • BC-4.11.2

                  All retail banks must refrain from transferring any funds, collected by way of donations or fund raising, to the account of any society or club where the NGO has not submitted a valid written fund collection license to the bank, as required under Paragraph BC-4.11.1.

                  Added: April 2014

                • BC-4.11.3

                  Banks must notify the CBB in instances where donated funds have been received and no valid license was submitted. The CBB will then inform the MoSD accordingly.

                  Added: April 2014

                • BC-4.11.4

                  NGOs, including societies and clubs, registered with the MoSD, and having fund collection licenses, are listed in the NGOs fund collection directory, available on the website of the MoSD.

                  Added: April 2014

                • BC-4.11.5

                  NGOs registered with the MoSD and holding a fund collection license must present such license to the concerned banks in order for the related administration fee to be waived.

                  Added: April 2014

                • BC-4.11.6

                  Administration fees will be waived by the banks only for the period of the validity of the funds collection license.

                  Added: April 2014

              • BC-4.12 BC-4.12 Credit Check Reports

                • BC-4.12.1

                  Where a pensioner has been requested to produce a credit report by the Social Insurance Organization (SIO) to establish his/her credit standing, conventional retail bank licensees must not levy any administrative charges.

                  Added: October 2015

              • BC-4.13 BC-4.13 Fees and Charges for Services Provided to Individuals

                • BC-4.13.1

                  Retail bank licensees must comply with the caps on fees and charges for standard services provided to individuals effective from 1st May 2018 as per the table in Appendix BC-7 in Part B of the CBB Rulebook Volume 1.

                  Added: April 2018

                • BC-4.13.2

                  Fees and charges on withdrawals done through bank counters for amounts below the ATM withdrawal limits must be waived for all of the following customers:

                  (a) Orphans;
                  (b) Widows;
                  (c) Pensioners;
                  (d) Individuals receiving social subsidies from Ministry of Labor and Social Affairs;
                  (e) Students; and
                  (f) Bahraini nationals with a monthly salary below BD 250.
                  Added: January 2019

              • BC-4.14 BC-4.14 Fees and Charges for Services Provided to Companies Under Formation

                • BC-4.14.1

                  Retail bank licensees may charge companies under formation a fee capped at BD 10 for the issuance of letter of confirmation of capital maintained with the bank regardless of the capital amount deposited and maintained.

                  Added: October 2018

                • BC-4.14.2

                  Retail bank licensees must not charge any setup fees for opening bank accounts for companies under formation.

                  Added: October 2018

              • BC-4.15 BC-4.15 Interest on Credit Card Transactions

                • BC-4.15.1

                  Conventional retail bank licensees must comply with the following requirements with regards to charging interest on credit card statement dues:

                  (a) Interest must not be charged if the customer pays the full amount billed and due before or on the due date specified in the monthly credit card statement except for cash withdrawal transactions;
                  (b) Interest must not be charged on partial payments made by the customer on or before the due date specified in the monthly credit card statement against credit card amount billed and due;
                  (c) Interest on cash withdrawal transactions must be computed from the date of the transaction ("transaction date");
                  (d) Interest on credit card amounts billed but unpaid on or before the due date must be computed from the posting date of the transaction; and
                  (e) Interest must not be charged on outstanding interest amounts, fees and charges due from the customer.
                  Added: July 2019

                • BC-4.15.2

                  For the purpose of charging interest on credit card dues, conventional retail bank licensees must only calculate interest charges using 365-days a year basis.

                  Added: July 2019

              • BC-4.16 BC-4.16 Interest on Credit Facilities

                • BC-4.16.1

                  Conventional retail bank licensees must not charge interest on credit facilities using a 'monthly flat rate'; they must instead use an effective interest rate based on a reducing balance method.

                  Added: October 2019

              • BC-4.17 BC-4.17 Blocking Customer Accounts

                • BC-4.17.1

                  Conventional retail bank licensees must not block the accounts of a customer (who has a financing arrangement with it) due to customer’s termination from his or her employment or retirement regardless of the bank’s contractual rights to take such action. Banks instead must agree on other arrangements with the customer for the repayment of the financing.

                  Added: April 2020

              • BC-4.18 BC-4.18 Fund Transfers by Customers of Payment Service Providers (PSP)

                • BC-4.18.1

                  Conventional bank licensees that act as acquirers or payment gateways for PSPs, must not charge more than 100 fils in line with the Electronic Fund Transfer System (EFTS) requirements to the customers of PSPs for normal fund transfers made electronically.

                  Added: October 2020

              • BC-4.19 BC-4.19 Merchant Fees on Payments to Zakat and Charity Fund

                • BC-4.19.1

                  Conventional bank licensees must exempt the Zakat and Charity Fund (“the Fund”) of the Ministry of Justice, Islamic Affairs and Awqaf from merchant fees for payments made to the Fund.

                  Added: April 2021

              • BC-4.20 BC-4.20 Dormant Accounts and Unclaimed Balances

                • BC-4.20.1

                  This section sets out the requirements relating to dormant accounts which represents customer accounts including current, call, savings or fixed deposits which turn dormant due to inactivity or no claim or renewal request being made and unclaimed balances relating to various negotiable instruments such as manager cheques, amounts remaining unpaid to customers relating to their investments or amounts remaining unclaimed for other reasons such as cash not dispensed from ATMs etc.

                   

                  Added: January 2022

                • BC-4.20.2

                  Conventional retail bank licensees must establish policies and procedures to deal with dormant accounts and unclaimed balances which must include measures to contact the customer concerned, activation of the accounts where appropriate, return of the moneys to the customer and control measures to prevent frauds and misuse of such accounts.

                   

                  Added: January 2022

                • Dormant Accounts Treatment

                  • BC-4.20.3

                    Conventional retail bank licensees must treat customer accounts as dormant accounts in the following cases:

                    (a) Current and call accounts, where there have been no transactions initiated by the customer by for a period of 12 months; or
                    (b) Saving accounts of any type, where there have been no transactions for a period of 24 months; or
                    (c) Fixed deposit accounts where there has been no claim or renewal request for a period of 6 months from the maturity date.

                     

                    Added: January 2022

                  • BC-4.20.4

                    For the purpose of Paragraph BC-4.20.3 (b), savings certificates with no expected withdrawals and deposit should not be considered as “dormant” unless the licensee has become aware of non-traceability of the customer and there is evidence for the same.

                     

                    Added: January 2022

                  • BC-4.20.5

                    Conventional retail bank licensees must not treat a customer account as dormant if any one or more of the following criteria are met:

                    a) The customer has other accounts, of any nature, with the licensee in respect of which there are active transactions initiated by the account holder;
                    b) The account is blocked under the requirements of a relevant competent authority; or
                    c) The account is subject to litigations or constraints from other regulatory authorities or the customer is deceased.

                     

                    Added: January 2022

                  • BC-4.20.6

                    Notwithstanding the requirement under BC-4.20.5, conventional retail bank licensees must notify the customer by mail, e-mail or other communication channel, when any of his accounts becomes inactive.

                     

                    Added: January 2022

                  • BC-4.20.7

                    Conventional retail bank licensees must ensure that no withdrawal or transfer or inward clearing cheque is permitted from dormant accounts unless the activation procedures set out in this section are complied with.

                    Amended: July 2022
                    Added: January 2022

                  • BC-4.20.8

                    Conventional retail bank licensees must comply with the following additional requirements in transactions relating to dormant accounts:

                    (a) Allow electronic and manual transfers to the account;
                    (b) Accrue interest in respect of interest-bearing accounts at the prevailing rates depending on the terms of the contract between the bank and the customer;
                    (c) Ensure only fees or expenses permitted by CBB is charged, provided, however, that no fee is charged when the account balances become zero;
                    (d) Ensure that an account is closed within six months from the date the account becomes dormant and its balance becomes zero following which, a closure notification is sent to the customer by mail, e-mail or other communication channel;
                    (e) Make attempts to periodically contact the customer through different communication means and such attempts must be documented;
                    (f) Ensure that the movements in dormant accounts are monitored to ensure that such accounts are not being used for money laundering or fraudulent purposes by internal or external parties;
                    (g) Licensees must ensure that any movement in dormant accounts is subject to principles of “four-eyes” or “maker and checker” involving at least one authorised signatory of the licensee; and
                    (h) Ensure that changes in respect of the dormant accounts, including movement in balances, change of customer contact details, status etc. are subject to internal audit every six months.

                     

                    Added: January 2022

                  • BC-4.20.9

                    Conventional retail bank licensees must ensure that the terms and conditions of deposit agreements include provisions relevant to Subparagraphs BC-4.20.8 (a) and (d) above.

                     

                    Added: January 2022

                • Activation of Dormant Accounts

                  • BC-4.20.10

                    To activate a dormant account, conventional retail bank licensees must ensure the following:

                    (a) The customer provides the licensee with a written or electronic request to activate the account stating the reasons for dormancy of the account;
                    (b) The customer submits updated KYC information;
                    (c) Activation of the account is subject to principles of “four-eyes” or “maker and checker”/ dual authority checks involving at least one authorised signatory of the licensee; and
                    (d) In case of a joint account, the request for activation of the dormant account is signed by the joint accountholders authorised to operate the account unless a valid power of attorney is given.

                     

                    Added: January 2022

                  • BC-4.20.11

                    In case of requests for activation of a dormant account through electronic channels using digital signature, the conventional retail bank licensee must check the authenticity of the request and related information, for example, through telephone or video calls, email or other measures to satisfy itself about the authenticity.

                     

                    Added: January 2022

                • Unclaimed Balances

                  • BC-4.20.12

                    Conventional retail bank licensees must treat the following balances that remain unpaid due to operational or other reasons as unclaimed balances:

                    (a) Unclaimed balances relating to manager cheques, demand drafts, or cashier cheques which have not been presented /claimed during their validity periods;
                    (b) Positive credit card balances relating to credit cards not used for a period of 1 year or more;
                    (c) Unclaimed cash due to failed ATM/POS or electronic transactions for a period of 1 month or more;
                    (d) Dividends that remained unpaid by non-listed conventional retail bank licensees for a period of 1 year or more; and
                    (e) Unclaimed balances relating to investments, including undistributed profits and accrued profit/interest for a period of 1 year or more.

                     

                    Added: January 2022

                  • BC-4.20.13

                    For purposes of Subparagraph BC-4.20.12 (d), listed companies must follow the guidelines stipulated in Bahrain Bourse Resolution of year 2020, mandating the transfer of unclaimed cash dividends into the Unclaimed Cash Dividends Fund account maintained by Bahrain Clear.

                     

                    Added: January 2022

                  • BC-4.20.14

                    Conventional retail bank licensees must make attempts to periodically contact the relevant customers or the rightful parties to return the unclaimed balances through different communication means. The licensee must maintain documentary evidence of such attempts.

                     

                    Added: January 2022

                • Reporting

                  • BC-4.20.15

                    Conventional retail bank licensees must report the particulars of dormant accounts and unclaimed balances in the relevant section of the Prudential Information Return ('Form PIR').

                     

                    Added: January 2022

                • Prohibition of Transfer of Balances

                  • BC-4.20.16

                    Conventional retail bank licensees must not transfer any of the balances in dormant accounts or unclaimed balances to their income statements.

                     

                    Added: January 2022

              • BC-4.21 Insurance Cover on Loans

                • BC-4.21.1

                  The requirements in this Section apply to conventional retail bank licensees which seek life or other insurance cover in respect of loans to a borrower. These requirements are effective from 1st April 2024, i.e. all credit exposures that mature or are repaid/prepaid in full on or after 1st April 2024 must be subject to the requirements in this Section.

                  Added: January 2024

                  • BC-4.21.2

                    Conventional retail bank licensees using insurance cover as risk mitigant for its loans to individuals must comply with the following requirements:

                    (a) Credit policies must specify whether the licensee will bear the cost of insurance cover or if it will recover the cost from the customer;
                    (b) If a customer wishes to buy his own insurance cover, the licensee must not refuse to accept assignment of such policy, however, the licensee may require the customer to ensure that the insurance policy terms, duration and features match its requirements;
                    (c) If insurance is arranged by the licensee for its customer, the cost recovered from the customer must be the actual cost paid by the licensee to the insurance provider;
                    (d) The insurance cost recovered from the customer, in the case of group insurance cover, must not exceed the proportionate aggregate cost payable to the insurance company attributable to the credit facility. Licensees must, on an annual basis, evaluate the insurance costs, which must be based on the actual insurance premiums levied by the insurer for the purpose of determining the insurance cost to be recovered for new facilities. At maturity of loans or at the point of early repayment, the licensee must refund any excess insurance cost amount collected;
                    (e) Licensee must not receive any commission, referral fees or any other fees from the insurance provider and/or receive any commission from the borrower;

                    (f) Full disclosure with respect to the insurance arrangement (whether individual or group insurance cover), must be made to the customer prior to signing the loan agreement regarding:

                    (i) The terms of the insurance coverage and name of the insurance provider;
                    (ii) Benefits and exclusions;
                    (iii) Need for medical examinations, underlying illnesses not covered and the implications of health conditions on the insurance cost or the insurance claim;
                    (iv) Payment method for the insurance cost (i.e. one time upfront payment or addition to loan amount and recovered as part of repayment instalments);
                    (v) The insurance premium rate currently applicable and
                    (vi) The basis and method of calculation of the insurance cost at the time of granting of the loan;
                    (vii) Refund/adjustment of insurance cost in the case of early repayment/ pre-payments and top-ups;

                    (g) Customers must be informed in writing if:

                    (i) There is a change in the insurance provider in the case of individual insurance cover;
                    (ii) There is a possibility of additional costs to be recovered or refunds in case of upfront payments due to changes in insurance premium rates; and
                    (iii) Additional insurance costs would be recovered from the customer if loan repayment instalments are not paid on time; and
                    (h) The statements of account must clearly show the insurance cost as a separate item where applicable.
                    Added: January 2024

                  • BC-4.21.3

                    If licensees decide to restructure the loan but cannot obtain insurance coverage due to the customer's age or due to a ‘retiree’ status, they must inform the customer in writing about the unavailability of insurance for the extended loan period. In such cases, the licensee must not demand full repayment of loan by the customer due to the customer’s age.

                    Added: January 2024

                  • BC-4.21.4

                    Licensees’ credit policy must specify, at a minimum, the following:

                    (a) Disclosures to be made to customers prior to signing of the loan agreement;
                    (b) Age limits, if any, that apply for insurance cover as per the licensee’s arrangements with the insurer and the options available to customers not meeting the age limits;
                    (c) Measures or implications of default or extension of tenor for any reason, particularly for loans which have an expiry date falling in a higher age bracket at the time of grant of the loan; and
                    (d) Any additional terms that apply to customers who fall within the higher age bracket.
                    Added: January 2024

                  • BC-4.21.5

                    Licensees’ credit policy must also specify its approach with regard to lending and the corresponding insurance coverage implications for customers who fall within higher age groups (to be defined by the licensee) and those who have retired from employment or will retire during the tenor of the loan.

                    Added: January 2024

                  • BC-4.21.6

                    For the purposes of BC-4.21.5, extension of loans to individuals who are beyond the retirement age should take into account, in addition to other factors, the increases in life expectancy in Bahrain and the general trend in loss ratios. For this purpose, licensees should agree with their insurer the terms, conditions and procedures in order to meet the needs of individuals above the insurable age of the group loan portfolio and consider measures to be taken in the case of exceptional scenarios such as a customer in the higher age group needing to restructure a facility.

                    Added: January 2024

                  • BC-4.21.7

                    Licensees using group insurance cover must perform a due diligence of the insurance provider at periodic intervals to ensure optimum benefits are obtained for their customers. The due diligence must also involve assessment of various insurance plans and loss ratios.

                    Added: January 2024

                  • BC-4.21.8

                    If the insurance provider is a related party of the licensee, the insurance cost must not be higher than the market quotes for similar insurance cover.

                    Added: January 2024

            • BC-5 BC-5 Dishonoured Cheques

              • BC-5.1 BC-5.1 Penalty System for Dishonoured Cheques

                • BC-5.1.1

                  The purpose of the contents of this Section is to set out Rules relating to the system of penalising any person, whether natural or corporate in form, (referred to as a 'customer' in this Chapter) whose cheque is:

                  (a) Presented for payment, but is returned due to insufficient funds being available on his current account, where,
                  (b) In the opinion of the bank on whom the cheque is drawn, such cheque has been issued by the customer in bad faith.
                  Cheques falling within this system are referred to as 'dishonoured cheques'. Due regard must be given by retail banks to the general provisions of Bahrain Law regarding joint accounts, partnership accounts and accounts in the name of corporate entities, as well as to the customer mandate in each case, to determine how such accounts may be dealt with for purposes of the Rules in this Chapter.
                  Amended: October 2012
                  Amended: January 2011
                  October 07

                • Procedures to be Followed

                  • BC-5.1.2

                    On each occasion that a retail bank becomes aware of a dishonoured cheque of one of its customers, that bank will send a written warning to the relevant customer informing him/her of the existence of the dishonoured cheque, requesting him/her to immediately make good the insufficiency in his current account in order to clear the cheque. This written warning will also inform the customer of the provisions of this system with regard to dishonoured cheques and abusers of cheques.

                    Amended: October 2012
                    October 07

                  • BC-5.1.3

                    On the first working day of each calendar month, each retail bank must provide to the CBB a list of the names, supported with I.D. numbers (CPR or CR numbers (as applicable) for Bahrain residents, Passport or CR-equivalent numbers (as applicable) for non-Bahrain residents) of those customers to whom one (or more) written warning(s) has been sent in accordance with Paragraph BC-5.1.2 above during the immediately preceding calendar month. This list should specify the number of written warnings relating to dishonoured cheques for each customer of the relevant retail bank for the month in question and shall be in the form set out in Appendix BC-1. Retail banks will be responsible for ensuring the accuracy of all details on their respective lists.

                    Amended: October 2012
                    Amended: January 2011
                    October 07

                  • BC-5.1.4

                    Using the lists referred to in Paragraph BC-5.1.3 above, the CBB will prepare a further list (the 'Control List') of those customers to whom two or more written warnings were sent by any one or more retail bank licensees at any time within a maximum period of three consecutive calendar months. The Control List, which will be in the form set out in Appendix BC-2, will specify the name and I.D. numbers of each such customer, the total number of dishonoured cheques for that customer included in the lists referred to in Paragraph BC-5.1.3 above, the name of the relevant bank(s) on whose list(s) the customer's name has been included, and other relevant details for banks' information and checking in accordance with Paragraph BC-5.1.5 below. Any customer to whom more than two written warnings relating to dishonoured cheques were sent by any one or more retail bank licensees at any time within a maximum period of three consecutive calendar months will be automatically deemed an abuser of cheques for the purposes of Paragraph BC-5.1.7 below.

                    Amended: October 2012
                    Amended: January 2011
                    October 07

                  • BC-5.1.5

                    On the second working day of each calendar month, the CBB will circulate a draft copy of the Control List to all retail bank licensees. Banks will be requested to check the accuracy of the Control List by reference to the information they have sent to the CBB in accordance with Paragraph BC-5.1.3 above, and to notify the CBB within a maximum period of one week of receiving the list of any inaccuracies on the Control List. The Control List, as amended if appropriate, will be circulated to retail bank licensees by the CBB on the second working day after it receives all responses from concerned banks. Retail bank licensees will be required to monitor the customers on this Control List to establish whether any one or more of them issued another dishonoured cheque in the instant calendar month. Any bank becoming aware of a dishonoured cheque of one or more of its customers on the Control List during this month should notify the CBB of this fact, using the relevant section in Appendix BC-1, on the first working day of each calendar month.

                    Amended: January 2011
                    October 07

                  • BC-5.1.6

                    If the CBB does not receive any notification as contemplated in Paragraph BC-5.1.5 above for a particular customer on the Control List, that customer's name shall be withdrawn from the next issue of the Control List. However, the CBB will monitor the names of customers appearing on the Control List during the three consecutive calendar months falling immediately after the calendar month in which a customer's name is taken off the Control List. If any such customer's name is again reported to the CBB pursuant to Paragraph BC-5.1.3 above at any time during this three-month period,

                    (a) His name will be returned to the Control List on the date of its next issue if there is only one dishonoured cheque reported in this context; or
                    (b) He will be automatically deemed an abuser of cheques for the purposes of Paragraph BC-5.1.7 below if there is more than one dishonoured cheque reported in this context.
                    If, however, his name is not reported to the CBB in this regard, the CBB will cease its monitoring thereof.
                    Amended: January 2011
                    October 07

                  • BC-5.1.7

                    If the CBB does receive notification as contemplated in Paragraph BC-5.1.5 above for a particular customer on the Control List, or if a customer is deemed to be an abuser of cheques within Paragraph BC-5.1.4 or Paragraph BC-5.1.6 above, such customer (herein referred to as an 'abuser of cheques') will be penalised as follows. Using Appendix BC-3, on the second working day of the calendar month following the receipt of the information referred to above, the CBB will circulate a draft list to all retail bank licensees. Banks will be requested to check the accuracy of this list by reference to the information they have sent to the CBB in accordance with Paragraph BC-5.1.5 above, and to notify the CBB within a maximum period of one week of receiving the list of any inaccuracies on that list. The list, as amended if appropriate, will be circulated to retail bank licensees by the CBB on the second working day after it receives all responses from banks, and will direct the bank(s) which has/have reported an abuser of cheques to withdraw all cheque books held by that abuser of cheques, and to close such person's current account(s) by transferring any balances therein to saving and/or any other accounts held with that/those bank(s). Furthermore, that bank(s) must not provide current account facilities to that abuser of cheques for the twelve calendar month period immediately following the date of issue of the relevant list. All other banks should, within a maximum period of one month after the issue of the relevant list, also withdraw current account facilities from that abuser of cheques for the same twelve calendar month period. Retail bank licensees will be entitled to recover any amounts due to them from abusers of cheques as a result of compliance with this system by availing of their set-off rights under Bahrain Law.

                    Amended: January 2011
                    October 07

                  • BC-5.1.8

                    On Appendix BC-4, the CBB will notify retail bank licensees of those abusers of cheques in respect of whom the twelve calendar month period referred to in Paragraph BC-5.1.7 above has ended, and to whom banks may reinstate/offer current account facilities at their discretion.

                    Amended: January 2011
                    October 07

                  • BC-5.1.9

                    Nothing in this Directive shall prejudice the rights of banks against customers otherwise existing under Bahrain Law and/or under any particular bank/customer agreement. Furthermore, retail bank licensees will be entitled to the same immunity from prosecution as the CBB for any harm suffered, or alleged to be suffered, by customers as a result of banks complying with the Rules in this Chapter.

                    Amended: October 2012
                    Amended: January 2011
                    October 07

                  • BC-5.1.10

                    The Rules may be amended, in whole or in part, from time to time by the CBB. In addition, the CBB may, at its discretion and as it so deems appropriate, issue specific directions to all or any retail bank licensees regarding abusers of cheques or any particular abuser of cheques.

                    Amended: October 2012
                    Amended: January 2011
                    October 07

              • BC-5.2 BC-5.2 General Guidance on Administration of Dishonoured Cheques

                • BC-5.2.1

                  Retail bank licensees that wish to issue cheque guarantee cards for an amount not exceeding BD 200 may do so, subject to informing the Director of Banking Services at the CBB of their intention and the arrangements governing the issue of such cards.

                  Amended: January 2011
                  October 07

                • BC-5.2.2

                  Retail bank licensees, generally, should take steps to extend their administrative supervision and control over current account customers (in particular those who are in repeated breach of normally-accepted behaviour), and to stress to account holders the need for an appropriate level of discipline in the usage of cheques.

                  October 07

                • BC-5.2.3

                  Retail bank licensees should exercise greater vigilance over borrowers, especially in the area of consumer finance, where such borrowers maintain their current accounts at a bank or banks other than at the lending bank.

                  October 07

                • BC-5.2.4

                  The CBB will monitor the incidence of returned cheques on a monthly basis (as stipulated in Section BC-5.1) in order to determine the extent to which such incidence is being reduced or otherwise.

                  Amended: January 2011
                  October 07

              • BC-5.3 BC-5.3 Penalty Charges on Dishonoured Cheques

                • BC-5.3.1

                  The CBB will impose penalty charges of BD 7 on each returned cheque for the reasons of 'Insufficient Funds', 'Refer to Drawer', 'Not Arranged For', 'Present the cheque again', and 'Account Closed'. Individual banks will continue to be informed daily of any charges accruing to their accounts. The respective accounts will be debited on the same day.

                  Amended: July 2017
                  Amended: October 2013
                  Amended: January 2011
                  October 07

                • BC-5.3.2

                  [This paragraph was deleted in April 2018].

                  Deleted: April 2018
                  Amended: October 2013
                  October 07

            • BC-5A BC-5A Return Policy — Post-Dated Cheques

              • BC-5A.1 BC-5A.1 Return Policy — Post-Dated Cheques

                • BC-5A.1.1

                  When a customer fully repays his/her credit outstanding amount in full or settles in part pursuant to a settlement agreement, the subject retail bank licensee must immediately return all holding of the customer's post-dated cheques taken as collateral or destroy such cheques and inform the customer in writing.

                  Added: January 2017

            • BC-6 BC-6 Automated Teller Machines (ATM)

              • BC-6.1 BC-6.1 [This Section was deleted in October 2019].

                • BC-6.1.1

                  [This Paragraph was deleted in October 2019].

                  Deleted: October 2019
                  October 07

                • BC-6.1.2

                  [This Paragraph was deleted in October 2019].

                  Deleted: October 2019
                  Amended: October 2012
                  Amended: January 2011
                  October 07

                • General Criteria

                  • BC-6.1.3

                    [This Paragraph was deleted in October 2019].

                    Deleted: October 2019
                    Amended: January 2011
                    October 07

                  • BC-6.1.4

                    [This Paragraph was deleted in October 2019].

                    Deleted: October 2019
                    Amended: January 2011
                    October 07

                  • BC-6.1.5

                    [This Paragraph was deleted in October 2019].

                    Deleted: October 2019
                    October 07

                  • BC-6.1.6

                    [This Paragraph was deleted in October 2019].

                    Deleted: October 2019
                    Amended: July 2016
                    Amended: April 2012
                    Amended: January 2011
                    October 07

                  • BC-6.1.7

                    [This Paragraph was deleted in October 2019].

                    Deleted: October 2019
                    Amended: January 2011
                    October 07

                  • BC-6.1.8

                    [This Paragraph was deleted in October 2019].

                    Deleted: October 2019
                    Amended: January 2011
                    October 07

                  • BC-6.1.9

                    [This Paragraph was deleted in October 2019].

                    Deleted: October 2019
                    Amended: January 2011
                    October 07

                  • BC-6.1.10

                    [This Paragraph was deleted in October 2019].

                    Deleted: October 2019
                    Amended: April 2012
                    Amended: January 2011
                    October 07

                  • BC-6.1.11

                    [This Paragraph was deleted in October 2019].

                    Deleted: October 2019
                    Added: April 2012

              • BC-6.2 BC-6.2 GCC ATM Network Charges [This Section was deleted in April 2018]

                • BC-6.2.1

                  [This paragraph was deleted in April 2018].

                  Deleted: April 2018
                  October 07

                • BC-6.2.2

                  [This paragraph was deleted in April 2018].

                  Deleted: April 2018
                  October 07

                • BC-6.2.3

                  [This paragraph was deleted in April 2018].

                  Deleted: April 2018
                  Amended: January 2011
                  October 07

              • BC-6.3 BC-6.3 Local ATM Network Charges [This Section was deleted in April 2018]

                • BC-6.3.1

                  [This paragraph was deleted in April 2018].

                  Deleted: April 2018
                  Amended: April 2016
                  Added: January 2014

                • BC-6.3.2

                  [This Paragraph was deleted in April 2016.]

                  Deleted: April 2016
                  Added: January 2014

                • BC-6.3.3

                  [This Paragraph was deleted in April 2016.]

                  Deleted: April 2016
                  Added: January 2014

            • BC-7 BC-7 Margin Trading System

              • BC-7.1 BC-7.1 Introduction

                • BC-7.1.1

                  This Chapter applies to all full commercial banks in Bahrain.

                  October 07

                • BC-7.1.2

                  Investors purchasing securities listed on any licensed exchange may pay for them under the Margin Trading System ("The System") by borrowing a portion of the purchase price from a participating bank. The System is subject to relevant provisions of the CBB Law, the Rulebook of the licensed exchange, any rules and regulations issued pursuant to such Law, Rulebook and this Module. The System applies to equities in companies listed on any licensed exchange. Unless restrictions apply under Bahrain law in this regard, the System shall be available to Bahraini or non-Bahraini investors, whether resident or non-resident in Bahrain.

                  Amended: January 2011
                  October 07

                • BC-7.1.3

                  The main objective of introducing the System is to enhance the overall activity on any licensed exchange, allowing investors to leverage their investments, in a controlled manner.

                  Amended: January 2011
                  October 07

                • General Criteria

                  • BC-7.1.4

                    Only retail bank licensees will be permitted to act as participating banks for the System. Participating banks must each receive the prior general written approval of the CBB in order to take part in the System. The CBB will notify the licensed exchange of the identity of participating banks for the System. The CBB's approval may be withdrawn at its discretion.

                    Amended: January 2011
                    October 07

                  • BC-7.1.5

                    SRO members who are not retail banks will not be permitted to act as lenders or financiers for the System.

                    Amended: January 2011
                    October 07

              • BC-7.2 BC-7.2 Limits and Trading Rules

                • BC-7.2.1

                  An investor may, through his relationship with any participating bank under the System, invest in securities made up by way of the investor's own initial margin and by way of financing from the relevant participating bank to that investor.

                  Amended July 09
                  October 07

                • BC-7.2.2

                  Such financing referred to in Paragraph BC-7.2.1 is subject to the limit on margin percentage given in Paragraph BC-7.2.10.

                  Amended: January 2011
                  Amended July 09
                  October 07

                • BC-7.2.3

                  The amount of the margin facility made to an investor under the System shall be included as an exposure to that customer, and contribute towards the large exposures limit and the consumer finance limit for that person.

                  October 07

                • BC-7.2.4

                  The total amount of financing granted by an individual participating bank to all investors under the System shall not, at any time exceed 15% of that participating bank's capital base, such percentage to be reviewed by the CBB at its discretion from time to time.

                  October 07

                • BC-7.2.5

                  The CBB will require participating banks to inform the Credit Reference Bureau ('CRB') of all facility limits approved to investors under the System from time to time. Participating banks must check with the CRB on the amount of facility limits outstanding under the System at any time to a particular investor.

                  Amended: July 2016
                  Amended: January 2011
                  October 07

                • SRO Members

                  • BC-7.2.6

                    Only licensed SRO members who meet the requirements to participate in the System and are authorised as such by the licensed exhange and the CBB will be permitted to act as brokers for the System.

                    Amended: January 2011
                    October 07

                • Documentation

                  • BC-7.2.7

                    Only standard-form documents (application forms and agreements) will be used for the System. Standard-form agreements, drafted and approved in advance by the licensed exchange, will be entered into between the participating bank and the investor (in respect of financing), and between the participating bank and the investor and the SRO member (in respect of trading) and, as relevant, these agreements shall (amongst other things) confirm that:

                    (a) The investor is borrowing or financing a stated amount from the participating bank for the purpose of taking part in the System;
                    (b) The investor will repay such stated amount, together with any interest or charges thereon, when due and in accordance with the agreement;
                    (c) The investor understands the risks involved in margin trading as well as the implications of the undertakings given by him;
                    (d) The participating bank can sell the securities bought through the System if the relevant margin is called and not met, without further formalities being required;
                    (e) The SRO member is liable for marking the securities to market on a daily (or more frequent) basis and for keeping the participating bank updated as to the participating bank's exposure to the investor;
                    (f) The investor can place orders with the broker for the purchase of securities up to the limit permitted by the agreement;
                    (g) Each party to the agreement in question shall abide by the duty of confidentiality imposed on him in relation to the matters set out in the agreement; and
                    (h) There is an overriding obligation on the parties thereto to comply with Bahrain law in general and, in particular, with the share-ownership restrictions applying to certain types of securities.
                    Amended: January 2011
                    October 07

                • Owner of the Securities bought Using the System

                  • BC-7.2.8

                    For ease of transfer and sale of the securities in the event that a margin is called by the participating bank but not met by the investor, the securities will be registered in the participating bank's name (for the account of the investor) and held by a custodian.

                    Amended: January 2011
                    October 07

                  • BC-7.2.9

                    Under Paragraph BC-7.2.8 above; (a) the securities should not be considered as part of the bank's own assets for the purposes of determining ownership/control under Bahrain law, and (b) if the investor has discharged his obligations to the participating bank under the System and the securities have not been sold, the securities shall be transferred into the legal ownership of the investor.

                    Amended: January 2011
                    October 07

                • Margin Percentage

                  • BC-7.2.10

                    For equities listed on any licensed exchange, an investor shall have the right to borrow a loan the value of which shall not exceed 50% of the total value of the funds being invested (i.e. 1:1). The CBB and the licensed exchange shall coordinate in making any change to the margin percentages set for the System.

                    Amended: April 2011
                    Amended: January 2011
                    October 07

                • Margin Call Top-up

                  • BC-7.2.11

                    The margin call top-up shall be 30% of the total value of the funds invested by an investor through a margin account with a participating bank. An investor shall settle a margin call on the settlement date (as determined by the BSE) by making a cash payment of such amount to the participating bank. Such cash payment may, at the investor's discretion and in whole or part, come from the sale of the securities bought through the System, or otherwise. Failure to meet such margin call will, however, give the participating bank the right to sell the securities bought through the System.

                    Amended: January 2011
                    October 07

                • Margin Interest

                  • BC-7.2.12

                    The participating bank shall charge a rate of interest or impose charges on the financing amount granted to the investor at a rate or on a basis to be determined by the participating bank. In the event that investor's margin account is in credit in excess of the margin applicable thereto, interest or profit shall be paid on the excess at a rate to be determined by the participating bank.

                    October 07

            • BC-8 BC-8 Investment Business Activities

              • BC-8.1 BC-8.1 Scope of Application in Relation to Customer Categories

                • BC-8.1.1

                  This Chapter provides for two categories of customers, and applies different levels of protection to each, depending on their level of sophistication.

                  Added: April 2008

                • BC-8.1.2

                  The scope of application of this Chapter BC-8 with regards to customer categories is as follows:

                  Section Subject Matter Customer Category
                  BC-8.3 Overarching Principles All categories.
                  BC-8.4 Customer Classification All categories.
                  BC-8.5 Marketing and Promotion All categories; BC-8.5.3 and BC-8.5.4 apply to retail customers only.
                  BC-8.6 Accepting Customers Retail customers only.
                  BC-8.7 Suitability Retail customers only.
                  BC-8.8 Disclosure of Information All categories; BC-8.8.5 to BC-8.8.12 apply to retail customers only.
                  BC-8.9 Dealing and Managing All categories; various Rules apply to retail customers only.
                  BC-8.10 Reporting to Customers All categories.
                  BC-8.11 Complaints All categories.
                  BC-8.12 Conflicts of Interest All categories.
                  BC-8.13 Appendix All categories; various Paragraphs apply to retail customers only.


                  Added: April 2008

                • Overseas Branches and Subsidiaries

                  • BC-8.1.3

                    Locally incorporated conventional bank licensees must ensure that their branches and subsidiaries operating in foreign jurisdictions comply, at a minimum, with local conduct of business standards and regulatory requirements (where applicable).

                    Added: April 2008

                  • BC-8.1.4

                    For branches of foreign banks located in Bahrain, these requirements only apply to the business and customers of the Bahrain branch.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.1.5

                    The CBB encourages locally incorporated conventional bank licensees to apply — with respect to their overseas branches and subsidiaries — conduct of business standards at least equivalent to those set out in this Module. Where this is not the case, then the CBB will consider any potential risk to the conventional bank licensee that may arise through adverse reputational or other consequences.

                    Amended: January 2011
                    Added: April 2008

              • BC-8.2 BC-8.2 General Rules

                • BC-8.2.1

                  This Module applies to the regulated banking services listed in Subparagraphs LR-1.3.1 (h to l) of all conventional bank licensees.

                  Amended: April 2012
                  Amended: January 2011
                  Added: April 2008

                • BC-8.2.2

                  This Module aims to encourage high standards of business conduct, which are broadly applicable to all conventional bank licensees, all regulated banking services referred to in Paragraph BC-8.2.1, and all types of customers. The CBB, nevertheless, recognises that customers' level of sophistication and understanding of risks underlying financial instruments vary. Accordingly, the level of safeguards provided for in the business conduct requirements for retail customers, for instance, are different from those for accredited investors.

                  Amended: January 2011
                  Added: April 2008

                • BC-8.2.3

                  This Chapter comprises a number of overarching principles of business conduct, with respect to the conduct of regulated banking services by conventional bank licensees; these cover the various stages of the life of a customer relationship.

                  Added: April 2008

                • BC-8.2.4

                  Conventional bank licensees must maintain adequate records to demonstrate compliance with the requirements in this Chapter.

                  Added: April 2008

                • BC-8.2.5

                  The CBB will monitor compliance with this Chapter. If required, the CBB may develop more detailed rules and guidance to supplement the existing IBCP.

                  Added: April 2008

              • BC-8.3 BC-8.3 Overarching Principles

                • BC-8.3.1

                  In the course of offering regulated banking services listed in Paragraph BC-8.2.1, licensees must:

                  (a) Act with due skill, care and diligence in all dealings with customers;
                  (b) Act fairly and reasonably in all dealings with customers;
                  (c) Identify customers' specific requirements in relation to the products and services about which they are enquiring;
                  (d) Ensure that any advice to customers is aimed at the customers' interests and based on adequate standards of research and analysis;
                  (e) Provide sufficient information to enable customers to make informed decisions when purchasing investment products and services offered to them;
                  (f) Provide sufficient and timely documentation to customers to confirm that their investment arrangements are in place and provide all necessary information about their products, rights and responsibilities;
                  (g) Maintain fair treatment of customers through the lifetime of the customer relationships, and ensure that customers are kept informed of important events;
                  (h) Ensure complaints from customers are dealt with fairly and promptly;
                  (i) Ensure that all information provided to customers is clear, fair and not misleading, and appropriate to customers' information needs; and
                  (j) Take appropriate measures to safeguard any money and property handled on behalf of customers and maintain confidentiality of customer information.
                  Amended: January 2011
                  Added: April 2008

                • BC-8.3.2

                  The Rules contained in Chapter BC-8 are largely principles-based and focus on desired outcomes rather than on prescribing detailed measures to achieve those outcomes. This gives conventional bank licensees flexibility in how to implement the basic standards prescribed in this Module.

                  Added: April 2008

              • BC-8.4 BC-8.4 Customer Classification

                • BC-8.4.1

                  A conventional bank licensee must classify the persons with or for whom it intends to carry on regulated banking services listed in Paragraph BC-8.2.1, in accordance with the requirements in this Section, and communicate its classification to the person concerned. The customer must be notified of his/her customer classification before any documentation is finalised or where regulated banking services or products listed in Paragraph BC-8.2.1 are offered.

                  Amended: January 2011
                  Added: April 2008

                • BC-8.4.2

                  The purpose of the classification is to ensure that conventional bank licenseescustomers are appropriately categorised so that regulatory protections are focused on those classes of customer that need them most: The following wording may be used for customer notification of status. ‘According to the Central Bank of Bahrain Rulebook, we are required to notify all customers of their status for the purpose of investment business and certain regulated banking services. For the purpose of this relationship, you are classified as an accredited investor/retail customer.’

                  Added: April 2008

                • BC-8.4.3

                  Before conducting regulated banking services listed in Paragraph BC-8.2.1 with or for any person, a conventional bank licensee must take reasonable steps to obtain appropriate information to establish whether that person is an accredited investor or a retail customer.

                  Amended: January 2011
                  Added: April 2008

                • BC-8.4.4

                  The treatment of a conventional bank licensee’s customers must be in accordance with the classification it has established for the purpose of Rule BC-8.4.3.

                  Added: April 2008

                • BC-8.4.5

                  Where specific rules do not exist for a particular class of customers, the CBB requires appropriate treatment in accordance with the overarching principles set forth in Section BC-8.3.

                  Added: April 2008

                • Accredited Investors

                  • BC-8.4.6

                    For the purpose of Rule BC 8.4.3, an accredited investor includes:

                    (a) Individuals holding financial assets (either singly or jointly with their spouse) of USD 1,000,000 or more;
                    (b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 1,000,000; or
                    (c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).
                    Amended: January 2011
                    Added: April 2008

                  • BC-8.4.7

                    Conventional bank licensees must notify a customer (that is not licensee of the CBB or a licensed financial institution in a foreign country) in writing, that he is being classified as an accredited investor and provide a written warning that he will not benefit from the specific protections afforded to retail investors.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.4.8

                    Persons classified as accredited investors under Rule BC-8.4.6 may, however, request treatment as retail customers where the concerned product is a listed security or is retail in nature, in which case conventional bank licensees must agree to treat them as retail customers.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.4.9

                    A retail customer, as defined in Rule BC-8.4.10, may voluntarily elect to be treated as an accredited investor. In this instance the conventional bank licensee must obtain a signed declaration to that effect prior to any provision of regulated banking services.

                    Added: April 2008

                • Retail Customer

                  • BC-8.4.10

                    For the purposes of Rule BC-8.4.3 a retail customer means a customer who is not classified as an accredited investor under Rule BC-8.4.6 .

                    Amended: January 2011
                    Added: April 2008

                • Records

                  • BC-8.4.11

                    A conventional bank licensee must make a record of the classification established for each customer, including sufficient information to support such classification.

                    Added: April 2008

              • BC-8.5 BC-8.5 Marketing and Promotion

                • BC-8.5.1

                  The requirements of this section apply to product specific or service specific material and not to general brand awareness promotional material.

                  Added: April 2008

                • BC-8.5.2

                  Conventional bank licensees must ensure that all advertising and promotional material that is sent to any class of customer is fair, clear and not misleading.

                  Added: April 2008

                • BC-8.5.3

                  With respect to retail customers, in ensuring that the description of the product or the service in the promotional material is fair, clear and not misleading, the conventional bank licensee should, among other precautionary measures, ensure that:

                  a) The purpose, and to the extent practicable, the content, of the information or communication are likely to be understood by the average member of the group to whom the communication is addressed;
                  b) Key items contained in the information are given due prominence;
                  c) The method of presentation in the information does not disguise, diminish, or obscure important risks, warnings or information; and
                  d) The communication does not omit information that is material to ensure it is fair, clear and not misleading.

                  Added: April 2008

                • BC-8.5.4

                  In ensuring that the description of the product or the service in the promotional material is fair, the conventional bank licensee should avoid exaggerating the potential benefits of the investment service or financial instrument in any communication with a retail customer or potential retail customer.

                  Added: April 2008

                • BC-8.5.5

                  In ensuring that the description of the product or the service in relation to promotional material directed at retail customers is adequate, the conventional bank licensee should: ensure that the promotional material contains a balanced description of the main characteristics of the financial instrument and/or service state it relates, including the nature of the financial commitment and risks involved; whether or not the financial instruments involved are illiquid, and traded in a recognised exchange or market; the existence or absence of any right of withdrawal or cancellation and, where such a right exists, its duration and the conditions for exercising it, including information on any amount that the retail customer may be required to pay to exercise that right; and state if the communication relates to a financial instrument or service of a person other than the conventional bank licensee, the name of the person.

                  Added: April 2008

                • BC-8.5.6

                  Conventional bank licensees must ensure that the accuracy of all material statements of fact in promotional materials is supported by adequate evidence.

                  Added: April 2008

                • BC-8.5.7

                  Conventional bank licensees must not, in any form of communication with an individual customer or any class of customer, unreasonably attempt to limit or avoid any duty or liability it may have to that individual customer or class of customer in relation to regulated banking services, unless otherwise agreed in writing by both parties.

                  Added: April 2008

                • BC-8.5.8

                  An example of an unreasonable attempt to limit liability is where a financial product is given protection or compensation status in its home country and such status is not given by the Bahrain Bank (or branch) to its customers.

                  Added: April 2008

                • BC-8.5.9

                  Conventional bank licensees that underwrite or market public offerings must ensure that their promotional material complies with the relevant capital markets disclosure standards of the CBB.

                  Added: April 2008

                • BD-8.5.10

                  Capital markets disclosure standards are currently contained in the Disclosure Standards Regulation of 3 December 2003.

                  Added: April 2008

                • Content of Promotions

                  • BC-8.5.11

                    Before a conventional bank licensee communicates any promotional material on a specific product or service to a customer or a potential customer it must ensure that the promotional material at the very least contains the information laid out in Paragraph BC-8.13.1.

                    Added: April 2008

                  • BC-8.5.12

                    Conventional bank licensees must not make use of the name of the CBB in any promotion in such a way that would indicate endorsement or approval of its products or services.

                    Added: April 2008

                  • BC-8.5.12A

                    For greater certainty, notification in promotion material that a bank is licensed by the CBB is not regarded as endorsement or approval by the CBB of any products or services being offered by the bank and does not contravene the requirements of Paragraph BC-8.5.12.

                    Added: July 2012

                • Records

                  • BC-8.5.13

                    Conventional bank licensees must maintain a record of all promotional materials issued by them or on their behalf.

                    Added: April 2008

                • Real Time Promotions

                  • BC-8.5.14

                    Conventional bank licensees must not make a real time promotion to retail customers unless the concerned customer has been notified of the fact in advance and has agreed in writing to receive real time promotions.

                    Added: April 2008

                  • BC-8.5.15

                    For the purposes of Paragraph BC-8.5.14, a real time promotion is a promotion made in the course of a personal visit, telephone conversation or other interactive dialogue.

                    Added: April 2008

                  • BC-8.5.16

                    Consent to receive real time promotions could be, for instance, at the time of the initial customer profiling, by means of signing a form clearly indicating such consent.

                    Added: April 2008

                  • BC-8.5.17

                    A representative of the conventional bank licensee must, on making contact for the first time with a customer, and again at any time when asked to do so by the customer:

                    (a) Identify himself as being a representative of the conventional bank licensee;
                    (b) State the name of the conventional bank licensee; and
                    (c) Present the customer with a business card on meeting that customer, unless he has given him such a card at a previous meeting. The business card must include a statement of the conventional bank licensee's licensing status.
                    Amended: October 2010
                    Added: April 2008

                  • BC-8.5.18

                    For the purposes of Rule BC-8.5.17(c), the statement on the business card should make clear the licensing status of the conventional bank licensee; however it should not lead the customer to believe that the product being offered has been approved by the CBB. The suggested wording for the statement of licensing status is as follows: "Licensed as a conventional retail /wholesale bank by the CBB".

                    Amended: October 2010
                    Added: April 2008

                  • BC-8.5.19

                    In oral communications with a retail customer, whether in person or by telephone, the representative of the conventional bank licensee must:

                    (i) Conduct himself in a polite manner and respect the wishes of the customer;
                    (ii) State the genuine purpose of the call at the commencement of the conversation;
                    (iii) Ascertain whether or not the customer wishes him to proceed with the conversation if the time of the conversation was not previously agreed by the customer;
                    (iv) Explain clearly the financial instruments or other services which he is authorised to arrange;
                    (v) Recognise and respect the right of the customer to terminate the call at any time; and
                    (vi) If he requests another appointment and the customer refuses, shall accept that refusal courteously and in such a manner as to cause no embarrassment to the customer.

                    Added: April 2008

                  • Records

                    • BC-8.5.20

                      Conventional bank licensees must keep sufficient records of real time promotions made by them, or on their behalf by other persons, for CBB’s supervision purposes.

                      Added: April 2008

                    • BC-8.5.21

                      These records should include evidence that customers have been notified in advance and agreed to receive real time promotions, as required under Rule BC-8.5.14.

                      Added: April 2008

              • BC-8.6 BC-8.6 Accepting Customers

                • Applicability

                  • BC-8.6.1

                    This Section applies to retail customers only.

                    Added: April 2008

                • Terms of Business

                  • BC-8.6.2

                    Conventional bank licensees must provide their retail customers with their terms of business, setting out the basis on which the regulated banking services are to be conducted (see also Paragraph BC-8.8.13).

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.6.3

                    The terms of business in relation to providing regulated banking services as defined in Paragraph BC-8.2.1 to a retail customer must take the form of a customer agreement.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.6.4

                    The terms of business must include the rights and obligations of parties to the agreement, as well as other terms relevant to the regulated banking services. The terms of business must include, but are not limited to, the items included in Paragraph BC-8.13.2.

                    Added: April 2008

                  • BC-8.6.5

                    An application form in relation to regulated banking services will be deemed to be a customer agreement, provided the form includes the principal terms and conditions of the service, such that the customer is provided sufficient information to allow him to understand the basis on which the service is to be conducted.

                    Added: April 2008

                  • BC-8.6.6

                    The customer agreement must be provided in good time prior to providing the regulated banking service.

                    Added: April 2008

                  • BC-8.6.7

                    For the purposes of Rule BC-8.6.6, ‘good time’ should be taken to mean sufficient time to enable the customer to consider properly the service or financial instrument on offer before he is bound.

                    Added: April 2008

                • Customer Understanding and Acknowledgement

                  • BC-8.6.8

                    Conventional bank licensees must not enter into a customer agreement unless they have taken reasonable care to ensure that their retail customer has had a proper opportunity to consider the terms.

                    Added: April 2008

                  • BC-8.6.9

                    Conventional bank licensees must obtain their retail customer’s consent to the terms of the customer agreement as evidenced by a signature or an equivalent mechanism.

                    Added: April 2008

                  • BC-8.6.10

                    The equivalent mechanism refers to instances where a customer may have signed a mandate letter or other document accompanying the terms of the customer agreement.

                    Added: April 2008

                  • BC-8.6.11

                    The customer agreement must contain the signatures of both parties to the agreement. If the agreement is signed by only the customer (in case it is in the form of an application), copies of the signed agreement must be provided by the conventional bank licensee to the customer.

                    Added: April 2008

                • Records

                  • BC-8.6.12

                    Conventional bank licensees must keep sufficient records of customer agreements and any documents referred to in the customer agreement as soon as the agreement comes into force, for CBB’s supervision purposes.

                    Added: April 2008

                  • BC-8.6.13

                    Detailed record-keeping requirements are contained in Module GR (General Requirements) and Module FC (Financial Crime).

                    Added: April 2008

              • BC-8.7 BC-8.7 Suitability

                • Applicability

                  • BC-8.7.1

                    This Section applies to retail customers only.

                    Added: April 2008

                • Information and Communication

                  • BC-8.7.2

                    Conventional bank licensees must seek information from their retail customers (and potential retail customers about their needs, circumstances and investment objectives (including their risk appetite), relevant to the services to be provided.

                    Added: April 2008

                  • BC-8.7.3

                    For the purposes of Rule BC-8.7.2, the conventional bank licensee, when providing the regulated investment services, should ask the customer or potential customer to provide information regarding his knowledge and experience in the investment field relevant to the specific type of financial instrument or service offered or demanded so as to enable the licensee to assess whether the financial instrument or service is appropriate to the customer. The evaluation of the customer's needs, circumstances and investment objectives (including risk appetite) can be done through a structured questionnaire.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.7.4

                    For the purposes of satisfying the requirement under Rule BC-8.7.2, conventional bank licensees must ensure that the information and facts they hold about their customers are accurate, complete and up to date.

                    Added: April 2008

                  • BC-8.7.5

                    Where a conventional bank licensee is managing financial instruments for a customer, it must periodically assess whether the customer’s portfolio or account remains suitable over the lifetime of the customer relationship and advise the customer if it is no longer suitable.

                    Added: April 2008

                  • BC-8.7.6

                    Where a conventional bank licensee has pooled a customer’s assets with those of others, with a view to taking common discretionary management decisions, the conventional bank licensee must take reasonable steps to ensure that the transaction is suitable for the related customers having regard to their stated investment objectives.

                    Added: April 2008

                • Records

                  • BC-8.7.7

                    Conventional bank licensees must keep a record of each recommendation made to retail customers, and be able to demonstrate to the CBB compliance with this Section.

                    Added: April 2008

              • BC-8.8 BC-8.8 Disclosure of Information

                • Applicability

                  • BC-8.8.1

                    This Section applies to conventional bank licensees in relation to their dealings with all categories of customers, except when stated otherwise.

                    Added: April 2008

                • Initial Disclosure Requirement

                  • BC-8.8.2

                    A conventional bank licensee must provide (with respect to regulated banking services), comprehensible information to customers or potential customers on:

                    a) Itself and the types of services that it can provide;
                    b) Whether it is acting as agent or principal;
                    c) Fees, costs and associated charges payable by the customer such as:
                    i. The basis or amount of its charges, remuneration and commission for conducting regulated financial services and
                    ii. The nature or amount of any other income receivable by it or, to its knowledge, by its associate and attributable to that regulated banking service;
                    d) Financial instruments and proposed strategies and appropriate guidance on and warnings of the risks associated with those financial instruments and strategies; and
                    e) Information about methods of redress.

                    Added: April 2008

                  • BC-8.8.3

                    The purpose of Paragraph BC-8.8.2 is to ensure that customers are reasonably able to understand the nature and risks of the investment service and type of financial instrument that is being offered and, consequently, to take investment decisions on an informed basis. This information may be provided in standard format.

                    Amended: January 2011
                    Added: April 2008

                • Risks

                  • BC-8.8.4

                    Conventional bank licensees must disclose adequate information to all classes of customers about risks underlying the financial instrument that are not readily apparent and which relate to the regulated banking service being provided.

                    Added: April 2008

                  • BC-8.8.5

                    Without prejudice to the scope of the requirement under Rule BC-8.8.2(c), conventional bank licensees must provide retail customers with appropriate guidance on, and warnings of, relevant risks when providing regulated banking services, in relation to:

                    (a) Transactions in illiquid financial instruments;
                    (b) Leveraged transactions, including asset portfolios or collective investment schemes that have embedded leverage;
                    (c) Financial instruments subject to high volatility in normal market conditions;
                    (d) Securities repurchase agreements or securities lending agreements;
                    (e) Transactions which involve credit, margin payments, or deposit of collateral;
                    (f) Transactions involving material foreign exchange risk;
                    (g) Interests in real estate; and/or
                    (h) Islamic financial instruments.
                    Amended: January 2011
                    Added: April 2008

                  • BC-8.8.6

                    In relation to transactions involving warrants or derivatives, conventional bank licensees must provide retail customers with a written statement that includes explanations of their characteristics, in particular their leverage effect, liquidity and price volatility.

                    Added: April 2008

                  • BC-8.8.7

                    To satisfy Rule BC-8.8.6, with respect to warrants, conventional bank licensees should provide retail customers with a statement that includes, at a minimum, the information contained in Paragraph BC-8.13.3.

                    Added: April 2008

                  • BC-8.8.8

                    To satisfy Rule BC-8.8.6, with respect to futures contracts, conventional bank licensees should provide retail customers with a statement that includes, at a minimum, the information contained in Paragraph BC-8.13.4.

                    Added: April 2008

                  • BC-8.8.9

                    To satisfy Rule BC-8.8.6, with respect to option transactions, conventional bank licensees should provide retail customers with a statement that includes, at a minimum, the information contained in Paragraphs BC-8.13.5 and BC-8.13.6.

                    Added: April 2008

                  • BC-8.8.10

                    In relation to a transaction in a financial instrument that is not readily realisable, conventional bank licensees must:

                    (a) Warn the retail customer that there is a restricted market for such financial instruments, and that it may therefore be difficult to deal in the financial instrument or to obtain reliable information about its value; and
                    (b) Disclose any position knowingly held by the conventional bank licensee or any of its associates in the financial instrument or in a related financial instrument.

                    Added: April 2008

                  • BC-8.8.11

                    The risk warning given to a retail customer or potential retail customer must be given due prominence in all related materials and must not be concealed or masked in any way by the wording, design or format of the information provided.

                    Added: April 2008

                  • BC-8.8.12

                    Risk warnings provided to a retail customer or potential retail customer about warrants or derivatives must make clear that the instrument can be subject to sudden and sharp falls in value. Where the retail customer may not only lose his entire investment but may also be required to pay more later, he must also be warned about this fact and the possible obligation to provide extra funding.

                    Added: April 2008

                • Cancellations and Withdrawals

                  • BC-8.8.13

                    Conventional bank licensees must disclose in their terms of business the existence or absence of a right to cancel as per the provisions of Paragraph BC-8.6.2.

                    Added: April 2008

                  • BC-8.8.14

                    Conventional bank licensees must pay due regard to the interests of their customers and treat them fairly.

                    Added: April 2008

                • Records

                  • BC-8.8.15

                    Conventional bank licensees must keep a record of statements issued in compliance with Rule BC-8.8.6, and of other information or recommendations provided to their customers, and be able to demonstrate to the CBB compliance with this Section.

                    Added: April 2008

              • BC-8.9 BC-8.9 Dealing and Managing

                • BC-8.9.1

                  Conventional bank licensees must apply the requirements contained in this Section to all customer categories.

                  Added: April 2008

                • Best and Timely Execution

                  • BC-8.9.2

                    Conventional bank licensees must take all reasonable steps to obtain, when executing orders, the best possible result for customers taking into account price, costs, speed, likelihood of execution and settlement, and any other consideration relevant to the execution of the order (subject to Paragraph BC-8.9.5 below).

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.9.3

                    Conventional bank licensees must establish and implement effective arrangements for complying with Rule BC-8.9.2 including:

                    a) Execution policies for each class of financial instrument;
                    b) Maintenance of and disclosure to customers of information regarding execution venues and arrangements for disclosure to customers if orders are to be executed outside regulated markets;
                    c) Monitoring of effectiveness of the order execution arrangements and execution policies in order to identify and, where appropriate, correct any deficiencies; and
                    d) Maintenance of audit trails to demonstrate to their customers that orders were executed in accordance with the relevant execution policy.

                    Added: April 2008

                  • BC-8.9.4

                    Conventional bank licensees are not required to provide best execution (as defined in Paragraph BC-8.9.5 below) where they have agreed with the customer in writing that they will not provide best execution.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.9.5

                    In determining whether a conventional bank licensee has taken reasonable care to provide the best overall price for a customer in accordance with Rules BC-8.9.2 to BC-8.9.4, the CBB will take into account whether an conventional bank licensee has:

                    (a) Executed orders promptly and sequentially;
                    (b) Discounted any fees and charges previously disclosed to the customer;
                    (c) Disclosed the price at which an order is executed; and
                    (d) Taken into account the available range of price sources for the execution of its customers’ transactions. In the case where the conventional bank licensee has access to prices of different regulated financial markets or alternative trading systems, it must execute the transaction at the best overall price available having considered other relevant factors.

                    Added: April 2008

                  • BC-8.9.6

                    Conventional bank licensees may only postpone the execution of a transaction if it is in the best interests of the customer, and the prior consent of the customer has been given, or when circumstances are beyond its control. The conventional bank licensee must maintain a record of all postponements together with the reasons for the postponement.

                    Added: April 2008

                  • BC-8.9.7

                    Factors relevant to whether the postponement of an existing customer order may be in the best interests of the customer include where:

                    (a) The customer order is received outside of normal trading hours;
                    (b) A foreseeable improvement in the level of liquidity in the financial instrument is likely to enhance the terms on which the conventional bank licensee can execute the order; or
                    (c) Executing the order as a series of partial executions over a period of time is likely to improve the terms on which the order as a whole is executed.

                    Added: April 2008

                • Non-market Price Transactions

                  • BC-8.9.8

                    Conventional bank licensees must not enter into a non-market price transaction in any capacity, with or for a customer, if it has reasonable grounds to suspect that the customer is entering into the transaction for an illegal or improper purpose.

                    Added: April 2008

                  • BC-8.9.9

                    For the purposes of Paragraph BC-8.9.8, a non-market price transaction is one where the price paid by the conventional bank licensee, or its customer, differs from the prevailing market price. With respect to transactions in financial instruments traded on a licensed exchange, licensees are reminded that in Bahrain the law prohibits off-market transactions.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.9.10

                    For the purposes of Paragraph BC-8.9.8, examples of improper purposes for transactions include:

                    (a) The perpetration of a fraud;
                    (b) The disguising or concealment of the nature of a transaction or of profits, losses or cash flows;
                    (c) Transactions which amount to market abuse;
                    (d) High-risk transactions under the Anti Money Laundering Regulations; and
                    (e) "Window dressing", in particular around the year end, to disguise the true financial position of the person concerned.

                    Added: April 2008

                  • BC-8.9.11

                    Rule BC-8.9.8 does not apply to a non-market-price transaction if it is subject to the rules of a recognised investment exchange.

                    Added: April 2008

                • Aggregation and Allocation

                  • BC-8.9.12

                    Conventional bank licensees may only aggregate an order for a customer with an order for other customers, or with an order for its own account, where:

                    (a) It is unlikely that the aggregation will disadvantage the customers whose orders have been aggregated; and
                    (b) It has disclosed to each customer concerned in writing that it may aggregate orders, where these work to the customer’s advantage.

                    Added: April 2008

                  • BC-8.9.13

                    If a conventional bank licensee has aggregated orders of customers, it must make a record of the intended basis of allocation and the identity of each customer before the order is effected (subject to the "best execution" provisions of Paragraph BC-8.9.2).

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.9.14

                    Where an allocation takes place, prices must not be changed. The order must be allocated equally so that no customer or broker is advantaged over any change.

                    Amended: April 2013
                    Added: April 2008

                  • BC-8.9.15

                    Conventional bank licensees must have written policies on aggregation and allocation which are consistently applied; these must include the policy that will be adopted when only part of the aggregated order has been filled.

                    Added: April 2008

                  • BC-8.9.16

                    Where a conventional bank licensee has aggregated a customer order with an order for other customers or with an order for its own account, and part or all of the aggregated order has been filled, it must:

                    (a) Promptly allocate the financial instruments concerned;
                    (b) Allocate the financial instruments in accordance with its stated policy;
                    (c) Ensure the allocation is done fairly and uniformly by not giving undue preference to itself or to any of those for whom it dealt;
                    (d) Give priority to satisfying customer orders where the aggregation order combines a customer order and an own account order, if the aggregate total of all orders cannot be satisfied, unless it can demonstrate on reasonable grounds that without its own participation it would not have been able to execute those orders on such favourable terms, or at all; and
                    (e) Make and maintain a record of:
                    (i) The date and time of the allocation;
                    (ii) The relevant financial instruments;
                    (iii) The identity of each customer concerned;
                    (iv) The amount allocated to each customer and to the conventional bank licensee; and
                    (v) The price of each financial instrument and allocation.
                    Amended: April 2013
                    Added: April 2008

                • Excessive Dealing

                  • BC-8.9.17

                    Conventional bank licensees must not advise any customer to transact with a frequency or in amounts that might result in those transactions being deemed excessive in light of historical volumes, market capitalisation, customer portfolio size and related factors. This Rule does not apply to customers classified as market counterparties.

                    Added: April 2008

                • Right to Realise a Retail Customer's Assets

                  • BC-8.9.18

                    Conventional bank licensees must not realise a retail customer’s assets, unless it is legally entitled to do so, and has either:

                    (a) Set out in the terms of business:
                    (i) The action it may take to realise any assets of the retail customer;
                    (ii) The circumstances in which it may do so;
                    (iii) The asset (if relevant) or type or class of asset over which it may exercise the right; or
                    (b) Given the retail customer written or oral notice of its intention to exercise its rights before it does so.

                    Added: April 2008

                • Margin Requirements

                  • BC-8.9.19

                    Before conducting a transaction with or for a retail customer, conventional bank licensees must notify the customer of:

                    (a) The circumstances in which the customer may be required to provide any margin;
                    (b) The form in which the margin may be provided;
                    (c) The steps the conventional bank licensee may be required or entitled to take if the customer fails to provide the required margin, including:
                    (i) The fact that the customer's failure to provide margin may lead to the conventional bank licensee closing out his position after a time limit specified by the firm;
                    (ii) The circumstances in which the conventional bank licensee will have the right or duty to close out the customer's position; and
                    (iii) The circumstances, other than failure to provide the required margin, that may lead to the conventional bank licensee closing out the customer’s position without prior reference to him.

                    Added: April 2008

                  • BC-8.9.20

                    Conventional bank licensees must close out a retail customer's open position if that customer has failed to meet a margin call within a maximum of five business days following the date on which the obligation to meet the call accrues, unless:

                    (a) The conventional bank licensee has received confirmation from a relevant third party (such as a clearing firm) that the retail customer has given instructions to pay in full; or
                    (b) The conventional bank licensee has taken reasonable care to establish that the delay is owing to circumstances beyond the retail customer's control.
                    Amended: January 2011
                    Added: April 2008

                  • BC-8.9.21

                    For the purposes of Rule BC-8.9.20, conventional bank licensees may require the closing of a retail customer’s open position in less than five business days, for their own risk management purposes.

                    Added: April 2008

                  • BC-8.9.22

                    Conventional bank licensees must also follow the requirements of Chapter BC-7 concerning the operation of the margin trading system.

                    Amended: January 2011
                    Added: April 2008

                • Programme Trading

                  • BC-8.9.23

                    Before a conventional bank licensee executes a programme trade, it must disclose to its customer whether it will be acting as a principal or agent. A conventional bank licensee must not subsequently act in a different capacity from that which is disclosed without the prior consent of the customer.

                    Added: April 2008

                  • BC-8.9.24

                    The term ‘programme trade’ describes a single transaction or series of transactions executed for the purpose of acquiring or disposing of, for a customer, all or part of a portfolio or a large basket of financial instruments.

                    Added: April 2008

                  • BC-8.9.25

                    Conventional bank licensees must ensure that neither they, nor an associate, execute an own account transaction in any financial instrument included in a programme trade, unless they have notified the customer in advance that they may do this, or can otherwise demonstrate that they have provided fair treatment to the customer concerned.

                    Added: April 2008

                • Records

                  • BC-8.9.26

                    Conventional bank licensees must keep a record of each step they undertake in relation to each transaction to demonstrate to the CBB compliance with Section BC-8.9.

                    Added: April 2008

              • BC-8.10 BC-8.10 Reporting to Customers

                • BC-8.10.1

                  Section BC-8.10 applies to all customer categories.

                  Added: April 2008

                • Confirmation of Transactions

                  • BC-8.10.2

                    When a conventional bank licensee executes a transaction in a financial instrument for a customer on a specific order, it must establish procedures to keep the customer informed of the essential details of the transaction and essential information regarding the carrying out of his order.

                    Added: April 2008

                  • BC-8.10.3

                    For the purposes of Rule BC-8.10.2, the essential details of the transaction and essential information regarding the carrying out of the order include:

                    (a) Execution price;
                    (b) Charges; and
                    (c) Date of execution.

                    Added: April 2008

                  • BC-8.10.4

                    For the purposes of Rule BC-8.10.2, conventional bank licensees must include at the very least in their confirmation notes, the information included in Paragraph BC-8.13.7.

                    Added: April 2008

                • Periodic Statements

                  • BC-8.10.5

                    Conventional bank licensees must promptly and at suitable intervals provide their customers with a written statement when they:

                    (a) Undertake the activity of managing financial instruments; or
                    (b) Operate a customer's account containing financial instruments.
                    Added: April 2008

                  • BC-8.10.6

                    Conventional bank licensees must provide a periodic statement:

                    (a) Monthly, if the customer is a retail customer and the retail customer's portfolio includes derivative transactions in highly volatile classes of financial instruments or leveraged transactions; or
                    (b) At least every six months in other cases.
                    Amended: July 2012
                    Added: April 2008

                  • BC-8.10.7

                    Periodic statements, issued in accordance with Rule BC-8.10.6, must contain, at the very least, the information contained in Paragraph BC-8.13.8, as at the end of the period covered.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.10.8

                    Where a conventional bank licensee undertakes the activity of managing financial instruments on a discretionary basis, the periodic statements, issued in accordance with Rule BC-8.10.6, must also include at the very least the information included in Paragraph BC-8.13.9.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.10.9

                    In addition to Rules BC-8.10.7 and BC-8.10.8, where the retail customer may not only lose his entire investment but may also be required to pay more later, conventional bank licensees must also include the additional information included in Paragraph BC-8.13.10.

                    Added: April 2008

                • Records

                  • BC-8.10.10

                    Conventional bank licensees must immediately record the essential elements of all orders that are received.

                    Added: April 2008

                  • BC-8.10.11

                    For the purposes of Rule BC-8.10.10, essential elements of orders received include the particulars of the customer and order, time, price of execution, and number of instruments.

                    Added: April 2008

                  • BC-8.10.12

                    Conventional bank licensees must record the essential elements of all:

                    (a) Orders executed;
                    (b) Transactions executed for their own account;
                    (c) Non-market price transactions entered into by the conventional bank licensee; and
                    (d) Orders that have been aggregated with their basis of allocation.

                    Added: April 2008

                  • BC-8.10.13

                    For purposes of Rule BC-8.10.12, conventional bank licensees should include, at the very least, the information provided in Paragraph BC-8.13.9.

                    Added: April 2008

                  • BC-8.10.14

                    Conventional bank licensees must make a copy of any confirmation of a transaction or periodic statement provided to a customer, and retain it for at least five years from the date on which it was provided.

                    Added: April 2008

              • BC-8.11 BC-8.11 [This section was deleted in October 2011]

                • BC-8.11.1

                  [This paragraph was deleted in October 2011]

                  Deleted: October 2011
                  Added: April 2008

                • BC-8.11.2

                  [This paragraph was deleted in October 2011]

                  Deleted: October 2011
                  Added: April 2008

                • BC-8.11.3

                  [This paragraph was deleted in October 2011]

                  Deleted: October 2011
                  Added: April 2008

                • [Deleted]

                  Deleted: October 2011

                  • BC-8.11.4

                    [This paragraph was deleted in October 2011]

                    Deleted: October 2011
                    Added: April 2008

                  • BC-8.11.5

                    [This paragraph was deleted in October 2011]

                    Deleted: October 2011
                    Added: April 2008

              • BC-8.12 BC-8.12 Conflicts of Interest

                • BC-8.12.1

                  Conventional bank licensees must undertake all reasonable steps to identify conflicts of interest between themselves (or any person directly or indirectly linked to them by control) and their customers, which may arise in the course of providing a regulated banking service.

                  Added: April 2008

                • BC-8.12.2

                  Where conflicts arise, conventional bank licensees must:

                  (a) Disclose any material interest or conflict of interest to the customer in writing (which may include a disclosure in the conventional bank licensee’s terms of business) either generally or in relation to a specific transaction, and take reasonable steps to ensure that the customer does not object;
                  (b) Establish information barriers between activities such as proprietary trading, portfolio management and corporate finance business; and
                  (c) Produce a written policy of independence, which requires an employee to disregard any conflict of interest or material interest when advising a customer or exercising discretion.

                  Added: April 2008

                • BC-8.12.3

                  If a conventional bank licensee determines that it is unable to manage a conflict of interest or material interest using one of the methods described in Rule BC-8.12.2 it must decline to act for the customer.

                  Added: April 2008

                • Personal Account Transactions

                  • BC-8.12.4

                    Conventional bank licensees must establish and maintain adequate policies and procedures, to ensure that:

                    (a) Employees involved with advising and arranging do not undertake a personal account transaction unless:
                    (i) The conventional bank licensee has, in a written notice, drawn to the attention of the employee the conditions upon which the employee may undertake personal account transactions and that the contents of such a notice are made a term of his contract of employment or services;
                    (ii) The conventional bank licensee has given its written permission to that employee for that transaction or to transactions generally in financial instruments of that kind; and
                    (iii) The transaction will not conflict with the conventional bank licensee’s duties to its customers;
                    (b) It receives prompt notification or is otherwise aware of each employee’s personal account transactions; and
                    (c) If an employee’s personal account transactions are conducted with the conventional bank licensee, each employee’s account must be clearly identified and distinguishable from other customers’ accounts.

                    Added: April 2008

                  • BC-8.12.5

                    The written notice in sub-Paragraph BC-8.12.4 (a)(i) must make it explicit that, if an employee is prohibited from undertaking a personal account transaction, he must not, except in the proper course of his employment:

                    (a) Procure another person to enter into such a transaction; or
                    (b) Communicate any information or opinion to another person if he knows, or ought to know, that the person will as a result, enter into such a transaction or procure some other person to do so.

                    Added: April 2008

                  • BC-8.12.6

                    Where a conventional bank licensee has taken reasonable steps to determine that an employee will not be involved to any material extent in, or have access to information about, the conventional bank licensee’s investment business, then the conditions or restrictions on personal account transactions, in Rule BC-8.12.4, need not be applied to that employee.

                    Added: April 2008

                  • BC-8.12.7

                    Conventional bank licensees must establish and maintain procedures and controls so as to ensure that an investment analyst does not undertake a personal account transaction in a financial instrument if the investment analyst is preparing investment research:

                    (a) On that investment or its issuer; or
                    (b) On a related investment, or its issuer;

                    until the investment research is published or made available to the conventional bank licensee’s customers.

                    Added: April 2008

                • Investment Research

                  • BC-8.12.8

                    Where a conventional bank licensee issues investment research, its conflict of interest policy must specify the types of investment research issued by it. A conventional bank licensee that prepares and publishes investment research must have adequate procedures and controls to ensure:

                    (a) The effective supervision of investment analysts by following at the very least the items listed in Paragraph BC-8.13.11;
                    (b) That any actual or potential conflicts of interest are managed in accordance with Rule BC-8.12.1; and
                    (c) That the investment research issued to customers is not biased.

                    Added: April 2008

                  • BC-8.12.9

                    Conventional bank licensees that publish investment research must take reasonable steps to ensure that the investment research:

                    (a) Identifies the types of customers for which it is principally intended;
                    (b) Distinguishes fact from opinion or estimates, and includes references to sources of data used;
                    (c) Specifies the date when it was first published;
                    (d) Specifies the period the ratings or recommendations are intended to cover;
                    (e) Contains a clear and unambiguous explanation of the rating or recommendation system used;
                    (f) Includes a price chart or line graph depicting the performance of the financial instrument for the period that the conventional bank licensee has assigned a rating or recommendation for that financial instrument, which must also show the dates on which the ratings were revised; and
                    (g) Includes a distribution of the different ratings or recommendations, in percentage terms:
                    (i) For all financial instruments in respect of which the conventional bank licensee publishes investment research; and
                    (ii) For financial instruments, if any, where the conventional bank licensee has undertaken corporate finance business with or for the issuer over the past 12 months.

                    Added: April 2008

                  • BC-8.12.10

                    A conventional bank licensee must take reasonable steps to ensure that when it publishes investment research, disclosure is made of the following matters:

                    (a) Any financial interest or material interest that the investment analyst or a close relative has, which relates to the financial instrument;
                    (b) Any shareholding by the conventional bank licensee or its associate of 1% or more of the total issued share capital of the issuer;
                    (c) Whether the conventional bank licensee or its associate acts as corporate broker for the issuer;
                    (d) Any material shareholding by the issuer in the conventional bank licensee;
                    (e) Any corporate finance business undertaken by the conventional bank licensee with or for the issuer over the past 12 months, and any future relevant corporate finance business initiatives; and
                    (f) Whether the conventional bank licensee is a market maker in the financial instrument.
                    Amended: January 2011
                    Added: April 2008

                  • BC-8.12.11

                    If a conventional bank licensee acts as a manager or co-manager of an initial public offering or a secondary offering it must take reasonable steps to ensure that it does not publish investment research relating to the financial instrument during the period beginning on the day of publication of the listing particulars or a prospectus relating to the offering of that financial instrument and ending on the 30th calendar day after the day on which the financial instrument is admitted to trading.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.12.12

                    A conventional bank licensee and its associates must not knowingly execute an own account transaction in a financial instrument, which is the subject of investment research, prepared either by the conventional bank licensee or its associate, until the customers for whom the investment research was principally intended have had a reasonable opportunity to act upon it.

                    Amended: January 2011
                    Added: April 2008

                  • BC-8.12.13

                    The restriction in Rule BC-8.12.11 does not apply if:

                    (a) The conventional bank licensee or its associate is a market maker in the relevant financial instrument;
                    (b) The conventional bank licensee or its associate executes an unsolicited transaction for a customer; or
                    (c) It is not expected to materially affect the price of the financial instrument.

                    Added: April 2008

                • Inducements

                  • BC-8.12.14

                    Conventional bank licensees must have systems and controls, policies and procedures to ensure that neither they, nor any of their employees, offer, give, solicit or accept any inducement which is likely to conflict significantly with any duty that they owe to their customers.

                    Added: April 2008

                  • BC-8.12.15

                    A conventional bank licensee may only accept goods and services under a soft dollar agreement if:

                    (a) The goods and services do not constitute an inducement;
                    (b) The goods and services are reasonably expected to assist in the provision of regulated investment activities to the conventional bank licensee’s customers;
                    (c) The agreement is a written agreement for the supply of goods or services described in Rule BC-8.12.14, and these goods and services do not take the form of, or include, cash or any other direct financial benefit; and
                    (d) The conventional bank licensee makes adequate disclosures regarding the use of soft dollar agreements.

                    Added: April 2008

                  • BC-8.12.16

                    For the purpose of Sub-Paragraph BC-8.12.15(d), Paragraph BC-8.13.12 sets out the minimum disclosure requirements.

                    Added: April 2008

                  • BC-8.12.17

                    A soft dollar agreement is an agreement in any form under which a conventional bank licensee receives goods or services in return for investment business put through or in the way of another person.

                    Added: April 2008

                  • BC-8.12.18

                    Before a conventional bank licensee enters into a transaction for a customer, either directly or indirectly, with or through the agency of another person, under a soft dollar agreement which the conventional bank licensee has, or knows that another member of its group has, with that other person, it must disclose to its customer:

                    (a) The existence of the soft dollar agreement; and
                    (b) The conventional bank licensee’s or its group’s policy relating to soft dollar agreements.

                    Added: April 2008

                  • BC-8.12.19

                    If a conventional bank licensee has a soft dollar agreement under which the conventional bank licensee deals for a customer, the conventional bank licensee must provide that customer with information as set out in Paragraph BC-8.13.12.

                    Added: April 2008

              • BC-8.13 BC-8.13 Appendix

                • BC-8.13.1

                  The minimum information that should be contained in promotional material for specific products includes:

                  (a) The name of the conventional bank licensee communicating the promotional material;
                  (b) The conventional bank licensee’s Category of license;
                  (c) The conventional bank licensee’s address;
                  (d) A description of the main characteristics of the financial instrument involved or service offered;
                  (e) Suitable warning regarding the risks of the financial instrument involved and/or service offered; and
                  (f) A clear statement indicating that, if a retail customer (as defined in Section BC-8.4) is in any doubt about the suitability of the agreement which is the subject of the promotion, he should consult his own financial adviser, or else the conventional bank licensee.

                  Added: April 2008

                • BC-8.13.2

                  The minimum information that should be contained in the terms of business includes:

                  (a) The regulatory status of the conventional bank licensee;
                  (b) A statement that the licensee is bound by the CBB's regulation and licensing conditions;
                  (c) The licensee's name, address, e-mail and telephone number;
                  (d) A statement of the products and services provided by the licensee, as permitted by the CBB;
                  (e) The total price to be paid by the customer to the conventional bank licensee for its services, or, where an exact price cannot be indicated, the basis for the calculation of the price enabling the customer to verify it;
                  (f) Information on any rights the parties may have to terminate the contract early or unilaterally under its terms, including any penalties imposed by the contract in such cases;
                  (g) Where appropriate, the customer's investment objectives;
                  (h) Where appropriate, the extent to which the conventional bank licensee will consider the customers' personal circumstances when considering suitability (as required under Section BC-8.7) and the details of such matters that will be taken into account;
                  (i) Any conflict of interest disclosure as required by Section BC-8.12;
                  (j) Any disclosure of soft dollar agreements under Section BC-8.12;
                  (k) A statement that clearly indicates the following:
                  (i) The customer's right to obtain copies of records relating to his business with the licensee;
                  (ii) The customer's record will be kept for 5 years or as otherwise required by Bahrain Law; and
                  (l) The name and job title, address and telephone number of the person in the conventional bank licensee to whom any complaint should be addressed (in writing) by the customer.
                  Added: April 2008

                • BC-8.13.3

                  The minimum information that should be contained in a notice in relation to a warrant includes:
                  "A warrant is a time-limited right to subscribe for shares or debentures and is exercisable against the original issuer of the underlying securities. A relatively small movement in the price of the underlying security results in a disproportionately large movement, unfavourable or favourable, in the price of the warrant. The prices of warrants can therefore be volatile. It is essential for anyone who is considering purchasing warrants to understand that the right to subscribe which a warrant confers is invariably limited in time, with the consequence that if the investor fails to exercise this right within the predetermined time-scale then the investment becomes worthless. You should not buy a warrant unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges."

                  Added: April 2008

                • BC-8.13.4

                  The minimum information that should be contained in a notice in relation to a futures transaction includes:
                  "Transactions in futures involve the obligation to make, or to take, delivery of the underlying asset of the contract at a future date, or in some cases to settle the position with cash. They carry a high degree of risk. The 'gearing' or 'leverage' often obtainable in futures trading means that a small deposit or down payment can lead to large losses as well as gains. It also means that a relatively small movement can lead to a proportionately much larger movement in the value of your investment, and this can work against you as well as for you. Futures transactions have a contingent liability, and you should be aware of the implications of this, in particular the margining requirements."

                  Added: April 2008

                • BC-8.13.5

                  The minimum information that should be contained in a notice in relation to a purchased option includes:
                  "Buying options: buying options involves less risk than selling options because, if the price of the underlying asset moves against you, you can simply allow the option to lapse. The maximum loss is limited to the premium, plus any commission or other transaction charges. However, if you buy a call option on a futures contract and you later exercise the option, you will acquire the future. This will expose you to the risks associated with 'futures' and 'contingent liability investment transactions'."

                  Added: April 2008

                • BC-8.13.6

                  The minimum information that should be contained in a notice in relation to a written option includes:
                  "Writing options: if you write an option, the risk involved is considerably greater than buying options. You may be liable for margin to maintain your position and a loss may be sustained well in excess of the premium received. By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you, however far the market price has moved away from the exercise price. If you already own the underlying asset which you have contracted to sell (when the options will be known as 'covered call options') the risk is reduced. If you do not own the underlying asset ('uncovered call options') the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, and then only after securing full details of the applicable conditions and potential risk exposure."

                  Added: April 2008

                • BC-8.13.7

                  The minimum information that should be included in a transaction confirmation includes:

                  (a) The conventional bank licensee’s name and address;
                  (b) Whether the conventional bank licensee executed the transaction as principal or agent;
                  (c) The customer’s name, account number or other identifier;
                  (d) Where relevant, a description of the collective investment undertaking or fund, including the amount invested or number of units involved;
                  (e) Whether the transaction was a sale or purchase;
                  (f) The price or unit price at which the transaction was executed;
                  (g) If applicable, a statement that the transaction was executed on an execution only basis;
                  (h) The date and time of the transaction or a statement that the time of execution will be provided on request;
                  (i) Due date and procedure for settlement of transaction and the bank account;
                  (j) The amount the conventional bank licensee charges in connection with the transaction, including commission charges and the amount of any mark-up or mark-down, fees, taxes or duties;
                  (k) The amount or basis of any charges shared with another person or statement that this will be made available on request;
                  (l) For collective investment undertakings, a statement that the price at which the transaction has been executed is on a historic price or forward price basis, as the case may be;
                  (m) The regulated market on which the transaction was carried out or the fact that the transaction was undertaken outside a regulated market; and
                  (n) Whether the retail customer’s counterparty was the conventional bank licensee itself or any other person in the conventional bank group.

                  Added: April 2008

                • BC-8.13.8

                  The minimum information that should be included in a periodic statement includes:

                  (a) The number, description and value of each financial instrument;
                  (b) The amount of cash held;
                  (c) The total value of the portfolio; and
                  (d) A statement as to the basis on which the value of each financial instrument was calculated.

                  Added: April 2008

                • BC-8.13.9

                  The minimum information that should be included in a periodic statement, where the relationship includes portfolio management, includes:

                  (a) A statement of which financial instruments, if any, were at the closing date loaned to any third party and which financial instruments, if any, were at that date charged to secure borrowings made on behalf of the portfolio;
                  (b) The aggregate of any interest payments made and income received during the account period in respect of loans or borrowings made during that period;
                  (c) A management report on the strategy implemented (provided at least yearly);
                  (d) Total amount of fees and charges incurred during the period and an indication of their nature;
                  (e) Information on any remuneration received from a third party and details of calculation basis;
                  (f) Total amount of dividends, interest and other payments received during the period in relation to the customers’ portfolio;
                  (g) Details of each transaction which have been entered into for the portfolio during the period;
                  (h) The aggregate of money and details of all financial instruments transferred into and out of the portfolio during the period;
                  (i) The aggregate of any interest payments, including the dates of their application and dividends or other benefits received by the conventional bank licensee from the portfolio for its own account during that period;
                  (j) A statement of the aggregate charges of the conventional bank licensee and its associates; and
                  (k) A statement of the amount of any remuneration received by the conventional bank licensee or its associates or both from a third party.

                  Added: April 2008

                • BC-8.13.10

                  The minimum information that should be included in periodic statements, where the relationship includes contingent liability investment transactions, includes:

                  (a) The aggregate of money transferred into and out of the portfolio during the valuation period;
                  (b) In relation to each open position in the account at the end of the account period, the unrealised profit or loss to the customer (before deducting or adding any commission which would be payable on closing out);
                  (c) In relation to each transaction executed during the account period to close out a customer’s position, the resulting profit or loss to the customer after deducting or adding any commission;
                  (d) The aggregate of each of the following in, or relating to, the customer’s portfolio at the close of business on the valuation date:
                  (i) Cash;
                  (ii) Collateral value;
                  (iii) Management fees; and
                  (iv) Commissions;
                  (e) Option account valuations in respect of each open option contained in the account on the valuation date stating:
                  (i) The share, or future or other financial instrument involved;
                  (ii) The trade price and date for the opening transaction, unless the valuation statement follows the statement for the period in which the option was opened;
                  (iii) The market price of the contract; and
                  (iv) The exercise price of the contract.

                  Added: April 2008

                • BC-8.13.11

                  The minimum requirements that should be met where the conventional bank licensee prepares and publishes investment research include:

                  (a) Analysts must not trade in securities or related derivatives ahead of publishing research on the issuer of these securities;
                  (b) Analysts must not trade in securities or related derivatives of any issuer that they review in a manner contrary to their existing recommendations except in special circumstances subject to pre-approval by compliance or legal personnel;
                  (c) Analysts must not accept inducements by issuers or others with a material interest in the subject matter of investment research; and
                  (d) Conventional banks must not promise issuers favorable research coverage, specific ratings or specific target prices in return for a future or continued business relationship, service or investment.
                  Amended: January 2011
                  Added: April 2008

                • BC-8.13.12

                  The minimum requirements that should be met where the conventional bank licensee has a soft dollar agreement under which it deals with customers include:

                  (a) The percentage paid under soft dollar agreements of the total commission paid by or at the direction of:
                  (i) The conventional bank licensee; and
                  (ii) Any other member of the conventional bank licensee’s group which is a party to those agreements;
                  (b) The value, on a cost price basis, of the goods and services received by the conventional bank licensee under soft dollar agreements, expressed as a percentage of the total commission paid by or at the direction of:
                  (i) The conventional bank licensee; or
                  (ii) Other members of the conventional bank licensee’s group;
                  (c) A summary of the nature of the goods and services received by the conventional bank licensee under the soft dollar agreements; and
                  (d) The total commission paid from the portfolio of that customer.

                  Added: April 2008

            • BC-9 BC-9 Customer Complaints Procedures

              • BC-9.1 BC-9.1 General Requirements

                • BC-9.1.1

                  All conventional bank licensees must have appropriate customer complaints handling procedures and systems for effective handling of complaints made by customers by 31st March 2012.

                  October 2011

                • BC-9.1.2

                  Customer complaints procedures must be documented appropriately and their customers must be informed of their availability.

                  October 2011

                • BC-9.1.3

                  All conventional bank licensees must appoint a customer complaints officer and publicise his/ her contact details at all departments and branches and on the bank's website. The customer complaints officer must be of a senior level at the conventional bank and must be independent of the parties to the complaint to minimize any potential conflict of interest.

                  October 2011

                • BC-9.1.3A

                  The position of customer complaints officer may be combined with that of compliance officer.

                  Added: July 2012

                • BC-9.1.4

                  In the case of an overseas conventional bank licensee, a local complaints officer must be present and must report all complaints to the head office complaints unit.

                  Amended: January 2012
                  October 2011

              • BC-9.2 BC-9.2 Documenting Customer Complaints Handling Procedures

                • BC-9.2.1

                  In order to make customer complaints handling procedures as transparent and accessible as possible, all conventional bank licensees must document their customer complaints handling procedures. These include setting out in writing:

                  (a) The procedures and policies for:
                  (i) Receiving and acknowledging complaints;
                  (ii) Investigating complaints;
                  (iii) Responding to complaints within appropriate time limits;
                  (iv) Recording information about complaints;
                  (v) Identifying recurring system failure issues.
                  (b) The types of remedies available for resolving complaints; and
                  (c) The organisational reporting structure for the complaints handling function.
                  Amended: January 2012
                  October 2011

                • BC-9.2.2

                  Conventional bank licensees must provide a copy of the procedures to all relevant staff, so that they may be able to inform customers. A simple and easy-to-use guide to the procedures must also be made available to all customers, on request, and when they want to make a complaint.

                  October 2011

                • BC-9.2.3

                  Conventional bank licensees are required to ensure that all financial services related documentation (such as loan documentation) provided to the customer includes a statement informing the customer of the availability of a simple and easy-to-use guide on customer complaints procedures in the event the customer is not satisfied with the services provided.

                  Amended: January 2012
                  October 2011

              • BC-9.3 BC-9.3 Principles for Effective Handling of Complaints

                • BC-9.3.1

                  Adherence to the following principles is required for effective handling of complaints:

                  October 2011

                • Visibility

                  • BC-9.3.2

                    "How and where to complain" must be well publicised to customers and other interested parties, in both English and Arabic languages.

                    October 2011

                • Accessibility

                  • BC-9.3.3

                    A complaints handling process must be easily accessible to all customers and must be free of charge.

                    October 2011

                  • BC-9.3.4

                    While a conventional bank licensee's website is considered an acceptable mean for dealing with customer complaints, it should not be the only means available to customers as not all customers have access to the internet.

                    Amended: January 2012
                    October 2011

                  • BC-9.3.5

                    Process information must be readily accessible and must include flexibility in the method of making complaints.

                    October 2011

                  • BC-9.3.6

                    Support for customers in interpreting the complaints procedures must be provided, upon request.

                    October 2011

                  • BC-9.3.7

                    Information and assistance must be available on details of making and resolving a complaint.

                    October 2011

                  • BC-9.3.8

                    Supporting information must be easy to understand and use.

                    October 2011

                  • BC-9.3.9

                    [This Paragraph was deleted in January 2012].

                    Deleted: January 2012

                • Responsiveness

                  • BC-9.3.10

                    Receipt of complaints must be acknowledged in accordance with Section BC-9.5 "Response to Complaints".

                    October 2011

                  • BC-9.3.11

                    Complaints must be addressed promptly in accordance with their urgency.

                    October 2011

                  • BC-9.3.12

                    Customers must be treated with courtesy.

                    October 2011

                  • BC-9.3.13

                    Customers must be kept informed of the progress of their complaint, in accordance with Section BC-9.5.

                    October 2011

                  • BC-9.3.14

                    If a customer is not satisfied with a conventional bank licensee's response, the conventional bank licensee must advise the customer on how to take the complaint further within the organisation.

                    October 2011

                  • BC-9.3.15

                    In the event that they are unable to resolve a complaint, conventional bank licensees must outline the options that are open to that customer to pursue the matter further, including, where appropriate, referring the matter to the Consumer Protection Unit at the CBB.

                    Amended: April 2020
                    Added: October 2011

                • Objectivity and Efficiency

                  • BC-9.3.16

                    Complaints must be addressed in an equitable, objective, unbiased and efficient manner.

                    Amended: January 2012
                    October 2011

                  • BC-9.3.17

                    General principles for objectivity in the complaints handling process include:

                    (a) Openness:

                    The process must be clear and well publicised so that both staff and customers can understand.
                    (b) Impartiality:
                    (i) Measures must be taken to protect the person the complaint is made against from bias;
                    (ii) Emphasis must be placed on resolution of the complaint not blame; and
                    (iii) The investigation must be carried out by a person independent of the person complained about.
                    (c) Accessibility:
                    (i) The bank must allow customer access to the process at any reasonable point in time; and
                    (ii) A joint response must be made when the complaint affects different participants.
                    (d) Completeness:

                    The complaints officer must find relevant facts, talk to both sides, establish common ground and verify explanations wherever possible;
                    (e) Equitability:

                    Give equal treatment to all parties.
                    (f) Sensitivity:

                    Each complaint must be treated on its merits and paying due care to individual circumstances.
                    (g) Objectivity for personnel — complaints handling procedures must ensure those complained about are treated fairly which implies:
                    (i) Informing them immediately and completely on complaints about performance;
                    (ii) Giving them an opportunity to explain and providing appropriate support;
                    (iii) Keeping them informed of the progress and result of the complaint investigation;
                    (iv) Full details of the complaint are given to those the complaint is made against prior to interview; and
                    (v) Personnel must be assured they are supported by the process and should be encouraged to learn from the experience and develop a better understanding of the complaints process.
                    (h) Confidentiality:
                    (i) In addition to customer confidentiality, the process must ensure confidentiality for staff who have a complaint made against them and the details must only be known to those directly concerned;
                    (ii) Customer information must be protected and not disclosed, unless the customer consents otherwise; and
                    (iii) Protect the customer and customer's identity as far as is reasonable to avoid deterring complaints due to fear of inconvenience or discrimination.
                    (i) Objectivity monitoring:

                    Conventional bank licensees must monitor responses to customers to ensure objectivity which could include random monitoring of resolved complaints.
                    (j) Charges:

                    The process must be free of charge to customers;
                    (k) Customer Focused Approach:
                    (i) Conventional bank licensees must have a customer focused approach;
                    (ii) Conventional bank licensees must be open to feedback; and
                    (iii) Conventional bank licensees must show commitment to resolving problems.
                    (l) Accountability:

                    Conventional bank licensees must ensure accountability for reporting actions and decisions with respect to complaints handling.
                    (m) Continual improvement:

                    Continual improvement of the complaints handling process and the quality of products and services must be a permanent objective of the conventional bank licensee.
                    Amended: January 2012
                    October 2011

              • BC-9.4 BC-9.4 Internal Complaint Handling Procedures

                • BC-9.4.1

                  A conventional bank licensee's internal complaint handling procedures must provide for:

                  (a) The receipt of written complaints;
                  (b) The appropriate investigation of complaints;
                  (c) An appropriate decision-making process in relation to the response to a customer complaint;
                  (d) Notification of the decision to the customer;
                  (e) The recording of complaints; and
                  (f) How to deal with complaints when a business continuity plan (BCP) is operative.
                  October 2011

                • BC-9.4.2

                  A conventional bank licensee's internal complaint handling procedures must be designed to ensure that:

                  (a) All complaints are handled fairly, effectively and promptly;
                  (b) Recurring systems failures are identified, investigated and remedied;
                  (c) The number of unresolved complaints referred to the CBB is minimised;
                  (d) The employee responsible for the resolution of complaints has the necessary authority to resolve complaints or has ready access to an employee who has the necessary authority; and
                  (e) Relevant employees are aware of the conventional bank licensee's internal complaint handling procedures and comply with them and receive training periodically to be kept abreast of changes in procedures.
                  October 2011

              • BC-9.5 BC-9.5 Response to Complaints

                • BC-9.5.1

                  A conventional bank licensee must acknowledge in writing customer written complaints within 5 working days of receipt.

                  October 2011

                • BC-9.5.2

                  A conventional bank licensee must respond in writing to a customer complaint within 4 weeks of receiving the complaint, explaining their position and how they propose to deal with the complaint.

                  October 2011

                • Redress

                  • BC-9.5.3

                    A conventional bank licensee should decide and communicate how it proposes (if at all) to provide the customer with redress. Where appropriate, the conventional bank licensee must explain the options open to the customer and the procedures necessary to obtain the redress.

                    October 2011

                  • BC-9.5.4

                    Where a conventional bank licensee decides that redress in the form of compensation is appropriate, the conventional bank licensee must provide the complainant with fair compensation and must comply with any offer of compensation made by it which the complainant accepts.

                    October 2011

                  • BC-9.5.5

                    Where a conventional bank licensee decides that redress in a form other than compensation is appropriate, it must provide the redress as soon as practicable.

                    October 2011

                  • BC-9.5.6

                    Should the customer that filed a complaint not be satisfied with the response received as per Paragraph BC-9.5.2, he can forward the complaint to the Consumer Protection Unit at the CBB within 30 calendar days from the date of receiving the letter.

                    Amended: April 2020
                    Added: October 2011

              • BC-9.6 BC-9.6 Records of Complaints

                • BC-9.6.1

                  A conventional bank licensee must maintain a record of all customers' complaints. The record of each complaint must include:

                  (a) The identity of the complainant;
                  (b) The substance of the complaint;
                  (c) The status of the complaint, including whether resolved or not, and whether redress was provided; and
                  (d) All correspondence in relation to the complaint. Such records must be retained by the conventional bank licensees for a period of 5 years from the date of receipt of the complaint.
                  October 2011

              • BC-9.7 BC-9.7 Reporting of Complaints

                • BC-9.7.1

                  A conventional bank licensee must submit to the CBB's Consumer Protection Unit, 20 days after the end of the quarter, a quarterly report summarising the following:

                  (a) The number of complaints received;
                  (b) The substance of the complaints;
                  (c) The number of days it took the conventional bank licensee to acknowledge and to respond to the complaints; and
                  (d) The status of the complaint, including whether resolved or not, and whether redress was provided.
                  Amended: April 2020
                  Added: October 2011

                • BC-9.7.2

                  The report referred to in Paragraph BC-9.7.1 must be sent electronically to complaint@cbb.gov.bh.

                  Amended: April 2020
                  Added: July 2013

                • BC-9.7.3

                  Where no complaints have been received by the licensee within the quarter, a 'nil' report should be submitted to the CBB's Consumer Protection Unit.

                  Amended: April 2020
                  Added: July 2013

              • BC-9.8 BC-9.8 Monitoring and Enforcement

                • BC-9.8.1

                  Compliance with these requirements is subject to the ongoing supervision of the CBB as well as being part of any CBB inspection of a licensee. Failure to comply with these requirements is subject to enforcement measures as outlined in Module EN (Enforcement).

                  October 2011

            • BC-10 BC-10 Measures and Procedures for Services Provided to Disabled Customers by Bahraini Retail Banks

              • BC-10.1 BC-10.1 General Requirements

                This Chapter BC-10 is applicable only to Bahraini retail banks that operate 10 or more branches.

                Amended: April 2017

                • BC-10.1.1

                  Bahraini retail banks must develop special measures and procedures when providing financial and banking services and transactions for disabled customers to safeguard their rights in requesting and receiving information to ensure equal treatment amongst all customers. Disabled customers must be identified based on the certificate issued by the Ministry of Labour and Social Development or a medical certificate issued by a qualified doctor.

                  Amended: April 2017
                  Added: April 2016

                • BC-10.1.2

                  Bahraini retail banks are encouraged to enhance the disabled customers' access to their ranges of banking services by:

                  (a) Liaising with organisations representing disabled customers to provide assistance; and
                  (b) Keeping pace with changing technologies involving ATMs, electronic and internet banking.
                  Amended: April 2017
                  Added: April 2016

                • BC-10.1.3

                  Bahraini retail banks must have in place appropriate methods to communicate with the disabled to address their specific needs.

                  Amended: April 2017
                  Added: April 2016

                • BC-10.1.4

                  Bahraini retail banks must ensure that all legal requirements/documentations are taken into consideration when entering into contracts with disabled customers with the aim of protecting the disabled customers and themselves in court cases.

                  Amended: April 2017
                  Added: April 2016

                • BC-10.1.5

                  Bahraini retail banks must ensure that disabled customers are provided full access to all banking and financial services offered by the bank, including the provision of ATM cards on the same basis as for all other bank customers.

                  Amended: April 2017
                  Added: April 2016

                • BC-10.1.6

                  Bahraini retail banks must provide fast track and/or priority services for disabled customers to address their banking needs.

                  Amended: April 2017
                  Added: April 2016

                • Fees and Charges

                  • BC-10.1.7

                    Fees and charges on withdrawals, done through bank counters must be waived for all disabled customers.

                    Added: April 2016

                  • BC-10.1.8

                    Monthly fees and charges on current and savings account, including minimum balance charges, must be waived for all disabled customers.

                    Added: April 2016

                • Branch and ATM Requirements

                  • BC-10.1.9

                    Bahraini retail banks must provide at least one branch for serving the disabled customers in line with the requirements in this Module, in addition to the normal branch activities. At least one ATM machine must be provided in the branch to serve the disabled customers.

                    Amended: April 2017
                    Added: April 2016

                  • BC-10.1.10

                    To ensure an adequate geographical distribution within the Kingdom of Bahrain, the CBB will expect two specially equipped branches within each governorate of the Kingdom. The geographical distribution will be coordinated by the CBB.

                    Added: April 2016

                  • BC-10.1.11

                    With reference to Paragraph BC-10.1.9, the ATM devices must be equipped with technology specially adapted for customers with disabilities where ATMs must:

                    (a) Be wheelchair accessible, ensuring that the ATM is set at an appropriate height and track for movement; and
                    (b) Provide Braille alphabet and voice software technology (talking ATM) for the visually impaired customers.
                    Added: April 2016

                • Customer Account Numbers

                  • BC-10.1.12

                    Customer account numbers provided for accounts of disabled customers must be identifiable among other customer accounts to ensure that the disabled customers are offered the specialised services as outlined in this Chapter and that all bank staff offers the bank's services accordingly, whether in person or by phone.

                    Added: April 2016

                • In Branch Services

                  • BC-10.1.13

                    Bahraini retail banks must provide a special priority desk for disabled customers, clearly designated with a special logo. In addition parking facilities and easy access entrances must also be provided.

                    Amended: April 2017
                    Added: April 2016

                  • BC-10.1.14

                    Within the branch itself, special layout and signage must be used to facilitate the movement of disabled customers, including the use of any elevators, should this be the case.

                    Added: April 2016

                • Training for Bank Staff

                  • BC-10.1.15

                    Bahraini retail banks must ensure that their staff dealing with disabled customers are enrolled in specialised training to ensure that they are qualified and fully familiar with the use of any specialised technology adapted for such customers and to address any other special requirements in dealing with these customers. Such training must be part of the staff's overall training requirements.

                    Amended: April 2017
                    Added: April 2016

                • Personal Banking

                  • BC-10.1.16

                    Bahraini retail banks must provide special door step non-cash financial services to disabled customers.

                    Amended: April 2017
                    Added: April 2016

              • BC-10.2 BC-10.2 Special Services for Visually Impaired Customers

                • BC-10.2.1

                  Bahraini retail banks must provide the following application forms along with the terms and conditions of contracts signed by visually impaired customers for all conducted transactions in Braille format or voice records or screen readers or any other advanced and secured means:

                  (a) Account opening forms;
                  (b) Facilities contracts;
                  (c) Investment and transactions documents;
                  (d) Instructions manuals; and
                  (e) Customer notifications.
                  Amended: April 2017
                  Added: April 2016

                • BC-10.2.2

                  Bahraini retail banks may accept electronic signatures and electronic finger print as a satisfactory form of signature to meet the needs of the disabled customers. Banks should refer to Legislative Decree No. (54) of 2018 with respect to Electronic Transactions "The Electronic Communications and Transactions Law" and its amendments. Banks may determine the terms and conditions on which the facilities of biometric identification can be extended to the disabled customers.

                  Amended: January 2020
                  Amended: April 2017
                  Added: April 2016

                • BC-10.2.3

                  Bahraini retail banks must ensure that two bank employees witness when transactions undertaken by visually impaired customers. In case of customers with visual as well as hearing impairments, Bahraini retail banks must ensure that witnesses (other than bank staff) are present for the signature of any transaction and that documents providing the identity of such witnesses are submitted.

                  Amended: April 2017
                  Added: April 2016

                • BC-10.2.4

                  Bahraini retail banks must provide speaking screens for the priority waiting area of banks for visually impaired customers.

                  Amended: April 2017
                  Added: April 2016

              • BC-10.3 BC-10.3 Special Services for Hearing Impaired Customers

                • BC-10.3.1

                  Bahraini retail banks must ensure that their staff dealing with hearing impaired customers are enrolled in specialised training on sign language or provide a full time translator/interpreter in the bank's premises, dedicated to communicate with such customers.

                  Amended: April 2017
                  Added: April 2016

                • BC-10.3.2

                  To facilitate the implementation of Paragraph BC-10.3.1, retail banks should provide a banking dictionary designed to address banking vocabulary by way of sign language through video clips and pictures to enable such customers to have a clear understanding of the banking terminology being used.

                  Amended: April 2017
                  Added: April 2016

            • BC-11 BC-11 Financial Advice Programme

              • BC-11.1.1

                All banks must ensure that staff members who provide financial advice to customers are enrolled in the BIBF Financial Advice Programme (“FAP”). Staff members with less than three years of experience must be enrolled for the foundation level course while staff members with three to five years of experience must be enrolled in the Level 2 programme. Staff members with five years of experience must be enrolled for the Level 3 FAP programme. However, FAP is not mandatory for employees who occupy controlled functions or employees who have the Chartered Financial Analyst (CFA) or the Certified Financial Planner (CFP) qualifications.

                Amended: July 2022
                Added: October 2018

              • BC-11.1.2

                All banks must ensure that a suitably experienced designated senior manager monitors compliance with the requirement in BC-11.1.1 on an on-going basis.

                Added: October 2018

              • BC-11.1.3

                [This Paragraph was deleted in January 2022].

                Deleted: January 2022
                Added: October 2018

        • CA CA Capital Adequacy

          • PART 1: PART 1: Definition of Capital

            • CA-A CA-A Introduction

              • CA-A.1 CA-A.1 Purpose

                • Executive Summary

                  • CA-A.1.1

                    The purpose of this module is to set out the Central Bank of Bahrain (CBB)'s capital adequacy Rules and provide guidance on the risk measurements for the calculation of capital requirements by Bahraini conventional bank licensees. This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).

                    January 2015

                  • CA-A.1.2

                    Principle 9 of the Principles of Business requires that conventional bank licensees maintain adequate human, financial and other resources, sufficient to run their business in an orderly manner (see Section PB-1.9). In addition, Condition 5 of CBB's Licensing Conditions (Section LR-2.5) requires conventional bank licensees to maintain financial resources in excess of the minimum requirements specified in Module CA (Capital Adequacy).

                    January 2015

                  • CA-A.1.3

                    This Module also sets out the minimum leverage requirements which relevant banks (referred to in Section CA-B.1) must meet as a condition of their licensing.

                    January 2015

                  • CA-A.1.4

                    The requirements specified in this Module vary according to the inherent risk profile of a licensee, and the volume and type of business undertaken. As one of the principal objectives of the CBB (as outlined in Article 3 of the CBB Law 2006) is the protection of depositors, it is essential to ensure that the capital recognised in regulatory capital measures is readily available for those depositors and to ensure that conventional bank licensees hold sufficient capital to provide some protection against unexpected losses in the normal course of business, and otherwise allow conventional banks to effect an orderly wind-down of their operations. The minimum capital requirements specified here may not be sufficient to absorb all unexpected losses. The CBB therefore may impose more stringent capital requirements than those stated in this Module on certain banks taking into account the riskiness of the activities conducted by the concerned bank (see Paragraph CA-A.1.5A).

                    January 2015

                  • CA-A.1.5

                    The CBB requires that conventional bank licensees maintain adequate capital, in accordance with the requirements of this Module, against their risks. In particular, all Bahraini conventional bank licensees are required to maintain capital adequacy ratios or CARs (both on a solo and a consolidated basis where applicable) above the minimum levels set out in Chapters CA-B and CA-2. Failure to remain above these ratios will result in enforcement and other measures as outlined in Section CA-1.2 and Module EN. The detailed methodology for calculating the CARs is set out in the instructions for the form PIR.

                    January 2015

                  • CA-A.1.5A

                    All Bahraini conventional bank licensees must maintain their own target capital ratios above the supervisory CARs mentioned in Section CA-B.2 (on a solo and on a consolidated basis). Each concerned licensee must observe individual target ratios as agreed with the CBB on a case-by-case basis subject to a methodology to be disclosed in due course.

                    January 2015

                  • CA-A.1.6

                    This module provides support for certain other parts of the Rulebook, mainly:

                    (a) Prudential Consolidation and Deduction Requirements;
                    (b) Licensing and Authorisation Requirements;
                    (c) CBB Reporting Requirements;
                    (d) Credit Risk Management;
                    (e) Operational Risk Management;
                    (f) High Level Controls:
                    (g) Relationship with Audit Firms; and
                    (h) Enforcement.
                    January 2015

                • Legal Basis

                  • CA-A.1.7

                    This Module contains the CBB's Directive (as amended from time to time) relating to the capital adequacy of conventional bank licensees, and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable in its entirety to all Bahraini conventional bank licensees.

                    January 2015

                  • CA-A.1.8

                    For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                    January 2015

              • CA-A.2 CA-A.2 Module History

                • CA-A.2.1

                  This module was first issued in July 2004 as part of the conventional principles volume. Material changes took place in January 2008 to implement Basel II. Other changes that have subsequently been made to this module are annotated with the calendar quarter date in which the changes were made. Chapter UG-3 provides further guidance on Rulebook maintenance and version control.

                  January 2015

                • CA-A.2.1A

                  The most recent changes are detailed in the Table below.

                  Summary of Changes

                  Module Ref. Change Date Description of Changes
                  CA-A.2 10/07 Change categorising Module as a Directive
                  CA-1 to CA-8 01/08 Extensive changes to implement Basel II
                  CA-3.4 04/08 Recognition and mapping of grades for Capital Intelligence
                  CA-3.2.15-18 01/09 New guidance and rules on SMEs
                  CA-A 01/2011 Various minor amendments to ensure consistency in CBB Rulebook.
                  CA-A.2.7 01/2011 Clarified legal basis.
                  CA-6, CA-8, CA-9, CA-10, CA-14 & CA-16 01/2012 Changes in respect of July 2009 and February 2011 amendments to Basel II.
                  CA-3.2.10 and CA-3.2.11A 04/2012 Amendment made for claims on banks dealing with self-liquidating letters of credit.
                  CA-2.1.5, CA-2.1.5A and CA-2.1.5B 04/2013 Clarified Rules dealing with subordinated debt issued.
                  CA-2.1.5(h) 10/2013 Added Rule to include limited general provision against unidentified future losses as part of Tier 2.
                  CA-11.3.7 10/2013 Clarified Rules for excluding positions of a structural nature from the calculation of the net open currency positions.
                  Module CA 01/2015 Extensive changes to implement Basel III.
                  CA-1.3.3 04/2015 Existing exemptions in respect of PIR review will cease as at 31st December 2014 for all Bahraini conventional bank licensees.
                  CA-2.1.2 04/2015 Underlined the term 'financial instruments' so that it is linked to the glossary definition.
                  CA-2.3.5 04/2015 Corrected cross reference.
                  CA-2.4.2 04/2015 Clarified that intangible assets other than goodwill and mortgage servicing rights are subject to transitional arrangements and are phased out as regulatory adjustments as outlined in Subparagraph CA-B.2.1(d).
                  CA-2.4.12 04/2015 Clarified that shares of the bank held as collateral are considered as shares held indirectly and are subject to deduction under regulatory adjustments.
                  CA-2.4.23 and CA-3.2.19A 04/2015 Corrected reference to conventional bank licensee.
                  CA-2.4.25 04/2015 Clarified the rule on significant investments in commercial entities by adding cross reference to the definition.
                  CA-2A.3.3 04/2015 Paragraph deleted as not applicable on the implementation of the capital conservation buffer.
                  CA-B.2.1(d) 07/2015 Amendment made to clarify that during the transition period, the remainder not deducted from capital is subject to the risk weights outlined in the October 2014 version of Chapter CA-3.
                  CA-2.4.25 and CA-2.4.26 07/2015 Amendment made to reflect the treatment of the risk weighting for exposures below the threshold limits.
                  CA-2.1.6 and CA-2.1.10 01/2016 Updated criteria for AT1 and T2 instruments.
                  CA-3.2.4, CA-3.2.4A and CA-3.2.4B 04/2016 Updated risk weightings for claims on non-central government public sector entities (PSEs).
                  CA-2.4.25 10/2016 Updated reference of CM Module
                  CA-B.1.5 and CA-B.1.6 07/2017 Deleted the term 'financial entity'.
                  CA-15 10/2018 Added new Section on Leverage Ratio Requirements.
                  CA-3.2.19B 07/2019 Added a new Paragraph on exposures to Social Housing Schemes.
                  CA-1.1.6 01/2022 Amended Paragraph.
                  CA-1.1.6A 01/2022 Added new Paragraph on reverting from standardised approach to basic indicator approach.
                  CA-3.2.19B 10/2022 Amended Paragraph on the implementation of social housing schemes.
                  CA-15.7 10/2022 Amended Section on Gearing.
                  CA-4.5.7A 01/2023 Added a new Paragraph on recognition of credit default guarantees provided by Tamkeen.

                • Evolution of Module

                  • CA-A.2.2

                    The contents retained from the previous Module (Capital Adequacy — Conventional Banks) are effective from the dates depicted above.

                    January 2015

              • CA-A.3 – CA-A.5

                [Sections CA-A.3 to CA-A.5 were deleted in January 2015.]

                Deleted: January 2015

            • CA-B CA-B Scope of Application and Transitional Rules

              • CA-B.1 CA-B.1 Scope

                • CA-B.1.1

                  All Bahraini conventional bank licensees are required to measure and apply capital charges with respect to their credit risk, operational risk and market risks capital requirements.

                  January 2015

                • CA-B.1.2

                  Rules in this Module are applicable to Bahraini conventional bank licensees on both a solo (i.e. including their foreign branches) and on a consolidated group basis as described below. The applicable ratios and methodology are described in this Chapter and Chapters CA-1 and CA-2 for solo and consolidated CAR calculations.

                  January 2015

                • CA-B.1.2A

                  The scope of this Module includes the parent bank and all its banking subsidiaries and any other financial entities such as Special Purpose Vehicles (SPVs) which are required to be consolidated for regulatory purposes by the CBB. The assets and liabilities of all such subsidiaries must be fully consolidated on a line-by-line basis. In some cases, the assets of foreign banking subsidiaries will be allowed to be included by way of aggregation (see CA-B.1.4 onward). All other financial activities (both regulated and unregulated) must be captured through consolidation where practical to do so. Generally, majority-owned or controlled financial entities must be fully consolidated according to the methodologies outlined in this Module. If any majority-owned financial entities are not consolidated for capital purposes, all equity and other regulatory capital investments in those entities must be deducted and the assets and liabilities as well as third-party capital investments in the entity must be removed from the conventional bank licensee's balance sheet.

                  January 2015

                • CA-B.1.2B

                  In addition, this Module applies to conventional bank licensees on a solo basis (also including their foreign branches). This means that the assets and liabilities of subsidiaries referred to in Paragraph CA-B.1.2A must not be included in the balance sheet of the parent bank for the solo capital calculation and all equity and other regulatory capital investments in those entities must be deducted from the applicable components of Total Capital of the parent bank.

                  January 2015

                • CA-B.1.2C

                  Where a conventional bank licensee has no subsidiaries as referred to in Paragraph CA-B.1.2A, then the consolidated CAR requirements of this Module apply to the conventional bank licensee on a stand-alone basis.

                  January 2015

                • CA-B.1.2D

                  Although consolidation outlined in this Module are prescribed only for computing regulatory minimum capital, the procedures applied for such consolidation are performed in accordance with applicable accounting standards and best practices which may be subject to change from time to time.

                  January 2015

                • CA-B.1.3

                  If conventional bank licensees have investments in or control over banking or financial entities, including SPVs, they will also need to apply rules set out in Section CA-2.4 for the calculation of their solo and consolidated Capital Adequacy Ratios (CAR).

                  January 2015

                • Full Consolidation Versus Aggregation

                  • CA-B.1.4

                    Generally, wherever possible, the assets and liabilities of banking subsidiaries must be consolidated on a line-by-line basis using the risk-weighting and other rules and guidance in this Module. In some cases, foreign banking subsidiaries are subject to slightly differing rules by their host regulator. In such cases it may be more convenient to add in the risk-weighted assets of the subsidiary as calculated by host rules rather than by adding in the assets of the subsidiary and subjecting them to CBB requirements and risk weights. This process of using host risk-weights instead of CBB risk-weights is termed 'aggregation'. Also host rules may treat some capital items differently to CBB rules. For example, T2 instruments may have different rules in host countries. There may therefore need to be a 'haircut' to such capital instruments, if the amount allowed by the host regulator is different to the amount of the investment by the parent bank.

                    January 2015

                  • CA-B.1.5

                    For the reasons outlined in Paragraphs CA-B.1.2A to CA-B.1.4, banks must agree the proposed regulatory consolidation or aggregation approach for banking subsidiaries with the CBB and their external auditor.

                    Amended: July 2017
                    January 2015

                  • CA-B.1.6

                    If a banking subsidiary is to be consolidated by way of aggregation, the capital and risk weighted assets (RWAs) of the non-resident entity must be shown separately. The parent bank is required to aggregate the subsidiary's eligible capital and RWAs (based on the risk weighting of assets reported by the subsidiary to its host central bank) with its own eligible capital and RWAs respectively.

                    Amended: July 2017
                    January 2015

                  • CA-B.1.7

                    Appropriate adjustments must be made to eliminate intra-group exposures.

                    January 2015

                  • CA-B.1.8

                    If a conventional bank operates an Islamic window, the assets of such Islamic window will be risk weighted in accordance with CBB's guidelines for conventional banks.

                    January 2015

                  • CA-B.1.9

                    If a bank in Bahrain is a subsidiary of a non-resident parent bank, the capital adequacy of such bank is determined on a standalone basis.

                    January 2015

                  • CA-B.1.10

                    Majority-owned or controlled financial entity subsidiaries must be adequately capitalised to reduce the possibility of future potential losses to the parent bank. The parent bank must monitor actions taken by the subsidiary to correct any capital shortfall and, if it is not corrected in a timely manner, the shortfall must also be deducted from the parent bank's solo and consolidated capital for regulatory capital purposes.

                    January 2015

              • CA-B.2 CA-B.2 Transitional Arrangements

                • CA-B.2.1

                  The transitional arrangements for implementing the new standards help to ensure that the banking sector can meet the higher capital standards through reasonable earnings retention and capital raising, while still supporting lending to the economy. The transitional arrangements are as follows:

                  (a) Implementation of this Module begins on 1 January 2015. As of 1 January 2015, conventional bank licensees are required to meet the following new minimum CAR requirements taking each component of capital as defined in Chapters CA-2 and CA-2A divided by total risk-weighted assets (RWAs) as defined in Paragraph CA-1.1.3:

                  Components of Consolidated CARs
                    Optional Minimum Ratio Required
                  Core Equity Tier 1 (CET 1)   6.5%
                  Additional Tier 1 (AT1) 1.5%  
                  Tier 1 (T1)   8%
                  Tier 2 (T2) 2%  
                  Total Capital   10%
                  Capital Conservation Buffer (CCB) (see below)   2.5%
                  CARs including CCB
                  CET 1 plus CCB   9%
                  Tier 1 plus CCB   10.5%
                  Total Capital plus CCB   12.5%

                  Components of Solo CARs
                    Optional Minimum Ratio Required
                  Core Equity Tier 1 (CET1)   4.5%
                  Additional Tier 1 (AT1) 1.5%  
                  Tier 1 (T1)   6.0%
                  Tier 2 (T2) 2%  
                  Total Capital   8.0%
                  Capital Conservation Buffer (CCB) (see below)   0%
                  CARs including CCB
                  CET 1 plus CCB   N/A
                  Tier 1 plus CCB   N/A
                  Total Capital plus CCB   N/A
                  (b) The difference between the Total Capital plus CCB (Capital Conservation Buffer — see Chapter CA-2A for more details) of 12.5% and the T1 plus CCB requirement (10.5%) for the consolidated CAR can be met with T2 and higher forms of capital;
                  (c) The regulatory adjustments (i.e. deductions), including amounts above the aggregate 15% limit for significant investments in financial institutions, mortgage servicing rights, and deferred tax assets from temporary differences, are fully deducted from CET1 by 1 January 2019;
                  (d) The regulatory adjustments (refer to Section CA-2.4) begin at 20% of the required adjustments to CET 1 on 1 January 2015, 40% on 1 January 2016, 60% on 1 January 2017, 80% on 1 January 2018, and reach 100% on 1 January 2019. The same transition approach applies to deductions from AT1 and T2 capital. Specifically, the regulatory adjustments to AT1 and T2 capital begin at 20% of the required deductions on 1 January 2015, 40% on 1 January 2016, 60% on 1 January 2017, 80% on 1 January 2018, and reach 100% on 1 January 2019. During the transition period, the remainder of exposures held prior to 1st January 2015 not deducted from capital is subject to the risk weights outlined in the October 2014 version of Chapter CA-3;
                  (e) The treatment of capital issued out of subsidiaries and held by third parties (e.g. minority interest) is also phased in. Where such capital is eligible for inclusion in one of the three components of capital according to Paragraphs CA-2.3.1 to CA-2.3.5, it can be included from 1 January 2015. Where such capital is not eligible for inclusion in one of the three components of capital but is included under the existing treatment, 20% of this amount must be excluded from the relevant component of capital on 1 January 2015, 40% on 1 January 2016, 60% on 1 January 2017, 80% on 1 January 2018, and reach 100% on 1 January 2019; and
                  (f) Capital instruments that no longer qualify as non-common equity T1 capital or T2 capital are phased out beginning 1 January 2015. Fixing the base at the nominal amount of such instruments outstanding on 1 January 2015, their recognition is capped at 90% from 1 January 2015, with the cap reducing by 10 percentage points in each subsequent year. This cap is applied to AT1 and T2 separately and refers to the total amount of instruments outstanding that no longer meet the relevant entry criteria. To the extent an instrument is redeemed, or its recognition in capital is amortised, after 1 January 2015, the nominal amount serving as the base is not reduced. In addition, instruments with an incentive to be redeemed are treated as follows:
                  (i) For an instrument that has a call and a step-up prior to 1 January 2015 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward-looking basis meets the new criteria for inclusion in T1 or T2, it continues to be recognised in that tier of capital;
                  (ii) For an instrument that has a call and a step-up on or after 1 January 2015 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward looking basis meets the new criteria for inclusion in T1 or T2, it continues to be recognised in that tier of capital. Prior to the effective maturity date, the instrument would be considered an "instrument that no longer qualifies as AT1 or T2" and is therefore phased out from 1 January 2015;
                  (iii) For an instrument that has a call and a step-up between 12 September 2012 and 1 January 2015 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward looking basis does not meet the new criteria for inclusion in T1 or T2, it is fully derecognised in that tier of regulatory capital from 1 January 2015;
                  (iv) For an instrument that has a call and a step-up on or after 1 January 2015 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward looking basis does not meet the new criteria for inclusion in T1 or T2, it is derecognised in that tier of regulatory capital from the effective maturity date. Prior to the effective maturity date, the instrument would be considered an "instrument that no longer qualifies as AT1 or T2" and is therefore phased out from 1 January 2015; and
                  (v) For an instrument that had a call and a step-up on or prior to 12 September 2012 (or another incentive to be redeemed), if the instrument was not called at its effective maturity date and on a forward looking basis does not meet the new criteria for inclusion in T1 or T2, it is considered an "instrument that no longer qualifies as AT1 or T2" and is therefore phased out from 1 January 2015.
                  Amended: July 2015
                  January 2015

                • CA-B.2.2

                  Capital instruments that do not meet the criteria for inclusion in CET1 are excluded from CET1 as of 1 January 2015.

                  January 2015

                • CA-B.2.3

                  Only those instruments issued before 12 September 2012 qualify for the transition arrangements outlined in Paragraph CA-B.2.1.

                  January 2015

            • CA-1 CA-1 General Requirements

              • CA-1.1 CA-1.1 Capital Adequacy Ratio (Definition and Methodology)

                • CA-1.1.1

                  A conventional bank licensee's consolidated capital adequacy ratio is calculated by dividing its Consolidated Total Capital by its consolidated risk-weighted assets (RWAs). These items are defined and described in Paragraphs CA-1.1.2 to CA-1.1.8. A diagrammatic description of the formula used to calculate the consolidated CAR is given below.

                                    Consolidated Total Capital                 
                  RWAs (Credit + Market + Operational Risks)
                  January 2015

                • Consolidated Total Capital

                  • CA-1.1.2

                    Consolidated Total Capital consists of the sum of the following elements:

                    (a) T1 (Going-concern):
                    (i) CET1 (as defined in Paragraph CA-2.1.2);
                    (ii) AT1 (as defined in Paragraph CA-2.1.4); and
                    (b) T2 (Gone-concern) as defined in Paragraph CA-2.1.8.
                    January 2015

                • Consolidated Risk-Weighted Assets

                  • CA-1.1.3

                    Consolidated Total RWAs are determined by:

                    (a) Multiplying the capital requirements for market risk (see CA-1.1.7) and operational risk (see CA-1.1.6) by 12.5 for the conventional bank licensee and all its consolidated subsidiaries; and
                    (b) Adding the resulting figures to the sum of RWAs for credit risk (see CA-1.1.4) and securitisation risk for the conventional bank licensee and all its consolidated subsidiaries (see CA-1.1.5).
                    January 2015

                  • CA-1.1.4

                    For the measurement of their credit risks, conventional bank licensees measure the risks in the standardised approach, applying the measurement framework described in Chapter CA-3 and subject to the credit mitigation techniques outlined in Chapter CA-4 of this Module.

                    January 2015

                  • CA-1.1.5

                    The securitisation framework is set out in Chapter CA-6. Conventional bank licensees must apply the securitisation framework for determining regulatory capital requirements on exposures arising from traditional and synthetic securitisations or similar structures that contain features common to both.

                    January 2015

                  • CA-1.1.6

                    For the measurement of their operational risks, conventional bank licensees have a choice, subject to notification to the CBB, between two broad methodologies:

                    (a) The basic indicator approach, by applying the measurement framework described in Chapter CA-7 of this Module; and
                    (b) The standardised approach (also in Chapter CA-7) this approach is subject to certain conditions (outlined in Chapter OM-8) and requires the explicit approval of the CBB.
                    Amended: January 2022
                    Added: January 2015

                  • CA-1.1.6A

                    For the purpose of Sub-paragraph CA-1.1.6 (b), a licensee must provide appropriate justification and seek CBB’s prior approval, if it wishes to revert from the standardised approach to the basic indicator approach.

                     

                    Added: January 2022

                  • CA-1.1.7

                    For the measurement of their market risk, conventional bank licensees have a choice, subject to the written approval of the CBB, between two broad methodologies:

                    (a) One alternative is to measure the risks in a standardised approach, applying the measurement frameworks described in Chapters CA-9 to CA-13 of this Module; and
                    (b) The second alternative methodology (i.e. the IMM or internal models approach) is set out in detail in Chapter CA-14 including the procedure for obtaining the CBB's approval. This methodology is subject to the fulfilment of certain conditions. The use of this methodology is, therefore, conditional upon the explicit approval of the CBB.
                    January 2015

                  • CA-1.1.8

                    In light of Paragraphs CA-1.1.3 to CA-1.1.7, each conventional bank licensee's overall capital requirement consists of:

                    (a) The credit risk requirements laid down in Chapters CA-2 to CA-6, and including the credit counterparty risk on all over-the-counter derivatives whether in the trading or the banking books (see Chapter CA-8);
                    (b) The capital charges for operational risk described in Chapter CA-7; and
                    (c) The capital charges for market risks:
                    (i) Described in Chapters CA-9 to CA-13 summed arithmetically;
                    (ii) Derived from the models approach set out in Chapter CA-14; or
                    (iii) A mixture of (i) and (ii) summed arithmetically.
                    January 2015

                  • CA-1.1.9

                    All transactions, including forward sales and purchases, must be included in the calculation of capital requirements as from the date on which they were entered into. Although regular reporting takes place quarterly, conventional bank licensees must manage their risks in such a way that the capital and leverage requirements are being met on a continuous basis, i.e. at the close of each business day. Conventional bank licensees must not "window-dress" by showing significantly lower credit or market risk positions on reporting dates. Conventional bank licensees must maintain strict risk management systems to ensure that intra-day exposures are not excessive. If a conventional bank licensee fails to meet the capital requirements of this Module, the bank must take immediate measures to rectify the situation as detailed in Section CA-1.2.

                    January 2015

                • Solo Capital Adequacy Ratio

                  • CA-1.1.10

                    A conventional bank licensee's solo capital adequacy ratio is calculated by dividing its Solo Total Capital by its Solo RWAs as described in Paragraph CA-1.1.11 and CA-1.1.12 without consolidating the assets and liabilities of subsidiaries referred to Paragraph CA-B.1.2A into the balance sheet of the parent bank.

                    January 2015

                • Solo Total Capital

                  • CA-1.1.11

                    Solo Total Capital consists of the sum of the following elements:

                    (a) T1 (Going-concern):
                    (i) CET1 for the parent bank only (as defined in Paragraph CA-2.1.2 but deducting item (c) before applying regulatory adjustments in item (d);
                    (ii) AT1 for the parent bank only (as defined in Paragraph CA-2.1.4 but deducting item (c) before applying regulatory adjustments in item (d); and
                    (b) T2 (Gone-concern) for the parent bank only as defined in Paragraph CA-2.1.8 but deducting item (c) before applying regulatory adjustments in item (d).
                    January 2015

                • Solo Risk-Weighted Assets

                  • CA-1.1.12

                    Solo Total RWAs are determined by:

                    (a) Multiplying the capital requirements for market risk (see CA-1.1.7) and operational risk (see CA-1.1.6) by 12.5 for the parent bank alone; and
                    (b) Adding the resulting figures to the sum of risk-weighted assets for credit risk (see CA-1.1.4) and securitisation risk for the parent bank alone (see CA-1.1.5).
                    January 2015

                  • CA-1.1.13

                    For the purpose of this Module the solo CAR may be shown diagrammatically as below.

                                                Total Capital                           
                    RWAs (Credit + Market + Operational Risks)
                    January 2015

              • CA-1.2 CA-1.2 Reporting

                • CA-1.2.1

                  Formal reporting to the CBB of capital adequacy must be made in accordance with the requirements set out under Section BR-3.1.

                  January 2015

                • CA-1.2.2

                  All Bahraini conventional bank licensees must provide the CBB, with immediate written notification (i.e. by no later than the following business day) of any actual breach of the minimum ratios outlined in Subparagraph CA-B.2.1 (a). Where such notification is given, the conventional bank licensee must also:

                  (a) Provide the CBB no later than one calendar week after the notification, with a written action plan setting out how the conventional bank licensee proposes to restore the relevant ratios to the required minimum level(s), further, describing how the conventional bank licensee will ensure that a breach of such ratios will not occur again in the future;
                  (b) Provide the CBB with weekly reports basis thereafter on the conventional bank licensee's relevant ratios until such ratios have reached the required minimum, level(s) described in Subparagraph CA-B.2.1(a); and
                  (c) Take additional note of the Capital Conservation plan requirements in Chapter CA-2A where additional action is required when the Capital Conservation Buffer has been breached.
                  January 2015

                • CA-1.2.3

                  The conventional bank licensee is required to submit form PIR to the CBB on a weekly basis, until the concerned CARs identified in Paragraph CA-1.2.2 exceed the required minimum ratios.

                  January 2015

                • CA-1.2.4

                  The CBB will notify conventional bank licensees in writing of any action required of them with regard to the corrective and preventive action (as appropriate) proposed by the conventional bank licensee pursuant to the above, as well as of any other requirement of the CBB in any particular case.

                  January 2015

                • CA-1.2.5

                  Conventional bank licensees must note that the CBB considers the breach of regulatory CARs to be a very serious matter. Consequently, the CBB may (at its discretion) subject a conventional bank licensee which breaches its CAR(s) to a formal licensing reappraisal. Such reappraisal may be effected either through the CBB's own inspection function or through the use of appointed experts, as appropriate. Following such appraisal, the CBB will notify the conventional bank licensee concerned in writing of its conclusions with regard to the continued licensing of the conventional bank licensee.

                  January 2015

                • CA-1.2.6

                  The CBB recommends that the conventional bank licensee's compliance officer support and cooperate with the CBB in the monitoring and reporting of the CARs and other regulatory reporting matters. Compliance officers should ensure that their conventional bank licensees have adequate internal systems and controls to comply with these rules.

                  January 2015

              • CA-1.3 CA-1.3 Review of Prudential Information Returns

                • CA-1.3.1

                  The CBB requires all conventional bank licensees to request their external auditor to conduct a review of the prudential returns on a quarterly basis in accordance with the requirements set out under Section BR-3.1.

                  January 2015

                • CA-1.3.2

                  If a conventional bank licensee provides prudential returns without any reservation from auditors for two consecutive quarters, it can apply for exemption from such review for a period to be decided by CBB.

                  January 2015

                • CA-1.3.3

                  For Bahraini conventional bank licensees, all existing exemptions in respect of PIR review as at 31st December 2014 will cease.

                  Amended: April 2015
                  January 2015

                • CA-1.3.4

                  Conventional bank licensees' daily compliance with the capital requirements for credit and market risk must be verified by the independent risk management department and the internal auditor.

                  January 2015

            • CA-2 CA-2 Regulatory Capital

              • CA-2.1 CA-2.1 Regulatory Capital

                • Tier 1 (T1)

                  • CA-2.1.1

                    The predominant form of T1 capital must be common shares and retained earnings (hereafter referred to as CET1). Deductions from capital and prudential filters are applied at the level of CET1 (see CA-2.1 to CA-2.4 for a more detailed explanation). The remainder of the T1 capital base must be comprised of instruments that are subordinated, have fully discretionary non-cumulative dividends or coupons and have neither a maturity date nor an incentive to redeem.

                    January 2015

                • Common Equity Tier 1 (CET1)

                  • CA-2.1.2

                    CET1 capital consists of the sum of the following items (a) to (d) below:

                    (a) Issued and fully paid common shares that meet the criteria for classification as common shares for regulatory purposes (see Paragraph CA-2.1.3);
                    (b) Disclosed reserves including:
                    (i) General reserves;
                    (ii) Legal / statutory reserves;
                    (iii) Share premium;
                    (iv) Fair value reserves arising from fair valuing financial instruments; and
                    (v) Retained earnings or losses (including net profit and loss for the reporting period, whether reviewed or audited);
                    (c) Common shares issued by consolidated banking subsidiaries of the conventional bank licensee and held by third parties (i.e. minority interest) that meet the criteria for inclusion in CET1. See Section CA-2.3 for the relevant criteria; and
                    (d) Regulatory adjustments applied in the calculation of CET1 (see Section CA-2.4).
                    Amended: April 2015
                    January 2015

                  • CA-2.1.2A

                    For unrealised fair value reserves relating to financial instruments to be included in CET1 Capital, conventional bank licensees and their auditor must only recognise such gains or losses that are prudently valued and independently verifiable (e.g. by reference to market prices). The CBB will closely review the components and extent of unrealised gains and losses and will exclude any that do not have reference to independent valuations (i.e. those made by bank management alone will not be included) or which are not deemed to be made on a prudent basis. As such, the prudent valuations, and the independent verification thereof, are mandatory. Unrealised gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank's own credit risk must be derecognised in the calculation of CET1.

                    January 2015

                  • CA-2.1.3

                    For a common share to be included in CET1, it must meet the following criteria:

                    (a) It is directly issued to shareholders and fully paid in;
                    (b) It is non-cumulative;
                    (c) It is able to absorb losses within the conventional bank licensee on a going-concern basis;
                    (d) It is neither secured nor covered by a guarantee of the issuer or a related entity or any other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors;
                    (e) It represents the most subordinated claim in liquidation of the conventional bank licensee (i.e. it is junior to depositors, general creditors, and subordinated debt of the bank);
                    (f) It is entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been repaid in liquidation (i.e. it has an unlimited and variable claim, not a fixed or capped claim);
                    (g) Its principal is perpetual and never repaid outside of liquidation;
                    (h) The conventional bank licensee does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled nor do the statutory or contractual terms provide any feature which might give rise to such an expectation;
                    (i) Distributions are paid out of distributable items (retained earnings included). The level of distributions is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items);
                    (j) There are no circumstances under which the distributions are obligatory. Non-payment is therefore not an event of default;
                    (k) Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions;
                    (l) It is the issued capital that takes the first and proportionately greatest share of any losses as they occur;
                    (m) The paid in amount is recognised as equity capital (i.e. it is not recognised as a liability) for determining balance sheet insolvency;
                    (n) The paid in amount is classified as equity under IFRS and disclosed separately in the financial statements;
                    (o) The conventional bank licensee cannot directly or indirectly have funded the purchase of the instrument (i.e. treasury shares and shares purchased or funded by the conventional bank licensee for employee share purchase schemes must be deducted from CET1, and are subject to the 10% limit under the Commercial Companies' Law. Any of the conventional bank licensee's own shares used as collateral for the advance of funds to its customers must be deducted from CET1 and are also subject to the above 10% limit); and
                    (p) It is only issued with the approval of the shareholders of the issuing conventional bank licensee.
                    January 2015

                • Additional Tier 1 Capital (AT1)

                  • CA-2.1.4

                    AT1 capital consists of the sum of the items (a ) to (d):

                    (a) Instruments issued by the bank that meet the criteria for inclusion in AT1 outlined in Paragraph CA-2.1.6;
                    (b) Stock surplus (share premium) resulting from the issue of instruments included in AT1;
                    (c) Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in AT1 and are not included in CET1. See section CA-2.3 for the relevant criteria; and
                    (d) Regulatory adjustments applied in the calculation of AT1 (see CA-2.4).
                    January 2015

                  • CA-2.1.5

                    [This paragraph has been left blank.]

                    January 2015

                  • CA-2.1.6

                    For an instrument to be included in AT1, it must meet or exceed all the criteria below:

                    (a) It is issued and paid-in;
                    (b) It is subordinated to depositors, general creditors and subordinated debt of the conventional bank licensee;
                    (c) It is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis conventional bank licensee creditors;
                    (d) It is perpetual, i.e. there is no maturity date and there are no step-ups or other incentives to redeem;
                    (e) It may be callable at the initiative of the issuer only after a minimum of five years and a conventional bank licensee must not do anything which creates an expectation that the call will be exercised. A conventional bank licensee may not exercise such a call option without receiving prior written approval of the CBB and the called instrument is replaced with capital of the same or better quality; or the conventional bank licensee demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised;
                    (f) In all early call situations, replacement of existing capital must be done at conditions which are sustainable for the income capacity of the conventional bank licensee;
                    (g) Any repayment of principal (e.g. through repurchase or redemption) must be with prior written approval of the CBB and the conventional bank licensee must not assume or create market expectations that supervisory approval will be given;
                    (h) The conventional bank licensee must have full discretion at all times to cancel distributions/payments. This means that 'dividend pushers' are prohibited. A dividend pusher obliges a bank to make a dividend or coupon payment on an instrument if it has made a payment on another capital instrument or share. Also features that require the conventional bank licensee to make distributions in kind are not permitted;
                    (i) Cancellation of discretionary payments must not be an event of default;
                    (j) Conventional bank licensees must have full access to cancelled payments to meet obligations as they fall due;
                    (k) Cancellation of distributions/payments must not impose restrictions on the conventional bank licensee except in relation to distributions to common stockholders;
                    (l) Dividends/coupons must be paid out of distributable items;
                    (m) The instrument cannot have a credit sensitive dividend feature (this might serve to increase the dividend payable if a bank's credit rating falls from A to BBB, for example) which may lead to the dividend/coupon being reset periodically based in whole or in part on the conventional bank licensee's credit standing;
                    (n) The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms part of national insolvency law. This means that instruments accounted for as liabilities must be able to be written down in some way as described in subparagraph (o);
                    (o) All instruments must have principal loss absorption through either (i) conversion to common shares at an objective pre-specified trigger event; or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger event. The write-down will reduce the claim of the instrument in liquidation and reduce the amount that will be re-paid when a call is exercised and partially or fully reduce coupon/dividend payments on the instrument;
                    (p) Neither the conventional bank licensee nor a related party over which it exercises control or significant influence can have purchased the instrument, nor can the conventional bank licensee directly or indirectly have funded the purchase of the instrument. This also means that own holdings of AT1 instruments and AT1 instruments purchased or funded by the bank for employee share purchase schemes must be deducted from AT1. Any of the conventional bank licensee's AT1 instruments used as collateral for the advance of funds to its customers must be deducted from AT1 ;
                    (q) The instrument cannot have any features that hinder recapitalisation, such as provisions that require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame; and
                    (r) If the instrument is not issued out of a fully consolidated subsidiary bank or the parent conventional bank licensee in the consolidated group (e.g. a special purpose vehicle — "SPV"), proceeds must be immediately available without limitation to the parent bank in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in AT1.
                    Amended: January 2016
                    January 2015

                  • CA-2.1.7

                    [This paragraph has been left blank.]

                    January 2015

                  • CA-2.1.7A

                    The issuance of any new shares as a result of a trigger event must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted.

                    January 2015

                  • CA-2.1.7B

                    Where an issuing bank or SPV is part of a banking group and the issuer wishes the instrument to be included in the capital base of the group (in addition to its solo capital where applicable), the terms and conditions must specify an additional trigger event.

                    January 2015

                  • CA-2.1.7C

                    Any common stock paid as compensation to the holders of the instrument must be common stock of either the issuing bank or the parent bank of the group (including any successor in resolution).

                    January 2015

                • Write Down or Conversion of Additional Tier 1 Instruments

                  • CA-2.1.7D

                    For the purposes of Subparagraph CA-2.1.6(o), the following provisions apply to AT1 instruments accounted for as liabilities:

                    (a) A trigger event occurs when the CET1 capital ratio of the conventional bank licensee institution referred to in Subparagraph CA-B.2.1(a) falls below either of the following:
                    (i) 7.0%;
                    (ii) A level higher than 7.0 %, where determined by the conventional bank licensee and specified in the provisions governing the instrument; and
                    (b) Conventional bank licensees may specify in the provisions governing the instrument one or more trigger events in addition to that referred to in Subparagraph (a).
                    January 2015

                  • CA-2.1.7E

                    Where the provisions governing AT1 instruments require them to be converted into CET1 instruments upon the occurrence of a trigger event, those provisions must specify either of the following:

                    (a) The rate of such conversion and a limit on the permitted amount of conversion; or
                    (b) A range within which the instruments will convert into CET1 instruments.
                    January 2015

                  • CA-2.1.7F

                    Where the provisions governing AT1 instruments require their principal amount to be written down upon the occurrence of a trigger event, the write down must reduce all the following:

                    (a)The claim of the holder of the instrument in the insolvency or liquidation of the conventional bank licensee;
                    (b)The amount required to be paid in the event of the call or redemption of the instrument; and
                    (c)The distributions made on the instrument.
                    January 2015

                  • CA-2.1.7G

                    Write down or conversion of an AT1 instrument must, under the applicable accounting framework, generate items that qualify as CET1 items.

                    January 2015

                  • CA-2.1.7H

                    The amount of AT1 instruments recognised in AT1 items is limited to the minimum amount of CET1 items that would be generated if the principal amount of the AT1 instruments were fully written down or converted into CET1 instruments.

                    January 2015

                  • CA-2.1.7I

                    The aggregate amount of AT1 instruments that is required to be written down or converted upon the occurrence of a trigger event must be no less than the lower of the following:

                    (a)The amount required to restore fully the CET1 ratio of the conventional bank licensee to 7.0 %; and
                    (b)The full principal amount of the instrument.
                    January 2015

                  • CA-2.1.7J

                    When a trigger event occurs conventional bank licensees must do the following:

                    (a) Immediately inform the CBB;
                    (b) Inform the holders of the AT1 instruments; and
                    (c) Write down the principal amount of the AT1 instruments, or convert the instruments into CET1 instruments without delay, but no later than within one month, in accordance with the requirement laid down in this Section.
                    January 2015

                  • CA-2.1.7K

                    A conventional bank licensee issuing AT1 instruments that convert to CET1 on the occurrence of a trigger event must ensure that its authorised share capital is at all times sufficient, for converting all such convertible AT1 instruments into shares if a trigger event occurs.

                    January 2015

                  • CA-2.1.7L

                    All necessary authorisations must be obtained at the date of issuance of such convertible AT1 instruments. The conventional bank licensee must maintain at all times the necessary prior authorisation from the CBB to issue the CET1 instruments into which such AT1 instruments would convert upon occurrence of a trigger event.

                    January 2015

                  • CA-2.1.7M

                    A conventional bank licensee issuing AT1 instruments that convert to CET1 on the occurrence of a trigger event must ensure that there are no procedural impediments to that conversion by virtue of its incorporation or statutes or contractual arrangements.

                    January 2015

                • Consequences of the Conditions for AT1 Instruments Ceasing to Be Met

                  • CA-2.1.7N

                    The following must apply where, in the case of an AT1 instrument, the conditions laid down in Paragraph CA-2.1.6 cease to be met:

                    (a) That instrument must immediately cease to qualify as an AT1 instrument; and
                    (b) The part of the share premium accounts that relates to that instrument must immediately cease to qualify as an AT1 item.
                    January 2015

                • Tier 2 Capital (T2)

                  • CA-2.1.8

                    T2 capital consists of the sum of the following items:

                    (a) Instruments issued by the conventional bank licensee that meet the criteria for inclusion in T2 outlined in Paragraph CA-2.1.10;
                    (b) Stock surplus (share premium) resulting from the issue of instruments included in T2;
                    (c) Instruments issued by consolidated subsidiaries of the conventional bank licensee and held by third parties that meet the criteria for inclusion in T2 capital and are not included in T1. See CA-2.3 for the relevant criteria;
                    (d) General loan loss provisions held against future, presently unidentified losses and are freely available to meet losses which subsequently materialise and qualify for inclusion within T2. Such general loan loss provisions which are eligible for inclusion in T2 will be limited to a maximum of 1.25 percentage points of credit risk-weighted risk assets. Provisions ascribed to identified deterioration of particular assets or known liabilities, whether individual or grouped, must be excluded;
                    (e) Regulatory adjustments applied in the calculation of T2 (see CA-2.4); and
                    (f) Asset revaluation reserves which arise from the revaluation of fixed assets from time to time in line with the change in market values, and are reflected on the face of the balance sheet as a revaluation reserve. Similarly, gains may also arise from revaluation of Investment Properties (real estate). These reserves (including the net gains on investment properties) may be included in T2 capital, with the concurrence of the external auditor, provided that the assets are prudently valued, fully reflecting the possibility of price fluctuation and forced sale.
                    January 2015

                  • CA-2.1.9

                    The treatment of instruments issued out of consolidated subsidiaries of the conventional bank licensee and the regulatory adjustments applied in the calculation of T2 are addressed in Section CA-2.3.

                    January 2015

                  • CA-2.1.10

                    For an instrument to be included in T2(see CA-2.1.8(a)), it must meet all the criteria below:

                    (a) It is issued and paid-in;
                    (b) It is subordinated to depositors and general creditors of the conventional bank licensee;
                    (c) It is neither secured nor covered by a guarantee of the issuing conventional bank licensee or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis depositors and general creditors of the conventional bank licensee;
                    (d) It must have a minimum maturity of at least 5 years and it will be amortised on a straight line basis in the remaining five years before maturity and there are no step-ups or other incentives to redeem;
                    (e) It may be callable at the initiative of the conventional bank licensee only after a minimum of five years and the conventional bank licensee must not do anything which creates an expectation that the call will be exercised. The conventional bank licensee may not exercise such a call option without receiving written prior approval of the CBB and the called instrument must be replaced with capital of the same or better quality; or the conventional bank licensee demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised. In all early call situations, any replacement of existing capital must be done at conditions which are sustainable for the income capacity of the conventional bank licensee;
                    (f) The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal), except in bankruptcy and liquidation;
                    (g) The instrument cannot have a credit sensitive dividend/coupon that is reset periodically based in whole or in part on the conventional bank licensee's credit standing;
                    (h) Neither the conventional bank licensee nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the conventional bank licensee directly or indirectly have funded the purchase of the instrument. This means own holdings of T2 instruments and T2 purchased or funded by the conventional bank licensee for employee share purchase schemes must be deducted from T2. Any of the conventional bank licensee's own T2 instruments used as collateral for the advance of funds to its customers must be deducted from T2;
                    (i) If the instrument is not issued out of a fully consolidated subsidiary bank or the parent conventional bank licensee in the consolidated group (e.g. a special purpose vehicle — "SPV"), proceeds must be immediately available without limitation to the parent conventional bank licensee in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in T2; and
                    (j) All T2 Instruments must have principal loss absorption through either (i) conversion to common shares at an objective pre-specified trigger event; or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger event. The write-down will reduce the claim of the instrument in liquidation and reduce the amount that will be re-paid when a call is exercised and partially or fully reduce coupon/dividend payments on the instrument;
                    Amended: January 2016
                    January 2015

                  • CA-2.1.11

                    [This paragraph has been left blank.]

                    January 2015

                  • CA-2.1.11A

                    The issuance of any new shares as a result of a trigger event must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted.

                    January 2015

                  • CA-2.1.11B

                    Where an issuing bank or SPV is part of a banking group and the issuer wishes the instrument to be included in the capital base of the group (in addition to its solo capital where applicable), the terms and conditions must specify an additional trigger event.

                    January 2015

                  • CA-2.1.11C

                    Any common stock paid as compensation to the holders of the instrument must be common stock of either the issuing bank or the parent bank of the group (including any successor in resolution).

                    January 2015

                • Write Down or Conversion of Tier 2 Instruments

                  • CA-2.1.11D

                    For the purposes of Subparagraph CA-2.1.10(j), the following provisions apply to T2 instruments accounted for as liabilities:

                    (a) A trigger event occurs when the CET1 capital ratio of the conventional bank licensee institution referred to in Subparagraph CA-B.2.1(a) falls below either of the following:
                    (i) 7.0%; or
                    (ii) A level higher than 7.0 %, where determined by the conventional bank licensee and specified in the provisions governing the instrument; and
                    (b) Conventional bank licensees may specify in the provisions governing the instrument one or more trigger events in addition to that referred to in Subparagraph (a).
                    January 2015

                  • CA-2.1.11E

                    Where the provisions governing T2 instruments require them to be converted into CET1 instruments upon the occurrence of a trigger event, those provisions must specify either of the following:

                    (a) The rate of such conversion and a limit on the permitted amount of conversion; or
                    (b) A range within which the instruments will convert into CET1 instruments.
                    January 2015

                  • CA-2.1.11F

                    Where the provisions governing T2 instruments require their principal amount to be written down upon the occurrence of a trigger event, the write down must reduce all the following:

                    (a) The claim of the holder of the instrument in the insolvency or liquidation of the conventional bank licensee;
                    (b) The amount required to be paid in the event of the call or redemption of the instrument; and
                    (c) The distributions made on the instrument.
                    January 2015

                  • CA-2.1.11G

                    Write down or conversion of a T2 instrument must, under the applicable accounting framework, generate items that qualify as CET1 items.

                    January 2015

                  • CA-2.1.11H

                    The amount of T2 instruments recognised in T2 items is limited to the minimum amount of CET1 items that would be generated if the principal amount of the T2 instruments were fully written down or converted into CET1 instruments.

                    January 2015

                  • CA-2.1.11I

                    The aggregate amount of T2 instruments that is required to be written down or converted upon the occurrence of a trigger event must be no less than the lower of the following:

                    (a) The amount required to restore fully the CET1 ratio of the conventional bank licensee to 7.0 %; and
                    (b) The full principal amount of the instrument.
                    January 2015

                  • CA-2.1.11J

                    When a trigger event occurs conventional bank licensees must do the following:

                    (a)Immediately inform the CBB;
                    (b)Inform the holders of the T2 instruments; and
                    (c)Write down the principal amount of the T2 instruments, or convert the instruments into CET1 instruments without delay, but no later than within one month, in accordance with the requirement laid down in this Section.
                    January 2015

                  • CA-2.1.11K

                    A conventional bank licensee issuing T2 instruments that convert to CET1 on the occurrence of a trigger event must ensure that its authorised share capital is at all times sufficient, for converting all such convertible T2 instruments into shares if a trigger event occurs.

                    January 2015

                  • CA-2.1.11L

                    All necessary authorisations must be obtained at the date of issuance of such convertible T2 instruments. The conventional bank licensee must maintain at all times the necessary prior authorisation from the CBB to issue the CET1 instruments into which such T2 instruments would convert upon occurrence of a trigger event.

                    January 2015

                  • CA-2.1.11M

                    A conventional bank licensee issuing T2 instruments that convert to CET1 on the occurrence of a trigger event must ensure that there are no procedural impediments to that conversion by virtue of its incorporation or statutes or contractual arrangements.

                    January 2015

                • Consequences of the Conditions for T2 Instruments Ceasing to be Met

                  • CA-2.1.11N

                    The following must apply where, in the case of a T2 instrument, the conditions laid down in CA-2.1.10 cease to be met:

                    (a) That instrument must immediately cease to qualify as a T2 instrument; and
                    (b) The part of the share premium accounts that relates to that instrument must immediately cease to qualify as a T2 item.
                    January 2015

              • CA-2.2 CA-2.2 Limits and Minima on the Use of Different Forms of Capital

                • Consolidated T1 Capital and Total Capital

                  • CA-2.2.1

                    CAR components and CARs outlined in Paragraph CA-B.2.1 must meet or exceed the following minimum ratios relative to total risk-weighted assets:

                    (a) CET1 must be at least 6.5% of risk-weighted assets at all times;
                    (b) T1 Capital must be at least 8% of risk-weighted assets at all times;
                    (c) Total Capital (T1 Capital plus T2 Capital) must be at least 10% of risk-weighted assets at all times;
                    (d) In addition, conventional bank licensees must meet the minimum Capital Conservation Buffer (CCB) requirement of 2.5% of risk-weighted assets. The CCB must be composed of CET1 and so this gives an aggregate 9% CET1 including the CCB minimum capital requirement;
                    (e) A minimum 10.5% T1 Capital Adequacy Ratio including the above CCB requirement; and
                    (f) A 12.5% minimum Total Capital Adequacy Ratio including the above CCB requirement.
                    January 2015

                • Solo Tier 1 Capital and Total Capital

                  • CA-2.2.1A

                    CAR components and CARs outlined in Paragraph CA-B.2.1 must meet or exceed the following minimum ratios on a solo basis relative to total risk-weighted assets:

                    (a) CET1 must be at least 4.5% of risk-weighted assets at all times;
                    (b) T1 Capital must be at least 6% of risk-weighted assets at all times;
                    (c) Total Capital (T1 Capital plus T2 Capital) must be at least 8% of risk-weighted assets at all times; and
                    (d) The minimum Capital Conservation Buffer (CCB) requirement of 2.5% of risk-weighted assets does not apply on a solo basis.
                    January 2015

                  • CA-2.2.2

                    CET1 must be the predominant form of capital. Accordingly, the contribution of AT1 instruments towards the Minimum T1 Capital Ratios mentioned in Paragraphs CA-2.2.1 and CA-2.2.1A is limited to 1.5%.

                    January 2015

                  • CA-2.2.3

                    The limits on AT1 instruments and T2 instruments are based on the amount of CET1 after deductions pursuant to CA-2.4 (see Appendices CA-22 and CA-23 for examples of the threshold deduction effects and the caps).

                    January 2015

                • Tier 2: Supplementary Capital

                  • CA-2.2.4

                    The contribution of T2 capital towards the Minimum Total Capital Ratios and Minimum Total Capital plus Capital Conservation Buffer Ratios mentioned in Paragraphs CA-2.2.1 (consolidated) and CA-2.2.1A (solo) is limited to 2.0%.

                    January 2015

                  • CA-2.2.5

                    To explain the limits outlined in Paragraph CA-2.2.4 on the contributions of AT1 and T2 Capital to T1 and Total Capital, a simple example is given below where a conventional bank licensee has BD650mn of Core Equity Tier One Capital and BD200mn of AT1 and BD300mn of T2 Capital and BD10,000mn of total risk-weighted assets:

                    (a) 6.5% CET1 = BD650mn;
                    (b) 8.0% T1 = BD800mn (i.e. only BD150mn of the AT1 may be included in the T1 minimum requirement);
                    (c) 10% Total Capital = BD1,000 mn (i.e. only BD200mn of the T2 Capital may be included in the Total Capital requirement).

                    This means that if the conventional bank licensee only has BD650mn of CET1, it cannot comply with the additional Capital Conservation Buffer Requirement of 2.5% nor can it use excess AT1 or T2 Capital to meet this requirement. Although it would appear that the conventional bank licensee has BD1,150mn of total capital, only BD1,000 can be used to meet the minimum ratios. This example serves to underline the importance of CET1. Unless a conventional bank licensee can meet the CET1 minimum CARs of 6.5% and 9.0% mentioned above, it may not be able to meet any of the other minimum capital adequacy ratios outlined in Paragraph CA-2.2.1.

                    January 2015

              • CA-2.3 CA-2.3 Minority Interest Held by Third Parties in Consolidated Banking Subsidiaries

                • Common Shares Issued by Consolidated Banking Subsidiaries

                  • CA-2.3.1

                    In order for minority interest arising from the issue of common shares by a fully consolidated subsidiary of the conventional bank licensee to be recognised in CET1 for the consolidated CAR calculation, it must meet the following conditions:

                    (a) The instrument giving rise to the minority interest would, if issued by the conventional bank licensee, meet all of the criteria for classification as common shares for regulatory capital purposes;
                    (b) The subsidiary that issued the instrument is itself a bank1'2; and
                    (c) The subsidiary meets the limits outlined in Paragraph CA-2.3.2.

                    1 For the purposes of this paragraph, any institution that is subject to the same minimum prudential standards and level of supervision as a bank may be considered to be a bank.

                    2 Minority interest in a subsidiary that is a bank is strictly excluded from the parent bank's common equity if the parent bank or affiliate has entered into any arrangements to fund directly or indirectly minority investment in the subsidiary whether through an SPV or through another vehicle or arrangement. The treatment outlined above, thus, is strictly available where all minority investments in the bank subsidiary solely represent genuine third party common equity contributions to the subsidiary.

                    January 2015

                  • CA-2.3.2

                    The amount of minority interest meeting the criteria above that will be recognised in consolidated CET1 will be calculated as follows:

                    (a) Total minority interest meeting the criteria in Paragraph CA-2.3.1 minus the amount of the surplus CET1 of the subsidiary attributable to the minority shareholders;
                    (b) Surplus CET1 of the subsidiary is calculated as the CET1 of the subsidiary minus the lower of:
                    (i) The minimum CET1 requirement of the subsidiary plus the capital conservation buffer (CCB) (i.e. 7.0% of risk weighted assets or more as required by the concerned supervisor) and;
                    (ii) The portion of the consolidated minimum CET1 requirement plus the CCB (i.e. 9.0% of consolidated risk weighted assets) that relates to the subsidiary; and
                    (c) The amount of the surplus CET1 that is attributable to the minority shareholders is calculated by multiplying the surplus CET1 by the percentage of CET1 that is held by minority shareholders.
                    January 2015

                  • CA-2.3.2A

                    Appendix CA-1 outlines an example of the effect of an allocation of minority interest between the parent bank and minority shareholders in the fully consolidated subsidiary.

                    January 2015

                • AT1 Qualifying Capital Issued by Consolidated Banking Subsidiaries

                  • CA-2.3.3

                    AT1 capital instruments issued by a fully consolidated banking subsidiary of the conventional bank licensee to third party investors (including amounts under Paragraph CA-2.3.2) may receive recognition in T1 capital only if the instruments would, if issued by the conventional bank licensee, meet all of the criteria for classification as T1. The amount of this AT1 that will be recognised in consolidated AT1 will exclude amounts recognised in consolidated CET1 under Paragraph CA-2.3.2 and will be calculated as follows:

                    (a) T1 of the subsidiary issued to third parties minus the amount of the surplus T1 of the subsidiary attributable to the third party investors;
                    (b) Surplus T1 of the subsidiary is calculated as the T1 of the subsidiary minus the lower of: (1) the minimum T1 requirement of the subsidiary plus the CCB and (2) the portion of the consolidated minimum T1 requirement plus the CCB that relates to the subsidiary; and
                    (c) The amount of the surplus T1 that is attributable to the third party investors is calculated by multiplying the surplus T1 by the percentage of T1 that is held by third party investors.
                    January 2015

                • T2 Qualifying Capital issued by Consolidated Banking Subsidiaries

                  • CA-2.3.4

                    T2 instruments issued by a fully consolidated banking subsidiary of the conventional bank licensee to third party investors (including amounts under Paragraphs CA-2.3.2 and CA-2.3.3) may receive recognition in consolidated Total Capital only if the instruments would, if issued by the conventional bank licensee, meet all of the criteria for classification as T2. The amount of this T2 that will be recognised in the parent bank's T2 will exclude amounts recognised in CET1 under Paragraph CA-2.3.2 and amounts recognised in AT1 under Paragraph CA-2.3.3 and will be calculated as follows:

                    (a) Total capital instruments of the subsidiary issued to third parties minus the amount of the surplus Total Capital of the subsidiary attributable to the third party investors;
                    (b) Surplus Total Capital of the subsidiary is calculated as the Total Capital of the subsidiary minus the lower of:
                    (i) The minimum Total Capital requirement of the subsidiary plus the capital conservation buffer; and
                    (ii) The portion of the consolidated minimum Total Capital requirement plus the capital conservation buffer that relates to the subsidiary; and
                    (c) The amount of the surplus Total Capital that is attributable to the third party investors is calculated by multiplying the surplus Total Capital by the percentage of Total Capital that is held by third party investors.
                    January 2015

                  • CA-2.3.5

                    Where capital has been issued to third parties out of a special purpose vehicle (SPV), none of this capital can be included in consolidated CET1. However, such capital can be included in consolidated AT1 or T2 and treated as if the conventional bank licensee itself had issued the capital directly to the third parties only if it meets all the relevant entry criteria and the only asset of the SPV is its investment in the capital of the conventional bank licensee in a form that meets or exceeds all the relevant entry criteria3 (as required by CA-2.1.6(r) for AT1 and CA-2.1.10(i) for T2). In cases where the capital has been issued to third parties through an SPV via a fully consolidated subsidiary of the conventional bank licensee, such capital may, subject to the requirements of this paragraph, be treated as if the subsidiary itself had issued it directly to the third parties and may be included in the conventional bank licensee's consolidated AT1 or T2 in accordance with the treatment outlined in Paragraphs CA-2.3.3 and CA-2.3.4.


                    3 Assets that relate to the operation of the SPV may be excluded from this assessment if they are de minimis.

                    Amended: April 2015
                    January 2015

              • CA-2.4 CA-2.4 Regulatory Adjustments (Solo and Consolidated)

                • CA-2.4.1

                  This section sets out the regulatory adjustments to be applied to Regulatory Capital. There are four stages of adjustments for CET1. In most cases these adjustments are applied in the calculation of CET1. The first set of adjustments is applied in Paragraphs CA-2.4.2 to CA-2.4.15. A subtotal for CET1 is obtained (this can be called CET1a). A second regulatory adjustment described in Paragraphs CA-2.4.16 to CA-2.4.19 is then applied to CET1a (this adjustment results in CET1b). A third regulatory adjustment described in Paragraphs CA-2.4.20 to CA-2.4.21 is then applied to CET1b (this adjustment results in CET1c). Then a final regulatory adjustment described in Paragraph CA-2.4.23 is then applied to CET1c (this adjustment results in CET1d). This is the amount of CET1 that can be used for the calculation of the CAR and determining all other applicable caps on T1 and T2. An example of the effects of the regulatory deductions is given in Appendix CA-22.

                  January 2015

                • Goodwill and Other Intangibles (Except Mortgage Servicing Rights)

                  • CA-2.4.2

                    Goodwill must be deducted in the calculation of CET1, including any goodwill included in the valuation of significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation. The full amount is to be deducted net of any associated deferred tax liability which would be extinguished if the goodwill becomes impaired or derecognised under IFRS. The amount to be deducted in respect of mortgage servicing rights is set out in Paragraph CA-2.4.23A. Intangible assets other than goodwill and mortgage service rights are subject to transitional arrangements and are phased out as regulatory adjustments as outlined in Subparagraph CA-B.2.1(d).

                    Amended: April 2015
                    January 2015

                  • CA-2.4.3

                    Conventional bank licensees must use the IFRS definition of intangible assets to determine which assets are classified as intangible and are thus required to be deducted.

                    January 2015

                • Deferred Tax Assets

                  • CA-2.4.4

                    Deferred tax assets (DTAs) that rely on future profitability of the conventional bank licensee to be realised are to be deducted in the calculation of CET1. Deferred tax assets may be netted with associated deferred tax liabilities (DTLs) only if the DTAs and DTLs relate to taxes levied by the same taxation authority and offsetting is permitted by the relevant taxation authority. Where these DTAs relate to temporary differences (e.g. allowance for credit losses) the amount to be deducted is set out in Paragraph CA-2.4.23. All other such assets, e.g. those relating to operating losses, such as the carry forward of unused tax losses, or unused tax credits, are to be deducted in full net of deferred tax liabilities as described above. The DTLs permitted to be netted against DTAs must exclude amounts that have been netted against the deduction of goodwill, intangibles and defined benefit pension assets, and must be allocated on a pro rata basis between DTAs subject to the threshold deduction treatment and DTAs that are to be deducted in full.

                    January 2015

                  • CA-2.4.5

                    An over instalment of tax or, in some jurisdictions, current year tax losses carried back to prior years may give rise to a claim or receivable from the government or local tax authority. Such amounts are typically classified as current tax assets for accounting purposes. The recovery of such a claim or receivable would not rely on the future profitability of the conventional bank licensee and must be assigned the relevant sovereign risk weighting.

                    January 2015

                • Cash Flow Hedge Reserve

                  • CA-2.4.6

                    The amount of the cash flow hedge reserve that relates to the hedging of items that are not fair valued on the balance sheet (including projected cash flows) must be derecognised in the calculation of CET1. This means that positive amounts must be deducted and negative amounts must be added back.

                    January 2015

                  • CA-2.4.7

                    This treatment specifically identifies the element of the cash flow hedge reserve that is to be derecognised for prudential purposes. It removes the element that gives rise to artificial volatility in common equity, as in this case the reserve only reflects one half of the picture (the fair value of the derivative, but not the changes in fair value of the hedged future cash flow).

                    January 2015

                • Gain on Sale Related to Securitisation Transactions

                  • CA-2.4.8

                    Any increase in equity capital resulting from a securitisation transaction (see Section CA-6.4) must be deducted from the calculation of CET1.

                    January 2015

                  • CA-2.4.9

                    [This paragraph has been left blank.]

                    January 2015

                • Defined Benefit Pension Fund Assets and Liabilities

                  • CA-2.4.10

                    Defined benefit pension fund liabilities, as included on the balance sheet, must be fully recognised in the calculation of CET1 (i.e. CET1 cannot be increased through derecognising these liabilities). For each defined benefit pension fund that is an asset on the balance sheet, the asset must be deducted in the calculation of CET1 net of any associated deferred tax liability which would be extinguished if the asset should become impaired or derecognised under the relevant accounting standards. Assets in the fund to which the conventional bank licensee has unrestricted and unfettered access can, with supervisory approval, offset the deduction. Such offsetting assets must be given the risk weight they would receive if they were owned directly by the conventional bank licensee.

                    January 2015

                  • CA-2.4.11

                    Paragraph CA-2.4.10 only applies to conventional bank licensees which have subsidiaries which are located in jurisdictions where there are defined benefit pension schemes and addresses the concern that assets arising from pension funds may not be capable of being withdrawn and used for the protection of depositors and other creditors of a bank. The concern is that their only value stems from a reduction in future payments into the fund. The treatment allows for banks to reduce the deduction of the asset if they can address these concerns and show that the assets can be easily and promptly withdrawn from the fund.

                    January 2015

                • Investments in Own Shares

                  • CA-2.4.12

                    All of a conventional bank licensee's investments in its own common shares, whether held directly or indirectly must have already been deducted in the calculation of CET1 as required by Subparagraph CA-2.1.3(o). In addition, any own stock which the conventional bank licensee could be contractually obliged to purchase must be deducted in the calculation of CET1. The treatment described applies irrespective of the location of the exposure in the banking book or the trading book. In addition:

                    (a) Gross long positions may be deducted net of short positions in the same underlying exposure only if the short positions involve no counterparty risk (i.e. this would normally mean that the long and short positions are with the same counterparty and a valid close-out netting agreement is in place);
                    (b) Conventional bank licensees must look through holdings of index securities to deduct exposures to own shares. However, gross long positions in own shares resulting from holdings of index securities may be netted against short positions in own shares resulting from short positions in the same underlying index where they are undertaken with the same counterparty. In such cases the short positions may still involve counterparty risk (which is subject to the relevant counterparty credit risk charge); and
                    (c) Any shares of the conventional bank licensee held as collateral against exposures to customers are considered to be held indirectly and are subject to deduction.
                    Amended: April 2015
                    January 2015

                  • CA-2.4.13

                    The deductions under Subparagraphs CA-2.1.3(o) and Paragraph CA-2.4.12 are necessary to avoid the double counting of a conventional bank licensee's own capital. The treatment seeks to remove the double counting that arises from direct holdings, indirect holdings via index funds and potential future holdings as a result of contractual obligations to purchase own shares.

                    January 2015

                  • CA-2.4.14

                    Conventional bank licensee must deduct investments in their own AT1 in the calculation of their AT1 capital and must deduct investments in their own T2 in the calculation of their T2 capital.

                    January 2015

                • Reciprocal Cross Holdings in the Capital of Banking and Financial Entities

                  • CA-2.4.15

                    Reciprocal cross holdings of capital that are designed to artificially inflate the capital position of conventional bank licensees will be deducted in full. Conventional bank licensees must apply a "corresponding deduction approach" to such investments in the capital of other banks and financial entities. This means the deduction must be applied to the same component of capital for which the capital would qualify if it was issued by the conventional bank licensee itself. The above adjustments (CA-2.4.2 to CA-2.4.15) must now be aggregated and applied to CET1 to obtain a subtotal (CET1a). This new adjusted CET1a is used for the purpose of calculating the next adjustment.

                    January 2015

                • Investments in the capital of banking and financial entities that are outside the scope of regulatory consolidation and where the bank does not own more than 10% of the issued common share capital of the entity

                  • CA-2.4.16

                    The regulatory adjustment described in Paragraph CA-2.4.17 applies to investments in the capital of banking and financial entities that are outside the scope of regulatory consolidation and where the conventional bank licensee does not own more than 10% of the issued common share capital of the entity. In addition:

                    (a) Investments include direct, indirect4 and synthetic holdings of capital instruments. For example, conventional bank licensees must look through holdings of index securities to determine their underlying holdings of capital;5
                    (b) Holdings in both the banking book and trading book must be included. Capital includes common stock and all other types of cash and synthetic capital instruments (e.g. subordinated debt). It is the net long position that is to be included (i.e. the gross long position net of short positions in the same underlying exposure where the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least one year);
                    (c) Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included; and
                    (d) If the capital instrument of the entity in which the conventional bank licensee has invested does not meet the criteria for CET1, AT1, or T2 (see CA-2.1.2(f)) of the concerned bank, the capital is to be considered common shares for the purposes of this regulatory adjustment. However, if the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant jurisdiction of the financial entity, it is not required to be deducted.

                    4 Indirect holdings are exposures or parts of exposures that, if a direct holding loses its value, will result in a loss to the bank substantially equivalent to the loss in value of the direct holding.

                    5 If banks find it operationally burdensome to look through and monitor their exact exposure to the capital of other financial institutions as a result of their holdings of index securities, the CBB may permit banks, subject to prior CBB approval, to use a conservative estimate of the amount to be deducted.

                    January 2015

                  • CA-2.4.17

                    If the total of all holdings listed in Paragraph CA-2.4.16 in aggregate exceed 10% of the conventional bank licensee's CET1a (i.e. after applying all other regulatory adjustments from Paragraph CA-2.4.2 to Paragraph CA-2.4.15) then the amount above 10% is required to be deducted, applying a corresponding deduction approach. This means the deduction must be applied to the same component of capital for which the capital would qualify if it was issued by the conventional bank licensee itself. Accordingly, the amount to be deducted from CET1a must be calculated as the total of all holdings which in aggregate exceed 10% of the conventional bank licensee's CET1a (as per above) multiplied by the common equity holdings as a percentage of the total capital holdings. This would result in a CET1a deduction which corresponds to the proportion of Total Capital holdings held in CET1a. Similarly, the amount to be deducted from AT1 must be calculated as the total of all holdings which in aggregate exceed 10% of the conventional bank licensee's CET1a (as per above) multiplied by the AT1 holdings as a percentage of the Total Capital holdings. The amount to be deducted from T2 must be calculated as the total of all holdings which in aggregate exceed 10% of the conventional bank licensee's CET1a (as per above) multiplied by the T2 holdings as a percentage of the Total Capital holdings.

                    January 2015

                  • CA-2.4.18

                    See Paragraph CA-2.4.21 for further details on what to do if, under the corresponding deduction approach, a conventional bank licensee is required to make a deduction from a particular tier of capital and it does not have enough of that tier of capital to satisfy that deduction.

                    January 2015

                  • CA-2.4.19

                    Amounts below the threshold, which are not deducted, will continue to be risk weighted. Thus, instruments in the trading book will be treated as per the market risk rules and instruments in the banking book must be treated as per Chapter CA-3. For the application of risk weighting the amount of the holdings must be allocated on a pro rata basis between those below and those above the threshold. The above adjustments (CA-2.4.16 to CA-2.4.18) must now be aggregated and applied to CET1a to obtain a new subtotal (CET1b). This new adjusted CET1b is used for the purpose of calculating the next adjustment.

                    January 2015

                • Significant Investments in the Capital of Banking and Financial Entities that are Outside the Scope of Regulatory Consolidation

                  • CA-2.4.20

                    The regulatory adjustment described in Paragraph CA-2.4.21 applies to investments in the capital of banking and financial entities that are outside the scope of regulatory consolidation where the conventional bank licensee owns more than 10% of the issued common share capital of the issuing entity or where the entity is an affiliate of the conventional bank licensee. In addition:

                    (a) Investments include direct, indirect and synthetic holdings of capital instruments. For example, conventional bank licensee must look through holdings of index securities to determine their underlying holdings of capital;7
                    (b) Holdings in both the banking book and trading book are to be included. Capital includes common stock and all other types of cash and synthetic capital instruments (e.g. subordinated debt). It is the net long position that is to be included (i.e. the gross long position net of short positions in the same underlying exposure where the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least one year);
                    (c) Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included; and
                    (d) If the capital instrument of the entity in which the conventional bank licensee has invested does not meet the criteria for CET1, AT1, or T2 (see CA-2.1.2 (f)) of the concerned bank, the capital is to be considered common shares for the purposes of this regulatory adjustment. However, if the investment is issued out of a regulated financial entity and not included in regulatory capital of the financial entity, it is not required to be deducted.

                    6 Investments in entities that are outside the scope of regulatory consolidation refers to investments in entities that have not been consolidated at all or have not been consolidated in such a way as to result in their assets being included in the calculation of consolidated risk-weighted assets of the group.

                    7 If banks find it operationally burdensome to look through and monitor their exact exposure to the capital of other financial institutions as a result of their holdings of index securities, the CBB may permit banks, subject to prior CBB approval, to use a conservative estimate.

                    January 2015

                  • CA-2.4.21

                    All investments in Paragraph CA-2.4.20 that are not common shares must be fully deducted following a corresponding deduction approach. This means the deduction must be applied to the same tier of capital for which the capital would qualify if it was issued by the conventional bank licensee itself. If the conventional bank licensee is required to make a deduction from a particular tier of capital and it does not have enough of that tier of capital to satisfy that deduction, the shortfall will be deducted from the next higher tier of capital (e.g. if a conventional bank licensee does not have enough AT1 capital to satisfy a particular deduction, the shortfall will be deducted from CET1c as applicable).

                    January 2015

                  • CA-2.4.22

                    Investments in Paragraph CA-2.4.20 that are common shares are subject to the threshold treatment described in paragraph CA-2.4.23. The above adjustments (CA-2.4.20 to CA-2.4.21) must be aggregated and applied to CET1b to obtain a new subtotal (CET1c). This new adjusted CET1c is used for the purpose of calculating the next adjustment.

                    January 2015

                • Threshold Deductions

                  • CA-2.4.23

                    If the total of all common equity holdings listed in Paragraph CA-2.4.20 in aggregate exceeds 10% of the conventional bank licensee's CET1c, then the amount above 10% is required to be deducted from CET1c (see Appendices CA-22 and CA-23 for examples). After this deduction, the conventional bank licensee must deduct the amount by which each of items b) and c) in Paragraph CA-2.4.23A individually exceeds 10% of its CET1c. After these individual deductions, the aggregate of the three items below which exceeds 15% of its CET1c (calculated prior to the deduction of these items but after application of all other regulatory adjustments to CET1 applied in paragraphs CA-2.4.2 to CA-2.4.21) must be deducted from CET1c. The adjustments in this Paragraph are applied to CET1c to obtain a new subtotal (CET1d). This new adjusted CET1d is used for calculating the consolidated CAR and the applicable caps on AT1 and T2 Capital. The items included in the 15% aggregate limit are subject to full disclosure.

                    Amended: April 2015
                    January 2015

                  • CA-2.4.23A

                    As of 1 January 2020, the calculation of the 15% limit will be subject to the following treatment: the sum of the three items below that remains recognised after the application of all regulatory adjustments must not exceed 15% of CET1d (See Appendix CA-3 for an example):

                    (a) Significant investments in the common shares of unconsolidated banks and other financial entities as referred to in Paragraph CA-2.4.20;
                    (b) Mortgage servicing rights (MSRs); and
                    (c) Deferred Tax Assets (DTAs) that arise from temporary differences.
                    January 2015

                  • CA-2.4.24

                    The amount of the three above items that are not deducted in the calculation of CET1d is risk weighted at 250% (see Paragraph CA-3.2.26).

                    January 2015

                • Former Deductions from Capital

                  • CA-2.4.25

                    The following items receive the following risk weights:

                    (a) Certain securitisation exposures outlined in Chapter CA-6: 1,250%;
                    (b) Non-payment/delivery on non-DvP and non-PvP transactions (see Appendix CA-4): 1,250%;
                    (c) The amount of any significant investments in commercial entities, as defined in Paragraph CM-5.11.4, which exceed the materiality thresholds is risk weighted at 800%. The materiality thresholds for these investments are: 15% of Total Capital for individual significant investments; and 60% of Total Capital for the aggregate of such investments; and
                    (d) Any exposures above the large exposures limits set by the CBB in Chapter CM-5 of the CBB Rulebook: 800%.
                    Amended: October 2016
                    Amended: July 2015
                    Amended: April 2015
                    January 2015

                  • CA-2.4.26

                    For Subparagraphs CA-2.4.25 (c) and (d), amounts below the materiality thresholds and large exposure limits continue to be risk weighted in accordance with Chapter CA-3. Where the remaining holdings are made up of holdings carrying different risk weights, the application of the risk weighting must be allocated on a pro rata basis for those exposures that are not subject to the 800% risk weight. Appendix CA-21 gives an example of the way to calculate the risk weighted assets and the effect of the limits outlined in Subparagraphs CA-2.4.25 (c) and (d).

                    Added: July 2015

            • CA-2A CA-2A Capital Conservation Buffer

              • CA-2A.1 CA-2A.1 Capital Conservation Best Practice

                • CA-2A.1.1

                  This section outlines the operation of the capital conservation buffer, which is designed to ensure that banks build up capital buffers outside periods of stress which can be drawn down as losses are incurred. The requirement is based on simple capital conservation rules designed to avoid breaches of minimum capital requirements.

                  January 2015

                • CA-2A.1.2

                  Outside of periods of stress, conventional bank licensees must hold buffers of capital above the regulatory minimum.

                  January 2015

              • CA-2A.2 CA-2A.2 The Capital Conservation Buffer (CCB) Requirement

                • CA-2A.2.1

                  Conventional bank licensees are required to hold a Capital Conservation Buffer (CCB) of 2.5%, comprised of CET1 above the regulatory minimum Total Capital ratio of 10%.8 Capital distribution constraints will be imposed on a conventional bank licensee when the CCB falls below 2.5%. The constraints imposed only relate to distributions, not the operation of the conventional bank licensee.


                  8 Common Equity Tier 1 must first be used to meet the minimum capital requirements (including the 8% Tier 1 and 10% Total Capital requirements if necessary), before the remainder can contribute to the capital conservation buffer.

                  January 2015

                • CA-2A.2.2

                  Conventional bank licensees must note that they are required to maintain a minimum consolidated Total Capital Ratio of 12.5% and a solo Total Capital Ratio of 8% regardless of whether they do or do not have AT1 or T2 Capital and therefore conventional bank licensees will be required to retain 100% of the annual net profit unless their consolidated Total Capital Ratio is above 12.5% and their solo Total capital Ratio is above 8%.

                  January 2015

                • CA-2A.2.3

                  Elements subject to the restriction on distributions: Items considered to be distributions include dividends and share buybacks, discretionary profit distributions on other T1 capital instruments and discretionary bonus payments to staff. Payments that do not result in a depletion of CET1, which may for example include certain scrip dividends, are not considered distributions.

                  January 2015

                • Capital Conservation Plan

                  • CA-2A.2.4

                    Where a conventional bank licensee fails to meet the required level of capital conservation buffer, it must prepare a Capital Conservation Plan (hereinafter referred to as "Plan") clearly outlining the information mentioned in this Paragraph. The conventional bank licensee must submit this Plan to the CBB within one week of becoming aware of the shortfall (see also CA-1.2.2). The conventional bank licensee must already have prepared such a Plan on a contingency basis. The Plan must include the following:

                    (a) Estimates of income and expenditure and a forecasted balance sheet;
                    (b) Measures to be taken to increase the conventional bank licensee's capital ratios;
                    (c) A plan and time frame for the increase of capital with the objective of meeting fully the buffer requirement; and
                    (d) Any other information the CBB deems necessary to carry out the assessment required, as indicated in Paragraph CA-2A.2.5.
                    January 2015

                  • CA-2A.2.5

                    The CBB shall review the Plan submitted by the conventional bank licensee and shall approve it provided it considers that the Plan provides a reasonable basis for conserving or raising sufficient capital that will enable the conventional bank licensee to meet the buffer requirements within a period acceptable to the CBB. While reviewing the Plan, the CBB will also evaluate whether the conventional bank licensee has deliberately reduced its CET1 so as to operate in the buffer range (i.e. below the capital conservation buffer requirement) in order to reduce its cost of capital for competitive purposes.

                    January 2015

                  • CA-2A.2.6

                    If the Plan is not approved by the CBB, it may take one or more of the following steps, inter alia, as deemed necessary:

                    (a) Ask the conventional bank licensee to revise the Plan and resubmit it within a specified time period;
                    (b) Require the conventional bank licensee to raise new capital from private sources to specified levels within specified periods; or
                    (c) Impose more stringent restrictions on distributions than those required by Paragraph CA-2A.2.3
                    January 2015

              • CA-2A.3 CA-2A.3 Implementation Date

                • CA-2A.3.1

                  The capital conservation buffer will be implemented on 1 January 2015. It will be set at 2.5% of RWAs.

                  January 2015

                • CA-2A.3.2

                  Conventional bank licensees must maintain prudent earnings retention policies with a view to meeting the conservation buffer at all times.

                  January 2015

                • CA-2A.3.3

                  [This Paragraph was deleted in April 2015.]

                  Deleted: April 2015
                  January 2015

                • CA-2A.3.4

                  The CBB will issue rules and guidance on the countercyclical buffer in due course.

                  The CBB reserves the right to use its discretion on the timing and amount of the countercyclical buffer, depending on economic conditions in the region and globally.

                  January 2015

          • PART 2: PART 2: Credit Risk

            • CA-3 CA-3 Credit Risk — The Standardized Approach

              • CA-3.1 CA-3.1 Overview

                • CA-3.1.1

                  This Chapter sets out the rules relating to the standardized approach to credit risk. The securitisation framework is presented in Chapter CA-6. The standardized approach makes use of external credit assessments9 as a means of calculating the risk weight for exposures to certain categories of counterparty.


                  9 The notations follow the methodology used by one institution, Standard & Poor's. The use of Standard & Poor's credit ratings is an example only; those of some other external credit assessment institutions could equally well be used. The ratings used throughout this document, therefore, do not express any preferences or determinations on external assessment institutions by CBB.

                  January 2015

                • CA-3.1.2

                  The credit equivalent amount (CEA) of Securities Financing Transactions (SFT)10 and OTC derivatives that expose a conventional bank licensee to counterparty credit risk11 is calculated under the rules set out in Appendix CA-2.


                  10 Securities Financing Transactions (SFT) are transactions such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions, where the value of the transactions depends on the market valuations and the transactions are often subject to margin agreements.

                  11 The counterparty credit risk is defined as the risk that the counterparty to a transaction could default before the final settlement of the transaction's cash flows. An economic loss would occur if the transactions or portfolio of transactions with the counterparty has a positive economic value at the time of default. Unlike a firm's exposure to credit risk through a loan, where the exposure to credit risk is unilateral and only the lending bank faces the risk of loss, the counterparty credit risk creates a bilateral risk of loss: the market value of the transaction can be positive or negative to either counterparty to the transaction. The market value is uncertain and can vary over time with the movement of underlying market factors.

                  January 2015

                • CA-3.1.3

                  In determining the risk weights in the standardised approach, conventional bank licensees must use assessments by only those external credit assessment institutions which are recognised as eligible for capital purposes by CBB in accordance with the criteria defined in Section CA-3.4.

                  January 2015

                • CA-3.1.4

                  Exposures must be measured at the book value as shown in the financial statements of the conventional bank licensee (normally at amortised cost or fair value after applying specific provisions or fair value adjustments as applicable) and risk-weighted taking into account eligible financial collateral as applicable (see Chapter CA-4 concerning credit risk mitigation).

                  January 2015

              • CA-3.2 CA-3.2 Segregation of Claims

                • Claims on Sovereigns

                  • CA-3.2.1

                    Claims on governments of GCC member states (hereinafter referred to as GCC) and their central banks can be risk weighted at 0%. Claims on other sovereigns and their central banks are given a preferential risk weighting of 0% where such claims are denominated and funded in the relevant domestic currency of that sovereign/central bank (e.g. if a Bahraini bank has a claim on government of Australia and the loan is denominated and funded in Australian dollar, it will be risk weighted at 0%). Such preferential risk weight for claims on GCC/other sovereigns and their central banks will be allowed only if the relevant supervisor also allows 0% risk weighting to claims on its sovereign and central bank.

                    January 2015

                  • CA-3.2.2

                    Claims on sovereigns other than those referred to in the Paragraph CA-3.2.1 must be assigned risk weights as follows:

                    Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated
                    Risk Weight 0% 20% 50% 100% 150% 100%
                    January 2015

                • Claims on International Organisations

                  • CA-3.2.3

                    Claims on the Bank for International Settlements, the International Monetary Fund and the European Central Bank receive a 0% risk weight.

                    January 2015

                • Claims on Non-Central Government Public Sectors Entities (PSEs)

                  • CA-3.2.4

                    Any claims on the Bahraini PSEs listed in Appendix CA-18 are treated as claims on the government of Bahrain and are eligible for 0% risk weighting:

                    Amended: April 2016
                    Added: January 2015

                  • CA-3.2.4A

                    In addition to the Bahraini PSEs listed in Appendix CA-18, existing exposures to the following entities which have been removed from the list of PSEs as of 1st March 2016, will be grandfathered and will remain eligible until the final maturity or sale of such exposure:

                    (a) Durrat Khaleej Al Bahrain Company;
                    (b) Hawar Island Development Company;
                    (c) Lulu Tourism Company; and
                    (d) Al Awali Real estate Company.
                    Added: April 2016

                  • CA-3.2.4B

                    Any new claims to the entities listed under Paragraph CA-3.2.4A are subject to the normal risk weights as outlined in this Section.

                    Added: April 2016

                  • CA-3.2.5

                    Where other supervisors also treat claims on named PSEs as claims on their sovereigns, claims to those PSEs are treated as claims on the respective sovereigns as outlined in Paragraphs CA-3.2.1 and CA-3.2.2. These PSEs must be shown on a list maintained by the concerned central bank or financial regulator. Where PSEs are not on such a list, they must be subject to the treatment outlined in Paragraph CA-3.2.6.

                    January 2015

                  • CA-3.2.6

                    Claims on all other (foreign) PSEs (i.e. not having sovereign treatment) denominated and funded in the home currency of the sovereign must be risk weighted as allowed by their home country supervisors, provided the sovereign carries rating BBB- or above. Claims on PSEs with no explicit home country weighting or to PSEs in countries of BB+ sovereign rating and below are subject to ECAI ratings as per the following table:

                    Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated
                    Risk Weight 20% 50% 100% 100% 150% 100%
                    January 2015

                  • CA-3.2.7

                    Claims on commercial companies owned by governments must be risk weighted as normal commercial entities unless they are in the domestic currency and covered by a government guarantee in the domestic currency that satisfies the conditions in CA-4.2 and CA-4.5 in which case they may take the risk weight of the concerned government.

                    January 2015

                • Claims on Multilateral Development Banks (MDBs)

                  • CA-3.2.8

                    MDBs currently eligible for a 0% risk weight are: the World Bank Group comprised of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), the Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), the European Investment Bank (EIB), the European Investment Fund (EIF), the Nordic Investment Bank (NIB), the Caribbean Development Bank (CDB), the Islamic Development Bank (IDB), Arab Monetary Fund (AMF), the Council of Europe Development Bank (CEDB), the Arab Bank for Economic Development in Africa (ABEDA), Council of European Resettlement Fund (CERF) and the Kuwait Fund for Arab Economic Development (KFAED).

                    January 2015

                  • CA-3.2.9

                    The claims on MDB's, which do not qualify for the 0% risk weighting, are assigned risk weights as follows:

                    Banks Credit Quality Grades AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated
                    Risk weights 20% 50% 50% 100% 150% 50%
                    January 2015

                • Claims on Banks

                  • CA-3.2.10

                    Claims on banks must be risk weighted as given in the following table. No claim on an unrated bank may receive a risk weight lower than that applied to claims on its sovereign of incorporation (see Guidance in Paragraph CA-3.2.11A for self-liquidating letters of credit).

                    Banks Credit Quality Grades AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated
                    Standard risk weights 20% 50% 50% 100% 150% 50%
                    Preferential risk weight 20% 20% 20% 50% 150% 20%
                    January 2015

                  • CA-3.2.11

                    Short-term claims on locally incorporated banks may be assigned a risk weighting of 20% where such claims on the banks are of an original maturity of 3 months or less denominated and funded in either BD or US$. A preferential risk weight that is one category more favourable than the standard risk weighting may be assigned to claims on foreign banks licensed in Bahrain of an original maturity of 3 months or less denominated and funded in the relevant domestic currency (other than claims on banks that are rated below B-). Such preferential risk weight for short-term claims on banks licensed in other jurisdictions will be allowed only if the relevant supervisor also allows this preferential risk weighting to short-term claims on its banks.

                    January 2015

                  • CA-3.2.11A

                    Self-liquidating letters of credit issued or confirmed by an unrated bank are allowed a risk weighting of 20% without reference to the risk weight of the sovereign of incorporation. All other claims will be subject to the 'sovereign floor' of the country of incorporation of the concerned issuing or confirming bank.

                    January 2015

                  • CA-3.2.12

                    Claims with a contractual original maturity under 3 months that are expected to be rolled over (i.e. where the effective maturity is longer than 3 months) do not qualify for a preferential treatment for capital adequacy purposes.

                    January 2015

                • Claims on Investment Firms

                  • CA-3.2.13

                    Claims on category one and category two investment firms which are licensed by the CBB are treated as claims on banks for risk weighting purposes but without the use of preferential risk weight for short-term claims. Claims on category three investment firms licensed by the CBB must be treated as claims on corporates for risk weighting purposes. Claims on investment firms in other jurisdictions will be treated as claims on corporates for risk weighting purposes. However, if the bank can demonstrate that the concerned investment firm is subject to an equivalent capital adequacy regime to this Module and is treated as a bank for risk weighting purposes by its home regulator, then claims on such investment firms may be treated as claims on banks.

                    January 2015

                • Claims on Corporates, including Insurance Companies

                  • CA-3.2.14

                    Risk weighting for corporates including insurance companies is as follows:

                    Credit assessment AAA to AA- A+ to A- BBB+ to BB- Below BB- Unrated
                    Risk weight 20% 50% 100% 150% 100%
                    January 2015

                  • CA-3.2.15

                    Risk weighting for unrated (corporate) claims will not be given a preferential RW to the concerned sovereign. Credit facilities to small/medium enterprises (SMEs) may be placed in the regulatory retail portfolio in limited cases below.

                    January 2015

                • Claims included in the Regulatory Retail Portfolios

                  • CA-3.2.16

                    No claim on any unrated corporate, where said corporate originates from a foreign jurisdiction, may be given a risk weight lower than that assigned to a corporate within its own jurisdiction, and in no case will it be below 100%.

                    January 2015

                  • CA-3.2.17

                    Claims included in the regulatory retail portfolio must be risk weighted at 75%, except as provided in CA-3.2.23 for past due loans.

                    January 2015

                  • CA-3.2.18

                    To be included in the regulatory retail portfolio, claims must meet the following criteria:

                    (a) Orientation — the exposure is to an individual person or persons or to a small business. A small business is a Bahrain-based business with annual turnover below BD 2mn;
                    (b) Product — The exposure takes the form of any of the following: revolving credits and lines of credit (including credit cards and overdrafts), personal term loans and leases (e.g. auto leases, student loans) and small business facilities. Securities (such as bonds and equities), whether listed or not, are specifically excluded from this category. Mortgage loans will be excluded if they qualify for treatment as claims secured by residential property (see below). Loans for purchase of shares are also excluded from the regulatory retail portfolios;
                    (c) Granularity — The regulatory retail portfolio is sufficiently diversified to a degree that reduces the risks in the portfolio, warranting a 75% risk weight. No aggregate exposure to one counterpart12 can exceed 0.2% of the regulatory retail portfolio; and
                    (d) The maximum aggregated retail exposure to one counterpart must not exceed an absolute limit of BD 250,000.

                    12 Aggregated exposure means gross amount (i.e. not taking any credit risk mitigation into account) of all forms of debt exposures (e.g. loans or commitments) that individually satisfy the three other criteria. In addition, "to one counterpart" means one or several entities that may be considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the limit would apply to the bank's aggregated exposure on both businesses).

                    January 2015

                • Claims Secured by Residential Property

                  • CA-3.2.19

                    Lending fully secured by first mortgages on residential property that is or will be occupied by the borrower, or that is leased, must carry a risk weighting of 75%.

                    January 2015

                  • CA-3.2.19A

                    The RW for residential property may be reduced to 35% subject to meeting all of the criteria below:

                    (a) The residential property is to be utilised for residential purposes only;
                    (b) The residential property must be pledged as collateral to the conventional bank licensee;
                    (c) There exists a legal infrastructure in the jurisdiction whereby the conventional bank licensee can enforce the repossession and liquidation of the residential property; and
                    (d) The conventional bank licensee must obtain a satisfactory legal opinion that foreclosure or repossession as mentioned in (c) above is possible without any impediment.
                    Amended: April 2015
                    January 2015

                  • CA-3.2.19B

                    The RW for residential mortgage exposure granted under the Social Housing Schemes of the Kingdom of Bahrain may be reduced to 25% subject to meeting conditions, (a) and (b) in CA-3.2.19A. The reduced risk weight is subject to ensuring the compliance with the requirements for timely recognition of expected credit loss (ECL) as per the Credit Risk Management Module (Module CM).

                    Amended: October 2022
                    July 2019

                • Claims Secured by Commercial Real Estate

                  • CA-3.2.20

                    Claims secured by mortgages on commercial real estate are subject to a minimum of 100% risk weight. If the borrower is rated below BB-, the risk-weight corresponding to the rating of the borrower must be applied.

                    January 2015

                • Past Due Loans

                  • CA-3.2.21

                    The unsecured portion of any loan (other than a qualifying residential mortgage loan) that is past due for 90 days or more, net of specific provisions (including partial write-offs), must be risk-weighted as follows:

                    (a) 150% risk weight when specific provisions are less than 20% of the outstanding amount of the loan; and
                    (b) 100% risk weight when specific provisions are greater than 20% of the outstanding amount of the loan.
                    January 2015

                  • CA-3.2.22

                    For the purposes of defining the secured portion of a past due loan, eligible collateral and guarantees is the same as for credit risk mitigation purposes.

                    January 2015

                  • CA-3.2.23

                    Past due retail loans must be excluded from the overall regulatory retail portfolio when assessing the granularity criterion, for risk-weighting purposes.

                    January 2015

                  • CA-3.2.24

                    In the case of residential mortgage loans that qualify for lower risk weight in CA-3.2.19A, when such loans are past due for more than 90 days, they must be risk weighted at a minimum of 100% net of specific provisions.

                    January 2015

                • Securitisation Tranches

                  • CA-3.2.25

                    Holdings of securitisation tranches are weighted according to the weightings in CA-6.4.8 from 20% to 1,250%. Please refer to Chapter CA-6 for full details.

                    January 2015

                • Investments in Equities, MSRs and DTAs

                  • CA-3.2.26

                    Investments in listed equities must be risk weighted at 100% while equities other than listed must be risk weighted at 150% unless subject to the following treatments. The amount of any significant investments in commercial entities above the 15% and 60% Total Capital materiality thresholds (see CA-2.4.25) must be weighted at 800%. Significant investments in the common shares of unconsolidated financial entities and Mortgage Servicing Rights and Deferred Tax Assets arising from temporary differences must be risk weighted at 250% if they have not already been deducted from CET1 as required by Paragraphs CA-2.4.15 to CA-2.4.24.

                    January 2015

                • Investments in Funds

                  • CA-3.2.27

                    Investments in funds (e.g. mutual funds, Collective Investment Undertakings etc.) must be risk weighted as follows:

                    (a) If the instrument (e.g. units) is rated, it should be risk-weighted according to its external rating (for risk-weighting, it must be treated as a "claim on corporate");
                    (b) If not rated, such investment should be treated as an equity investment and risk weighted accordingly (i.e. 100% for listed and 150% for unlisted);
                    (c) The conventional bank licensee can apply to CBB for using the look-through approach for such investments if it can demonstrate that the look-through approach is more appropriate to the circumstances of the conventional bank licensee;
                    (d) If there are no voting rights attached to investment in funds, the investment will not be subjected to consolidation, deduction or additional risk weighting requirements (in respect of large exposures or significant investments); and
                    (e) For the purpose of determining the "large exposure limit" for investment in funds, the look-through approach must be used (even if the look-through approach is not used to risk weight the investment).
                    January 2015

                • Large Exposures over the Limits in Module CM

                  • CA-3.2.28

                    The amount of any large exposures exceeding the limits set in Chapter CM-5 must be weighted at 800%.

                    January 2015

                • Holdings of Real Estate

                  • CA-3.2.29

                    All holdings of real estate by conventional bank licensees (i.e. owned directly or by way of investments in Real Estate Companies, subsidiaries or associate companies or other arrangements such as trusts, funds or REITs) must be risk-weighted at 200%. Premises occupied by the conventional bank licensee may be weighted at 100%. Investments in Real Estate Companies are subject to the materiality thresholds for commercial companies described in Section CA-2.4 and Chapter CM-5 and therefore any holdings which amount to 15% or more of Total Capital will be subject to 800% risk weight. The holdings below the 15% threshold will be weighted at 200%.

                    January 2015

                • Other Assets

                  • CA-3.2.30

                    Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities may be treated as cash and therefore risk-weighted at 0%. In addition, cash items in the process of collection must be risk-weighted at 20%. The standard risk weight for all other assets will be 100%. Investments in regulatory capital instruments issued by banks or financial entities must be risk weighted at a minimum of 100%, unless they are deducted from regulatory capital according to the corresponding deduction approach outlined in Section CA-2.4 of this Module.

                    January 2015

                • Underwriting of Non-trading Book Items

                  • CA-3.2.31

                    Underwritings of capital instruments issued by other banking, financial or insurance entities are covered in Subparagraphs CA-2.4.16(c) and CA-2.4.20(c). The large exposures limits of Chapter CM-5 apply for underwritings. This means the 800% risk weights will apply for underwriting exposures in excess of the limits set in Chapter CM-5. The risk weights below apply for exposures within the limits of Module CM-5. Where a conventional bank licensee has acquired assets on its balance sheet in the banking book which it is intending to place with third parties under a formal arrangement, the following risk weightings apply for no more than 90 days. Once the 90-day period has expired, the usual risk weights apply:

                    (a) For holdings of private equity (non-bank), a risk weighting of 100% applies instead of the usual 150% (see CA-3.2.26); and
                    (b) For holdings of Real Estate, a risk weight of 100% applies instead of the usual 200% risk weight (see CA-3.2.29).
                    January 2015

              • CA-3.3 CA-3.3 Off-balance Sheet Items

                • CA-3.3.1

                  Off-balance-sheet items must be converted into credit exposure equivalents applying credit conversion factors (CCFs). Counterparty risk weightings for OTC derivative transactions will not be subject to any specific ceiling.

                  January 2015

                • CA-3.3.2

                  Commitments with an original maturity of up to one year and commitments with an original maturity of over one year will receive a CCF of 20% and 50%, respectively.

                  January 2015

                • CA-3.3.3

                  Any commitments that are unconditionally cancellable at any time by the conventional bank licensee without prior notice, or that are subject to automatic cancellation due to deterioration in a borrowers' creditworthiness, will receive a 0% CCF.

                  January 2015

                • CA-3.3.4

                  Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances) must receive a CCF of 100%.

                  January 2015

                • CA-3.3.5

                  Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the conventional bank licensee, must receive a CCF of 100%.

                  January 2015

                • CA-3.3.6

                  A CCF of 100% must be applied to the lending of other banks' securities or the posting of securities as collateral by banks, including instances where these arise out of repo-style transactions (i.e. repurchase/reverse repurchase and securities lending/securities borrowing transactions). See Section CA-4.3 for the calculation of risk-weighted assets where the credit converted exposure is secured by eligible collateral.

                  January 2015

                • CA-3.3.7

                  Forward asset purchases, forward deposits and partly-paid shares and securities, which represent commitments with certain drawdown must receive a CCF of 100%.

                  January 2015

                • CA-3.3.8

                  Certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions) must receive CCF of 50%.

                  January 2015

                • CA-3.3.9

                  Note issuance facilities and revolving underwriting facilities must receive a CCF of 50%.

                  January 2015

                • CA-3.3.10

                  For short-term self-liquidating trade letters of credit arising from the movement of goods, a 20% CCF must be applied to both issuing and confirming banks.

                  January 2015

                • CA-3.3.11

                  Where there is an undertaking to provide a commitment on an off-balance sheet item, conventional bank licensees are to apply the lower of the two applicable CCFs.

                  January 2015

                • CA-3.3.12

                  The credit equivalent amount of OTC derivatives and SFTs that expose a conventional bank licensee to counterparty credit risk must be calculated as per Appendix CA-2.

                  January 2015

                • CA-3.3.13

                  Conventional bank licensees must closely monitor securities, commodities, and foreign exchange transactions that have failed, starting the first day they fail. A capital charge to failed transactions must be calculated in accordance with CBB guidelines set forth in Appendix CA-4 (Capital treatment for failed trades and non-DvP transactions).

                  January 2015

                • CA-3.3.14

                  With regard to unsettled securities, commodities, and foreign exchange transactions, conventional bank licensees are encouraged to develop, implement and improve systems for tracking and monitoring the credit risk exposure arising from unsettled transactions as appropriate for producing management information that facilitates action on a timely basis.

                  January 2015

                • CA-3.3.15

                  Furthermore, when such transactions are not processed through a delivery-versus-payment (DvP) or payment-versus-payment (PvP) mechanism, conventional bank licensees must calculate a capital charge of up to 1,250% as set forth in Appendix CA-4.

                  January 2015

              • CA-3.4 CA-3.4 External Credit Assessments

                • The Recognition Process and Eligibility Criteria

                  • CA-3.4.1

                    CBB will assess all External Credit Assessment Institutions (ECAI) according to the six criteria below. The CBB also refers to the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies when determining ECAI eligibility. Any failings, in whole or in part, to satisfy these to the fullest extent will result in the respective ECAI's methodology and associated resultant rating not being accepted by the CBB:

                    (a) Objectivity: The methodology for assigning credit assessments must be rigorous, systematic, and subject to some form of validation based on historical experience. Moreover, assessments must be subject to ongoing review and responsive to changes in financial condition. Before being recognized by the CBB, an assessment methodology for each market segment, including rigorous back testing, must have been established for an absolute minimum of one year and with a preference of three years;
                    (b) Independence: An ECAI must show independence and should not be subject to political or economic pressures that may influence the rating. The assessment process should be as free as possible from any constraints that could arise in situations where the composition of the board of directors, political pressure, the shareholder structure of the assessment institution or any other aspect could be seen as creating a conflict of interest;
                    (c) International access/Transparency: The individual assessments, the key elements underlining the assessments and whether the issuer participated in the assessment process should be publicly available on a non-selective basis, unless they are private assessments. In addition, the general procedures, methodologies and assumptions for arriving at assessments used by the ECAI should be publicly available;
                    (d) Disclosure: An ECAI should disclose the following information: its code of conduct; the general nature of its compensation arrangements with assessed entities; its assessment methodologies, including the definition of default, the time horizon, and the meaning of each rating; the actual default rates experienced in each assessment category; and the transitions of the assessments, e.g. the likelihood of AA ratings becoming A over time;
                    (e) Resources: An ECAI must have sufficient resources to carry out high quality credit assessments. These resources should allow for substantial ongoing contact with senior and operational levels within the entities assessed in order to add value to the credit assessments. Such assessments will be based on methodologies combining qualitative and quantitative approaches; and
                    (f) Credibility: Credibility, to a certain extent, can derive from the criteria above. In addition, the reliance on an ECAI's external credit assessments by independent parties (investors, insurers, trading partners) may be evidence of the credibility of the assessments of an ECAI. The credibility of an ECAI will also be based on the existence of internal procedures to prevent the misuse of confidential information. In order to be eligible for recognition, an ECAI does not have to assess firms in more than one country.
                    January 2015

                  • CA-3.4.2

                    The CBB recognises Standard and Poor's, Moody's, Fitch IBCA and Capital Intelligence as eligible ECAIs. With respect to the possible recognition of other rating agencies as eligible ECAIs, CBB will update this paragraph subject to the rating agencies satisfying the eligibility requirements. (See Appendix CA-16 for mapping of eligible ECAIs).

                    Amended: April 2016
                    Added: January 2015

                  • CA-3.4.3

                    Conventional bank licensees must use the chosen ECAIs and their ratings consistently for each type of claim, for both risk weighting and risk management purposes. Conventional bank licensees will not be allowed to "cherry-pick" the assessments provided by different eligible ECAIs and to arbitrarily change the use of ECAIs.

                    January 2015

                  • CA-3.4.4

                    Conventional bank licensees must disclose in their annual reports the names of the ECAIs that they use for the risk weighting of their assets by type of claims, the risk weights associated with the particular rating grades as determined by CBB through the mapping process as well as the aggregated risk-weighted assets for each risk weight based on the assessments of each eligible ECAI.

                    January 2015

                • Multiple Assessments

                  • CA-3.4.5

                    If there are two assessments by eligible ECAIs chosen by a conventional bank licensee which map into different risk weights, the higher risk weight must be applied.

                    January 2015

                  • CA-3.4.6

                    If there are three or more assessments by eligible ECAIs chosen by a conventional bank licensee which map into different risk weights, the assessments corresponding to the two lowest risk weights must be referred to and the higher of those two risk weights must be applied.

                    January 2015

                • Issuer Versus Issues Assessment

                  • CA-3.4.7

                    Where a conventional bank licensee invests in a particular issue that has an issue-specific assessment, the risk weight of the claim will be based on this assessment. Where the conventional bank licensee's claim is not an investment in a specific assessed issue, the following general principles apply:

                    (a) In circumstances where the borrower has a specific assessment for an issued debt — but the conventional bank licensee's claim is not an investment in this particular debt — a high quality credit assessment (one which maps into a risk weight lower than that which applies to an unrated claim) on that specific debt may only be applied to the conventional bank licensee's un-assessed claim if this claim ranks pari passu or senior to the claim with an assessment in all respects. If not, the credit assessment cannot be used and the un-assessed claim will receive the risk weight for unrated claims; and
                    (b) In circumstances where the borrower has an issuer assessment, this assessment typically applies to senior unsecured claims on that issuer. Consequently, only senior claims on that issuer will benefit from a high quality issuer assessment. Other un-assessed claims of a highly assessed issuer will be treated as unrated. If either the issuer or a single issue has a low quality assessment (mapping into a risk weight equal to or higher than that which applies to unrated claims), an un-assessed claim on the same counterparty will be assigned the same risk weight as is applicable to the low quality assessment.
                    January 2015

                  • CA-3.4.8

                    Whether the conventional bank licensee intends to rely on an issuer- or an issue-specific assessment, the assessment must take into account and reflect the entire amount of credit risk exposure the conventional bank licensee has with regard to all payments owed to it.13


                    13 For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with repayment of both principal and interest.

                    January 2015

                  • CA-3.4.9

                    In order to avoid any double counting of credit enhancement factors, no recognition of credit risk mitigation techniques will be taken into account if the credit enhancement is already reflected in the issue specific rating (see Paragraph CA-4.1.5).

                    January 2015

                • Domestic Currency and Foreign Currency Assessments

                  • CA-3.4.10

                    Where unrated exposures are risk weighted based on the rating of an equivalent exposure to that borrower, the general rule is that foreign currency ratings must be used for exposures in foreign currency. Domestic currency ratings, if separate, must only be used to risk weight claims denominated in the domestic currency.

                    January 2015

                  • CA-3.4.11

                    However, when an exposure arises through a conventional bank licensee's participation in a loan that has been extended, or has been guaranteed against convertibility and transfer risk, by certain MDBs, its convertibility and transfer risk can be considered by CBB, on a case by case basis, to be effectively mitigated. To qualify, MDBs must have preferred creditor status recognised in the market and be included in MDB's qualifying for 0% risk rate under CA-3.2.8. In such cases, for risk weighting purposes, the borrower's domestic currency rating may be used instead of its foreign currency rating. In the case of a guarantee against convertibility and transfer risk, the local currency rating can be used only for the portion that has been guaranteed. The portion of the loan not benefiting from such a guarantee will be risk-weighted based on the foreign currency rating.

                    January 2015

                • Short-Term/Long-Term Assessments

                  • CA-3.4.12

                    For risk-weighting purposes, short-term assessments are deemed to be issue-specific. They can only be used to derive risk weights for claims arising from the rated facility. They cannot be generalised to other short-term claims, except under the conditions of paragraph CA-3.4.14. In no event can a short-term rating be used to support a risk weight for an unrated long-term claim. Short-term assessments may only be used for short-term claims against banks and corporates. The table below provides a framework for conventional bank licensees' exposures to specific short-term facilities, such as a particular issuance of commercial paper:

                    Credit assessment A-1/P-114 A-2/P-2 A-3/P-3 Others15
                    Risk weight 20% 50% 100% 150%

                    14 The notations follow the methodology used by Standard & Poor's and by Moody's Investors Service. The A-1 rating of Standard & Poor's includes both A-1+ and A-1-.

                    15 This category includes all non-prime and B or C ratings.

                    January 2015

                  • CA-3.4.13

                    If a short-term rated facility attracts a 50% risk-weight, unrated short-term claims cannot attract a risk weight lower than 100%. If an issuer has a short-term facility with an assessment that warrants a risk weight of 150%, all unrated claims, whether long-term or short-term, must also receive a 150% risk weight, unless the conventional bank licensee uses recognised credit risk mitigation techniques for such claims.

                    January 2015

                  • CA-3.4.14

                    For short-term claims on conventional bank licensees, the interaction with specific short-term assessments is expected to be the following:

                    (a) The general preferential treatment for short-term claims, as defined under paragraphs CA-3.2.11 and CA-3.2.12, applies to all claims on conventional bank licensees of up to three months original maturity when there is no specific short-term claim assessment;
                    (b) When there is a short-term assessment and such an assessment maps into a risk weight that is more favourable (i.e. lower) or identical to that derived from the general preferential treatment, the short-term assessment should be used for the specific claim only. Other short-term claims would benefit from the general preferential treatment; and
                    (c) When a specific short-term assessment for a short term claim on a conventional bank licensee maps into a less favourable (higher) risk weight, the general short-term preferential treatment for inter-bank claims cannot be used. All unrated short-term claims should receive the same risk weighting as that implied by the specific short-term assessment.
                    January 2015

                  • CA-3.4.15

                    When a short-term assessment is to be used, the institution making the assessment needs to meet all of the eligibility criteria for recognising ECAIs as presented in Paragraph CA-3.4.1 in terms of its short-term assessment.

                    January 2015

                • Level of Application of the Assessment

                  • CA-3.4.16

                    External assessments for one entity within a corporate group must not be used to risk weight other entities within the same group.

                    January 2015

                • Unsolicited Ratings

                  • CA-3.4.17

                    Unsolicited ratings should be treated as unrated exposures.

                    January 2015

            • CA-4 CA-4 Credit Risk — The Standardized Approach — Credit Risk Mitigation

              • CA-4.1 CA-4.1 Overarching Issues

                • Introduction

                  • CA-4.1.1

                    Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralised by first priority claims, in whole or in part with cash or securities, a loan exposure may be guaranteed by a third party, or a bank may buy a credit derivative to offset various forms of credit risk. Additionally banks may agree to net loans owed to them against deposits from the same counterparty. Off-balance sheet items will first be converted into on-balance sheet equivalents prior to the CRM being applied.

                    January 2015

                • General Remarks

                  • CA-4.1.2

                    The framework set out in this sub-section of "General remarks" is applicable to all banking book exposures.

                    January 2015

                  • CA-4.1.3

                    The comprehensive approach for the treatment of collateral (see Paragraphs CA-4.2.12 to CA-4.2.20 and CA-4.3.1 to CA-4.3.32) will also be applied to calculate the counterparty risk charges for OTC derivatives and repo-style transactions booked in the trading book.

                    January 2015

                  • CA-4.1.4

                    No transaction in which CRM techniques are used should receive a higher capital requirement than an otherwise identical transaction where such techniques are not used.

                    January 2015

                  • CA-4.1.5

                    The effects of CRM will not be double counted. Therefore, no additional recognition of CRM for regulatory capital purposes will be applicable on claims for which an issue-specific rating is used that already reflects that CRM. As stated in Paragraph CA-3.4.8, principal-only ratings will also not be allowed within the framework of CRM.

                    January 2015

                  • CA-4.1.6

                    Conventional bank licensees must employ robust procedures and processes to control residual risks (see Paragraph CA-4.1.6A), including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from the conventional bank licensee's use of CRM techniques and its interaction with the conventional bank licensee's overall credit risk profile.

                    January 2015

                  • CA-4.1.6A

                    While the use of CRM techniques reduces or transfers credit risk, it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks.

                    January 2015

                  • CA-4.1.6B

                    Where residual risks are not adequately controlled, the CBB may impose additional capital charges or take supervisory actions.

                    January 2015

                  • CA-4.1.6C

                    Conventional bank licensees must ensure that sufficient resources are devoted to the orderly operation of margin agreements with OTC derivative and securities-financing counterparties, as measured by the timeliness and accuracy of its outgoing calls and response time to incoming calls. Conventional bank licensees must have collateral management policies in place to control, monitor and report:

                    (a) The risk to which margin agreements exposes them (such as the volatility and liquidity of the securities exchanged as collateral);
                    (b) The concentration risk to particular types of collateral;
                    (c) The reuse of collateral (both cash and non-cash) including the potential liquidity shortfalls resulting from the reuse of collateral received from counterparties; and
                    (d) The surrender of rights on collateral posted to counterparties.
                    January 2015

                  • CA-4.1.7

                    Public Disclosure Requirements (see Module PD) relating to the use of collateral must also be observed for conventional bank licensees to obtain capital relief in respect of any CRM techniques.

                    January 2015

                • Legal Certainty

                  • CA-4.1.8

                    In order for conventional bank licensees to obtain capital relief for any use of CRM techniques, the minimum standards for legal documentation outlined in Paragraph CA-4.1.9 must be met.

                    January 2015

                  • CA-4.1.9

                    All documentation used in collateralised transactions and for documenting on-balance sheet netting, guarantees and credit derivatives must be binding on all parties and legally enforceable in all relevant jurisdictions. Conventional bank licensees must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.

                    January 2015

              • CA-4.2 CA-4.2 Overview of Credit Risk Mitigation Techniques16


                16 See Appendix CA-5 for an overview of methodologies for the capital treatment of transactions secured by financial collateral under the standardised approach.

                • Collateralised Transactions

                  • CA-4.2.1

                    A collateralised transaction is one in which:

                    (a) Conventional bank licensees have a credit exposure or potential credit exposure; and
                    (b) That credit exposure or potential credit exposure is hedged in whole or in part by collateral posted by a counterparty17 or by a third party on behalf of the counterparty.

                    17 In this section "counterparty" is used to denote a party to whom a bank has an on- or off-balance sheet credit exposure or a potential credit exposure. That exposure may, for example, take the form of a loan of cash or securities (where the counterparty would traditionally be called the borrower), of securities posted as collateral, of a commitment or of exposure under an OTC derivatives contract.

                    January 2015

                  • CA-4.2.2

                    Where conventional bank licensees take eligible financial collateral (e.g. cash or securities, more specifically defined in Paragraphs CA-4.3.1 and CA-4.3.2, they are allowed to reduce their credit exposure to a counterparty when calculating their capital requirements to take account of the risk mitigating effect of the collateral.

                    January 2015

                • Overall Framework and Minimum Conditions

                  • CA-4.2.3

                    Conventional bank licensees may opt for either the simple approach, which substitutes the risk weighting of the collateral for the risk weighting of the counterparty for the collateralised portion of the exposure (generally subject to a 20% floor), or for the comprehensive approach, which allows fuller offset of collateral against exposures, by effectively reducing the exposure amount by the value ascribed to the collateral. Conventional bank licensees may operate under either, but not both, approaches in the banking book, but only under the comprehensive approach in the trading book. Partial collateralisation is recognised in both approaches. Mismatches in the maturity of the underlying exposure and the collateral will only be allowed under the comprehensive approach.

                    January 2015

                  • CA-4.2.4

                    However, before capital relief will be granted in respect of any form of collateral, the standards set out below in Paragraphs CA-4.2.5 to CA-4.2.8 must be met under either approach.

                    January 2015

                  • CA-4.2.5

                    In addition to the general requirements for legal certainty set out in Paragraphs CA-4.1.8 and CA-4.1.9, the legal mechanism by which collateral is pledged or transferred must ensure that the conventional bank licensee has the right to liquidate or take legal possession of it, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the counterparty (and, where applicable, of the custodian holding the collateral). Furthermore conventional bank licensees must take all steps necessary to fulfil those requirements under the law applicable to the conventional bank licensee's interest in the collateral for obtaining and maintaining an enforceable security interest, e.g. by registering it with a registrar, or for exercising a right to net or set off in relation to title transfer collateral.

                    January 2015

                  • CA-4.2.6

                    In order for collateral to provide protection, the credit quality of the counterparty and the value of the collateral must not have a material positive correlation. For example, securities issued by the counterparty — or by any related group entity — would provide little protection and so would be ineligible.

                    January 2015

                  • CA-4.2.7

                    Conventional bank licensees must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed, and that collateral can be liquidated promptly.

                    January 2015

                  • CA-4.2.8

                    Where the collateral is held by a custodian, conventional bank licensees must take reasonable steps to ensure that the custodian segregates the collateral from its own assets.

                    January 2015

                  • CA-4.2.9

                    A capital requirement will be applied to a conventional bank licensee on either side of the collateralised transaction: for example, both repos and reverse repos will be subject to capital requirements. Likewise, both sides of a securities lending and borrowing transaction will be subject to explicit capital charges, as will the posting of securities in connection with a derivative exposure or other borrowing.

                    January 2015

                  • CA-4.2.10

                    Where a conventional bank licensee, acting as agent, arranges a repo-style transaction (i.e. repurchase/reverse repurchase and securities lending/borrowing transactions) between a customer and a third party and provides a guarantee to the customer that the third party will perform on its obligations, then the risk to the conventional bank licensee is the same as if the conventional bank licensee had entered into the transaction as a principal. In such circumstances, a conventional bank licensee will be required to calculate capital requirements as if it were itself the principal.

                    January 2015

                • The Simple Approach

                  • CA-4.2.11

                    In the simple approach the risk weighting of the collateral instrument collateralising or partially collateralising the exposure is substituted for the risk weighting of the counterparty. Details of this framework are provided in Paragraphs CA-4.3.26 to CA-4.3.29.

                    January 2015

                • The Comprehensive Approach

                  • CA-4.2.12

                    In the comprehensive approach, when taking collateral, conventional bank licensees must calculate their adjusted exposure to a counterparty for capital adequacy purposes in order to take account of the effects of that collateral. Using haircuts and add-ons, conventional bank licensees are required to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either18, occasioned by market movements. This will produce volatility adjusted amounts for both exposure and collateral. Unless either side of the transaction is cash, the volatility adjusted amount for the exposure will be higher than the exposure due to the add-on and for the collateral it will be lower due to the haircut.


                    18 Exposure amounts may vary where, for example, securities are being lent.

                    January 2015

                  • CA-4.2.13

                    Additionally where the exposure and collateral are held in different currencies an additional downwards adjustment must be made to the volatility adjusted collateral amount to take account of possible future fluctuations in exchange rates.

                    January 2015

                  • CA-4.2.14

                    Where the volatility-adjusted exposure amount is greater than the volatility-adjusted collateral amount (including any further adjustment for foreign exchange risk), conventional bank licensees must calculate their risk-weighted assets as the difference between the two multiplied by the risk weight of the counterparty. The framework for performing these calculations is set out in Paragraphs CA-4.3.3 to CA-4.3.6.

                    January 2015

                  • CA-4.2.15

                    Conventional bank licensees must use standard haircuts given in Paragraph CA-4.3.7 unless allowed to use models under Paragraph CA-4.3.22.

                    January 2015

                  • CA-4.2.16

                    The size of the individual haircuts and add-ons will depend on the type of instrument, type of transaction and the frequency of marking-to-market and remargining. For example, repo-style transactions subject to daily marking-to-market and to daily re-margining will receive a haircut based on a 5-business day holding period and secured lending transactions with daily mark-to-market and no re-margining clauses will receive a haircut based on a 20-business day holding period. These haircut numbers will be scaled up using the square root of time formula depending on the frequency of re-margining or marking-to-market.

                    January 2015

                  • CA-4.2.17

                    For certain types of repo-style transactions (broadly speaking government bond repos as defined in Paragraphs CA-4.3.14 and CA-4.3.15), the CBB may allow conventional bank licensees using standard haircuts not to apply these haircuts in calculating the exposure amount after risk mitigation.

                    January 2015

                  • CA-4.2.18

                    The effect of master netting agreements covering repo-style transactions can be recognised for the calculation of capital requirements subject to the conditions in Paragraph CA-4.3.17.

                    January 2015

                  • CA-4.2.19

                    As an alternative to standard haircuts conventional bank licensees may, subject to approval from CBB, use VaR models for calculating potential price volatility for repo-style transactions and other similar SFTs, as set out in Paragraphs CA-4.3.22 to CA-4.3.25. Alternatively, subject to approval from the CBB's, they may also calculate, for these transactions, an expected positive exposure, as set forth in Appendix CA-2.

                    January 2015

                • On-Balance Sheet Netting

                  • CA-4.2.20

                    Where conventional bank licensees have legally enforceable netting arrangements for loans and deposits they may calculate capital requirements on the basis of net credit exposures subject to the conditions in Paragraph CA-4.4.1.

                    January 2015

                • Guarantees and Credit Derivatives

                  • CA-4.2.21

                    Where guarantees or credit derivatives are direct, explicit, irrevocable and unconditional, and the CBB is satisfied that conventional bank licensees fulfil certain minimum operational conditions relating to risk management processes the CBB may allow conventional bank licensees to take account of such credit protection in calculating capital requirements.

                    January 2015

                  • CA-4.2.22

                    A range of guarantors and protection providers are recognised, as shown in Paragraph CA-4.5.7. A substitution approach will be applied. Thus only guarantees issued by or protection provided by entities with a lower risk weight than the counterparty will lead to reduced capital charges since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor or protection provider, whereas the uncovered portion retains the risk weight of the underlying counterparty.

                    January 2015

                  • CA-4.2.23

                    Detailed operational requirements are given in Paragraphs CA-4.5.1 to CA-4.5.5.

                    January 2015

                • Maturity Mismatch

                  • CA-4.2.24

                    Where the residual maturity of the CRM is less than that of the underlying credit exposure a maturity mismatch occurs. Where there is a maturity mismatch and the CRM has an original maturity of less than one year, the CRM is not recognised for capital purposes. In other cases where there is a maturity mismatch, partial recognition is given to the CRM for regulatory capital purposes as detailed below in Paragraphs CA-4.6.1 to CA-4.6.4. Under the simple approach for collateral maturity mismatches will not be allowed.

                    January 2015

                • Miscellaneous

                  • CA-4.2.25

                    Treatments for pools of credit risk mitigants and first- and second-to-default credit derivatives are given in Paragraphs CA-4.7.1 to CA-4.7.5.

                    January 2015

              • CA-4.3 CA-4.3 Collateral

                • Eligible Financial Collateral

                  • CA-4.3.1

                    The following collateral instruments are eligible for recognition in the simple approach:

                    (a) Cash (as well as certificates of deposit or comparable instruments issued by the lending bank) on deposit with the bank which is incurring the counterparty exposure;19,20
                    (b) Gold;
                    (c) Debt securities rated by a recognised external credit assessment institution where these are either:
                    (i) At least BB- when issued by sovereigns or PSEs that are treated as sovereigns by the CBB;
                    (ii) At least BBB- when issued by other entities (including banks and securities firms); or
                    (iii) At least A-3/P-3 for short-term debt instruments;
                    (d) Debt securities not rated by a recognised external credit assessment institution where these are:
                    (i) Issued by a bank;
                    (ii) Listed on a recognised exchange;
                    (iii) Classified as senior debt;
                    (iv) All rated issues of the same seniority by the issuing bank must be rated at least BBB- or A-3/P-3 by a recognised external credit assessment institution;
                    (v) The bank holding the securities as collateral has no information to suggest that the issue justifies a rating below BBB- or A-3/P-3 (as applicable);
                    (vi) The CBB is sufficiently confident about the market liquidity of the security;
                    (e) Equities (including convertible bonds) that are included in a main index;
                    (f) Undertakings for Collective Investments in Transferable Securities (UCITS) and mutual funds where:
                    (i) A price for the units is publicly quoted daily; and
                    (ii) The UCITS/mutual fund is limited to investing in the instruments listed in this paragraph21; and
                    (g) Re-securitisations (as defined in the securitisation framework), irrespective of any credit ratings, are not eligible financial collateral.

                    19 Cash funded credit linked notes issued by the bank against exposures in the banking book which fulfil the criteria for credit derivatives will be treated as cash collateralised transactions.

                    20 When cash on deposit, certificates of deposit or comparable instruments issued by the lending bank are held as collateral at a third-party bank in a non-custodial arrangement, if they are openly pledged/assigned to the lending bank and if the pledge /assignment is unconditional and irrevocable, the exposure amount covered by the collateral (after any necessary haircuts for currency risk) will receive the risk weight of the third-party bank.

                    21 However, the use or potential use by a UCITS/mutual fund of derivative instruments solely to hedge investments listed in this paragraph and paragraph CA-4.3.2 shall not prevent units in that UCITS /mutual fund from being eligible financial collateral.

                    January 2015

                  • CA-4.3.2

                    The following collateral instruments are eligible for recognition in the comprehensive approach:

                    (a) All of the instruments in paragraph CA-4.3.1;
                    (b) Equities (including convertible bonds) which are not included in a main index but which are listed on a recognised exchange; and
                    (c) UCITS/mutual funds which include such equities.
                    January 2015

                • The Comprehensive Approach

                  • Calculation of Capital Requirement

                    • CA-4.3.3

                      For a collateralised transaction, the exposure amount after risk mitigation is calculated as follows:

                      E* = Max {0, [E x (1 + He) - C x (1 - Hc - Hfx)]}

                      where:
                      E* = The exposure value after risk mitigation
                      E = Current value of the exposure
                      He = Add-on appropriate to the exposure
                      C = The current value of the collateral received
                      Hc = Haircut appropriate to the collateral
                      Hfx = Haircut appropriate for currency mismatch between the collateral and exposure

                      January 2015

                    • CA-4.3.4

                      The exposure amount after risk mitigation is multiplied by the risk weight of the counterparty to obtain the risk-weighted asset amount for the collateralised transaction.

                      January 2015

                    • CA-4.3.5

                      The treatment for transactions where there is a mismatch between the maturity of the counterparty exposure and the collateral is given in Paragraphs CA-4.6.1 to CA-4.6.4.

                      January 2015

                    • CA-4.3.6

                      Where the collateral is a basket of assets, the haircut on the basket will be:

                      H = ∑i ai Hi, where ai is the weight of the asset (as measured by units of currency) in the i basket and Hi the haircut applicable to that asset.

                      January 2015

                  • Standard Haircuts and Add-Ons

                    • CA-4.3.7

                      These are the standardised supervisory haircuts and add-ons (assuming daily mark-to market, daily re-margining and a 10-business day holding period), expressed as percentages:

                      Issue rating for debt securities Residual Maturity Sovereigns22,23 Other issuers24 Securitisation Exposures25
                      AAA to AA-/A-1 ≤1 year 0.5 1 2
                      >1 year, ≤5 years 2 4 8
                      >5 years 4 8 16
                      A+ to BBB-/ A-2/ A-3/ P-3 and Unrated bank securities ≤1 year 1 2 4
                      >1 year, ≤5 years 3 6 12
                      >5 years 6 12 24
                      BB+ to BB- All 15 Not Eligible Not Eligible
                      Main index equities 15
                      Other equities 25
                      UCITS/mutual funds Highest haircut applicable to any security in fund
                      Cash in the same currency26 0

                      22 Includes PSEs which are treated as sovereigns by the CBB.

                      23 Multilateral development banks receiving a 0% risk weight will be treated as sovereigns.

                      24 Includes PSEs which are not treated as sovereigns by CBB.

                      25 Securitisation exposures are defined as those exposures that meet the definition set forth in the securitisation framework.

                      26 Eligible cash collateral specified in Subparagraph CA-4.3.1(a).

                      January 2015

                    • CA-4.3.8

                      The standard haircut for currency risk where exposure and collateral are denominated in different currencies is 8% (also based on a 10-business day holding period and daily mark-to-market).

                      January 2015

                    • CA-4.3.9

                      For transactions in which the conventional bank licensee lends non-eligible instruments (e.g. non-investment grade corporate debt securities), the add-on to be applied on the exposure must be the same as the one for equity traded on a recognised exchange that is not part of a main index.

                      January 2015

                  • Adjustment for Different Holding Periods and Non Daily Mark-to-market or Re-Margining

                    • CA-4.3.10

                      For some transactions, depending on the nature and frequency of the revaluation and re-margining provisions, different holding periods are appropriate. The framework for collateral haircuts distinguishes between repo-style transactions (i.e. repo/reverse repos and securities lending/borrowing), "other capital-market-driven transactions" (i.e. OTC derivatives transactions and margin lending) and secured lending. In capital-market-driven transactions and repo-style transactions, the documentation contains remargining clauses; in secured lending transactions, it generally does not.

                      January 2015

                    • CA-4.3.11

                      The minimum holding period for various products is summarised in the following table.

                      Transaction type Minimum holding period Condition
                      Repo-style transaction five business days daily re-margining
                      Other capital market transactions ten business days daily re-margining
                      Secured lending twenty business days daily revaluation
                      January 2015

                    • CA-4.3.12

                      When the frequency of re-margining or revaluation is longer than the minimum, the minimum haircut numbers will be scaled up depending on the actual number of business days between re margining or revaluation using the square root of time formula below:

                      where:

                      H = Haircut

                      HM = Haircut under the minimum holding period

                      TM = Minimum holding period for the type of transaction

                      NR = Actual number of business days between re margining for capital market transactions or revaluation for secured transactions.

                      When a conventional bank licensee calculates the volatility on a TN day holding period which is different from the specified minimum holding period TM, the HM will be calculated using the square root of time formula:

                      TN = Holding period used by the bank for deriving HN

                      HN = Haircut based on the holding period TN

                      January 2015

                    • CA-4.3.13

                      For example, for conventional bank licensees using the standard CBB haircuts, the 10-business day haircuts provided in paragraph CA-4.3.7 will be the basis and this haircut will be scaled up or down depending on the type of transaction and the frequency of re-margining or revaluation using the formula below:

                      where:

                      H = Haircut

                      H10 = 10-business day standard CBB haircut for instrument

                      NR = Actual number of business days between re-margining for capital

                      = Market transactions or revaluation for secured transactions.

                      TM = Minimum holding period for the type of transaction

                      January 2015

                  • Conditions for Zero H

                    • CA-4.3.14

                      For repo-style transactions where the following conditions are satisfied, and the counterparty is a core market participant, conventional bank licensees are not required to apply the haircuts specified in the comprehensive approach and may instead apply a haircut of zero. This carve-out will not be available for conventional bank licensees using the modelling approaches as described in Paragraphs CA-4.3.22 to CA-4.3.25:

                      (a) Both the exposure and the collateral are cash or a sovereign security or PSE security qualifying for a 0% risk weight in the standardised approach;
                      (b) Both the exposure and the collateral are denominated in the same currency;
                      (c) Either the transaction is overnight or both the exposure and the collateral are marked-to-market daily and are subject to daily re-margining;
                      (d) Following a counterparty's failure to re-margin, the time that is required between the last mark-to-market before the failure to re-margin and the liquidation27 of the collateral is considered to be no more than four business days;
                      (e) The transaction is settled across a settlement system proven for that type of transaction;
                      (f) The documentation covering the agreement is standard market documentation for repo-style transactions in the securities concerned;
                      (g) The transaction is governed by documentation specifying that if the counterparty fails to satisfy an obligation to deliver cash or securities or to deliver margin or otherwise defaults, then the transaction is immediately terminable; and
                      (h) Upon any default event, regardless of whether the counterparty is insolvent or bankrupt, the conventional bank licensee has the unfettered, legally enforceable right to immediately seize and liquidate the collateral for its benefit.

                      27 This does not require the bank to always liquidate the collateral but rather to have the capability to do so within the given time frame.

                      January 2015

                    • CA-4.3.15

                      Core market participants include the following entities:

                      (a) Sovereigns, central banks and PSEs;
                      (b) Banks and securities firms;
                      (c) Other financial companies (including insurance companies) eligible for a 20% risk weight in the standardised approach;
                      (d) Regulated mutual funds that are subject to capital or leverage requirements;
                      (e) Regulated pension funds; and
                      (f) Recognised clearing organisations.
                      January 2015

                    • CA-4.3.16

                      Where a supervisor has applied a specific carve-out to repo-style transactions in securities issued by its domestic government, then banks incorporated in Bahrain are allowed to adopt the same approach to the same transactions.

                      January 2015

                  • Treatment of Repo-Style Transactions Covered under Master Netting Agreements

                    • CA-4.3.17

                      The effects of bilateral netting agreements covering repo-style transactions will be recognised on a counterparty-by-counterparty basis if the agreements are legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of whether the counterparty is insolvent or bankrupt. In addition, netting agreements must:

                      (a) Provide the non-defaulting party the right to terminate and close-out in a timely manner all transactions under the agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;
                      (b) Provide for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it so that a single net amount is owed by one party to the other;
                      (c) Allow for the prompt liquidation or setoff of collateral upon the event of default; and
                      (d) Be, together with the rights arising from the provisions required in (a) to (c) above, legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of the counterparty's insolvency or bankruptcy.
                      January 2015

                    • CA-4.3.18

                      Netting across positions in the banking and trading book will only be recognised when the netted transactions fulfil the following conditions:

                      (a) All transactions are marked to market daily28; and
                      (b) The collateral instruments used in the transactions are recognised as eligible financial collateral in the banking book.

                      28 The holding period for the haircuts will depend as in other repo-style transactions on the frequency of margining.

                      January 2015

                    • CA-4.3.19

                      The formula in Paragraph CA-4.3.3 will be adapted to calculate the capital requirements for transactions with netting agreements.

                      January 2015

                    • CA-4.3.20

                      For conventional bank licensees using the standard haircuts, the framework below will apply to take into account the impact of master netting agreements.

                      E* = Max {0, [(∑(E) – ∑(C)) + ∑ (ES x HS) + ∑ (EFX x HFX)]}29

                      Where:

                      E* = The exposure value after risk mitigation
                      E = Current value of the exposure
                      C = The value of the collateral received
                      ES = Absolute value of the net position in a given security
                      HS = Haircut appropriate to ES
                      EFX = Absolute value of the net position in a currency different from the settlement currency
                      HFX = Haircut appropriate for currency mismatch


                      29 The starting point for this formula is the formula in paragraph CA-4.3.3 which can also be presented as the following: E* = max {0, [(E – C) + (E x He) + (C x Hc) + (C x Hfx)]}

                      January 2015

                    • CA-4.3.21

                      The net long or short position of each security included in the netting agreement will be multiplied by the appropriate haircut. All other rules regarding the calculation of haircuts stated in Paragraphs CA4.3.3 to CA-4.3.16 equivalently apply for conventional bank licensees using bilateral netting agreements for repo-style transactions.

                      January 2015

                  • Use of Models

                    • CA-4.3.22

                      As an alternative to the use of standard haircuts, CBB may allow conventional bank licensees to use a VaR models approach to reflect the price volatility of the exposure and collateral for repo-style transactions, taking into account correlation effects between security positions. This approach would apply to repo-style transactions covered by bilateral netting agreements on a counterparty-by-counterparty basis. At the discretion of CBB, firms are also eligible to use the VaR model approach for margin lending transactions, if the transactions are covered under a bilateral master netting agreement that meets the requirements of Paragraphs CA-4.3.17 and CA-4.3.18. The VaR models approach is available to conventional bank licensees that have received CBB's recognition for an internal market risk model under Chapter CA-14. Conventional bank licensees which have not received CBB's recognition for use of models under Chapter CA-14 can separately apply for CBB's recognition to use their internal VaR models for calculation of potential price volatility for repo-style transactions. Internal models will only be accepted when a conventional bank licensee can prove the quality of its model to CBB through the backtesting of its output using one year of historical data.

                      January 2015

                    • CA-4.3.23

                      The quantitative and qualitative criteria for recognition of internal market risk models for repo-style transactions and other similar transactions are in principle the same as in Chapter CA-14. With regard to the holding period, the minimum will be 5-business days for repo-style transactions, rather than the 10-business days in the Market Risk Amendment. For other transactions eligible for the VaR models approach, the 10-business day holding period will be retained. The minimum holding period should be adjusted upwards for market instruments where such a holding period would be inappropriate given the liquidity of the instrument concerned.

                      January 2015

                    • CA-4.3.24

                      The calculation of the exposure E* for banks using their internal model will be the following:

                      E* = Max {0, [(∑E – ∑c) + VaR output from internal model]}

                      In calculating capital requirements banks will use the previous business day's VaR number.

                      January 2015

                    • CA-4.3.25

                      [This paragraph was deleted in January 2015.]

                      January 2015

                • The Simple Approach

                  • Minimum Conditions

                    • CA-4.3.26

                      For collateral to be recognised in the simple approach, the collateral must be pledged for at least the life of the exposure and it must be marked to market and revalued with a minimum frequency of six months. Those portions of claims collateralised by the market value of recognised collateral receive the risk weight applicable to the collateral instrument. The risk weight on the collateralised portion will be subject to a floor of 20% except under the conditions specified in Paragraphs CA-4.3.27 to CA-4.3.29. The remainder of the claim should be assigned to the risk weight appropriate to the counterparty. A capital requirement will be applied to conventional bank licensees on either side of the collateralised transaction: for example, both repos and reverse repos will be subject to capital requirements.

                      January 2015

                • Exceptions to the Risk Weight Floor

                  • CA-4.3.27

                    Transactions which fulfil the criteria outlined in Paragraph CA-4.3.14 and are with a core market participant, as defined in Paragraph CA-4.3.15, receive a risk weight of 0%. If the counterparty to the transactions is not a core market participant the transaction should receive a risk weight of 10%.

                    January 2015

                  • CA-4.3.28

                    OTC derivative transactions subject to daily mark-to-market, collateralised by cash and where there is no currency mismatch receive a 0% risk weight. Such transactions collateralised by sovereign or PSE securities qualifying for a 0% risk weight in the standardised approach will receive a 10% risk weight.

                    January 2015

                  • CA-4.3.29

                    The 20% floor for the risk weight on a collateralised transaction will not be applied and a 0% risk weight can be applied where the exposure and the collateral are denominated in the same currency, and either:

                    (a) The collateral is cash on deposit as defined in Paragraph CA-4.3.1(a); or
                    (b) The collateral is in the form of sovereign/PSE securities eligible for a 0% risk weight, and its market value has been discounted by 20%.
                    January 2015

                • Collateralised OTC Derivatives Transactions

                  • CA-4.3.30

                    Under the Current Exposure Method, the calculation of the counterparty credit risk charge for an individual contract is as follows:

                    Counterparty charge = [(RC + add-on) – CA] x r x 8%

                    Where:

                    RC = The replacement cost,
                    Add-on = The amount for potential future exposure calculated according to paragraph 45 of Appendix CA-2.
                    CA = The volatility adjusted collateral amount under the comprehensive approach prescribed in Paragraphs CA-4.3.3 to CA-4.3.16, or zero if no eligible collateral is applied to the transaction, and
                    r = The risk weight of the counterparty.

                    January 2015

                  • CA-4.3.31

                    When effective bilateral netting contracts are in place, RC is the net replacement cost and the add-on is ANet as calculated according to paragraph 50 (i) to 50 (vi) of Appendix CA-2. The haircut for currency risk (Hfx) must be applied when there is a mismatch between the collateral currency and the settlement currency. Even in the case where there are more than two currencies involved in the exposure, collateral and settlement currency, a single haircut assuming a 10-business day holding period scaled up as necessary depending on the frequency of mark-to-market must be applied.

                    January 2015

                  • CA-4.3.32

                    As an alternative to the Current Exposure Method for the calculation of the counterparty credit risk charge, conventional bank licensees may also use the Standardised Method.

                    January 2015

              • CA-4.4 CA-4.4 On-Balance Sheet Netting

                • CA-4.4.1

                  Where a conventional bank licensee:

                  (a) Has a well-founded legal basis for concluding that the netting or offsetting agreement is enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt;
                  (b) Is able at any time to determine those assets and liabilities with the same counterparty that are subject to the netting agreement;
                  (c) Monitors and controls its roll-off risks; and
                  (d) Monitors and controls the relevant exposures on a net basis,

                  it may use the net exposure of loans and deposits as the basis for its capital adequacy calculation in accordance with the formula in Paragraph CA-4.3.3. Assets (loans) are treated as exposure and liabilities (deposits) as collateral. The haircuts will be zero except when a currency mismatch exists. A 10-business day holding period will apply when daily mark-to- market is conducted and all the requirements contained in Paragraphs CA-4.3.7, CA-4.3.13, and CA-4.6.1 to CA-4.6.4 will apply.

                  January 2015

              • CA-4.5 CA-4.5 Guarantees and Credit Derivatives

                • Operational Requirements

                  • Operational Requirements Common to Guarantees and Credit Derivatives

                    • CA-4.5.1

                      A guarantee (counter-guarantee) or credit derivative must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible. Other than non-payment by a protection purchaser of money due in respect of the credit protection contract it must be irrevocable; there must be no clause in the contract that would allow the protection provider unilaterally to cancel the credit cover or that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure30. It must also be unconditional; there should be no clause in the protection contract outside the direct control of the conventional bank licensee that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due.


                      30 Note that the irrevocability condition does not require that the credit protection and the exposure be maturity matched; rather that the maturity agreed ex ante may not be reduced ex post by the protection provider. Paragraph CA-4.6.2 sets forth the treatment of call options in determining remaining maturity for credit protection.

                      January 2015

                  • Additional Operational Requirements for Guarantees

                    • CA-4.5.2

                      In addition to the legal certainty requirements in Paragraphs CA-4.1.8 and CA-4.1.9, in order for a guarantee to be recognised, the following conditions must be satisfied:

                      (a) On the qualifying default/non-payment of the counterparty, the conventional bank licensee may in a timely manner pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the conventional bank licensee, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The conventional bank licensee must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterparty for payment;
                      (b) The guarantee is an explicitly documented obligation assumed by the guarantor; and
                      (c) Except as noted in the following sentence, the guarantee covers all types of payments the underlying obligor is expected to make under the documentation governing the transaction, for example notional amount, margin payments etc. Where a guarantee covers payment of principal only, interests and other uncovered payments must be treated as an unsecured amount in accordance with Paragraph CA-4.5.10.
                      January 2015

                  • Additional Operational Requirements for Credit Derivatives

                    • CA-4.5.3

                      In order for a credit derivative contract to be recognised, the following conditions must be satisfied:

                      (a) The credit events specified by the contracting parties must at a minimum cover:
                      (i) Failure to pay the amounts due under terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with the grace period in the underlying obligation);
                      (ii) Bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
                      (iii) Restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account). When restructuring is not specified as a credit event, refer to Paragraph CA-4.5.4;
                      (b) If the credit derivative covers obligations that do not include the underlying obligation, Subparagraph (g) governs whether the asset mismatch is permissible;
                      (c) The credit derivative shall not terminate prior to expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay, subject to the provisions of Paragraph CA-4.6.2;
                      (d) Credit derivatives allowing for cash settlement are recognised for capital purposes insofar as a robust valuation process is in place in order to estimate loss reliably. There must be a clearly specified period for obtaining post-credit- event valuations of the underlying obligation. If the reference obligation specified in the credit derivative for purposes of cash settlement is different than the underlying obligation, Subparagraph (g) below governs whether the asset mismatch is permissible;
                      (e) If the protection purchaser's right/ability to transfer the underlying obligation to the protection provider is required for settlement, the terms of the underlying obligation must provide that any required consent to such transfer may not be unreasonably withheld;
                      (f) The identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the protection seller. The protection buyer must have the right/ability to inform the protection provider of the occurrence of a credit event;
                      (g) A mismatch between the underlying obligation and the reference obligation under the credit derivative (i.e. the obligation used for purposes of determining cash settlement value or the deliverable obligation) is permissible if (1) the reference obligation ranks pari passu with or is junior to the underlying obligation, and (2) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place; and
                      (h) A mismatch between the underlying obligation and the obligation used for purposes of determining whether a credit event has occurred is permissible if (1) the latter obligation ranks pari passu with or is junior to the underlying obligation, and (2) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.
                      January 2015

                    • CA-4.5.4

                      When the restructuring of the underlying obligation is not covered by the credit derivative, but the other requirements in Paragraph CA-4.5.3 are met, partial recognition of the credit derivative will be allowed. If the amount of the credit derivative is less than or equal to the amount of the underlying obligation, 60% of the amount of the hedge can be recognised as covered. If the amount of the credit derivative is larger than that of the underlying obligation, then the amount of eligible hedge is capped at 60% of the amount of the underlying obligation31.


                      31 The 60% recognition factor is provided as an interim treatment, which the CBB may refine in the future.

                      January 2015

                    • CA-4.5.5

                      Only credit default swaps and total return swaps that provide credit protection equivalent to guarantees will be eligible for recognition. The following exception applies. Where a conventional bank licensee buys credit protection through a total return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection will not be recognised. The treatment of first-to-default and second-to-default products is covered separately in Paragraphs CA-4.7.2 to CA-4.7.5.

                      January 2015

                    • CA-4.5.6

                      Other types of credit derivatives are not eligible for recognition32.


                      32 Cash funded credit linked notes issued by the bank against exposures in the banking book which fulfil the criteria for credit derivatives will be treated as cash collateralised transactions.

                      January 2015

                • Range of Eligible Guarantors (Counter-Guarantors)/Protection Providers

                  • CA-4.5.7

                    Credit protection given by the following entities will be recognised:

                    (a) Sovereign entities33, PSEs, banks34 and securities firms with a lower risk weight than the counterparty;
                    (b) Other entities that are externally rated except where credit protection is provided to a securitisation exposure. This would include credit protection provided by parent, subsidiary and affiliate companies when they have a lower risk weight than the obligor; and
                    (c) When credit protection is provided to a securitisation exposure, other entities that currently are externally rated BBB- or better and that were externally rated A- or better at the time the credit protection was provided. This would include credit protection provided by parent, subsidiary and affiliate companies when they have a lower risk weight than the obligor.

                    33 This includes the Bank for International Settlements, the International Monetary Fund, the European Central Bank and the European Community, as well as those MDBs referred to in CA-3.2.8.

                    34 This includes other MDBs.

                    January 2015

                  • CA-4.5.7A

                    Credit default guarantee provided by Tamkeen is recognised as an eligible credit risk mitigant.

                    Added: January 2023

                • Risk Weights

                  • CA-4.5.8

                    The protected portion is assigned the risk weight of the protection provider. The uncovered portion of the exposure is assigned the risk weight of the underlying counterparty.

                    January 2015

                  • CA-4.5.9

                    Materiality thresholds on payments below which no payment is made in the event of loss are equivalent to retained first loss positions and must be deducted in full from the Total Capital of the conventional bank licensee purchasing the credit protection.

                    January 2015

                • Proportional Cover

                  • CA-4.5.10

                    Where the amount guaranteed, or against which credit protection is held, is less than the amount of the exposure, and the secured and unsecured portions are of equal seniority, i.e. the conventional bank licensee and the guarantor share losses on a pro-rata basis capital relief will be afforded on a proportional basis: i.e. the protected portion of the exposure will receive the treatment applicable to eligible guarantees/credit derivatives, with the remainder treated as unsecured.

                    January 2015

                • Tranched Cover

                  • CA-4.5.11

                    Where the conventional bank licensee transfers a portion of the risk of an exposure in one or more tranches to a protection seller or sellers and retains some level of risk of the loan and the risk transferred and the risk retained are of different seniority, conventional bank licensees may obtain credit protection for either the senior tranches (e.g. second loss portion) or the junior tranche (e.g. first loss portion). In this case the rules as set out in Chapter CA-6 (Credit risk — securitisation framework) will apply.

                    January 2015

                • Currency Mismatches

                  • CA-4.5.12

                    Where the credit protection is denominated in a currency different from that in which the exposure is denominated — i.e. there is a currency mismatch — the amount of the exposure deemed to be protected will be reduced by the application of a haircut HFX, i.e.

                    GA = G x (1 – HFX)

                    Where:

                    G = Nominal amount of the credit protection
                    HFX = Haircut appropriate for currency mismatch between the credit protection and underlying obligation.

                    The appropriate haircut based on a 10-business day holding period (assuming daily marking-to-market) will be applied. If a conventional bank licensee uses the standard haircuts it will be 8%. The haircuts must be scaled up using the square root of time formula, depending on the frequency of revaluation of the credit protection as described in Paragraph CA-4.3.12.

                    January 2015

                • Sovereign Guarantees and Counter-guarantees

                  • CA-4.5.13

                    Portions of claims guaranteed by the entities detailed in Paragraph CA-3.2.1, where the guarantee is denominated in the domestic currency (and US$ in case of a guarantee provided by the Government of Bahrain and CBB) may get a 0% risk-weighting. A claim may be covered by a guarantee that is indirectly counter-guaranteed by such entities. Such a claim may be treated as covered by a sovereign guarantee provided that:

                    (a) The sovereign counter-guarantee covers all credit risk elements of the claim;
                    (b) Both the original guarantee and the counter-guarantee meet all operational requirements for guarantees, except that the counter-guarantee need not be direct and explicit to the original claim; and
                    (c) CBB is satisfied that the cover is robust and that no historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct sovereign guarantee.
                    January 2015

              • CA-4.6 CA-4.6 Maturity Mismatches

                • CA-4.6.1

                  For the purposes of calculating risk-weighted assets, a maturity mismatch occurs when the residual maturity of a hedge is less than that of the underlying exposure.

                  January 2015

                • Definition of Maturity

                  • CA-4.6.2

                    The maturity of the underlying exposure and the maturity of the hedge should both be defined conservatively. The effective maturity of the underlying should be gauged as the longest possible remaining time before the counterparty is scheduled to fulfil its obligation, taking into account any applicable grace period. For the hedge, embedded options which may reduce the term of the hedge should be taken into account so that the shortest possible effective maturity is used. Where a call is at the discretion of the protection seller, the maturity will always be at the first call date. If the call is at the discretion of the protection buying bank but the terms of the arrangement at origination of the hedge contain a positive incentive for the bank to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the effective maturity. For example, where there is a step-up in cost in conjunction with a call feature or where the effective cost of cover increases over time even if credit quality remains the same or increases, the effective maturity will be the remaining time to the first call.

                    January 2015

                • Risk Weights for Maturity Mismatches

                  • CA-4.6.3

                    As outlined in Paragraph CA-4.2.24, hedges with maturity mismatches are only recognised when their original maturities are greater than or equal to one year. As a result, the maturity of hedges for exposures with original maturities of less than one year must be matched to be recognised. In all cases, hedges with maturity mismatches will not be recognised when they have a residual maturity of three months or less.

                    January 2015

                  • CA-4.6.4

                    When there is a maturity mismatch with recognised credit risk mitigants (collateral, on-balance sheet netting, guarantees and credit derivatives) the following adjustment will be applied.

                    Pa = P x (t – 0.25) / (T – 0.25)
                    Where:

                    Pa = Value of the credit protection adjusted for maturity mismatch.
                    P = Credit protection (e.g. collateral amount, guarantee amount) adjusted for any haircuts.
                    T = Min (T, residual maturity of the credit protection arrangement) expressed in years.
                    T = Min (5, residual maturity of the exposure) expressed in years.

                    January 2015

              • CA-4.7 CA-4.7 Other Items Related to the Treatment of CRM Techniques

                • Treatment of Pools of CRM Techniques

                  • CA-4.7.1

                    In the case where a conventional bank licensee has multiple CRM techniques covering a single exposure (e.g. a bank has both collateral and guarantee partially covering an exposure), the conventional bank licensee is required to subdivide the exposure into portions covered by each type of CRM technique (e.g. portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately. When credit protection provided by a single protection provider has differing maturities, they must be subdivided into separate protection as well.

                    January 2015

                • First-to-default Credit Derivatives

                  • CA-4.7.2

                    There are cases where a conventional bank licensee obtains credit protection for a basket of reference names and where the first default among the reference names triggers the credit protection and the credit event also terminates the contract. In this case, the conventional bank licensee may recognise regulatory capital relief for the asset within the basket with the lowest risk-weighted amount, but only if the notional amount is less than or equal to the notional amount of the credit derivative.

                    January 2015

                  • CA-4.7.3

                    With regard to the conventional bank licensee providing credit protection through such an instrument, if the product has an external credit assessment from an eligible credit assessment institution, the risk weight in Paragraph CA-6.4.8 applied to securitisation tranches will be applied. If the product is not rated by an eligible external credit assessment institution, the risk weights of the assets included in the basket will be aggregated up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted asset amount.

                    January 2015

                • Second-to-default Credit Derivatives

                  • CA-4.7.4

                    In the case where the second default among the assets within the basket triggers the credit protection, the conventional bank licensee obtaining credit protection through such a product will only be able to recognise any capital relief if first-default-protection has also be obtained or when one of the assets within the basket has already defaulted.

                    January 2015

                  • CA-4.7.5

                    For conventional bank licensees providing credit protection through such a product, the capital treatment is the same as in Paragraph CA-4.7.3 above with one exception. The exception is that, in aggregating the risk weights, the asset with the lowest risk weighted amount can be excluded from the calculation.

                    January 2015

            • CA-5 CA-5 Credit Risk — The Internal Ratings-Based Approach

              • CA-5.1

                [This Chapter was deleted in January 2015.]

                January 2015

            • CA-6 CA-6 Credit Risk — Securitisation Framework

              • CA-6.1 CA-6.1 Scope and Definitions of Transactions Covered under the Securitisation Framework

                • CA-6.1.1

                  Conventional bank licensees must apply the securitisation framework for determining regulatory capital requirements on exposures arising from traditional and synthetic securitisations or similar structures that contain features common to both.

                  January 2015

                • CA-6.1.1A

                  A conventional bank licensee must meet all the requirements listed in the Paragraph CA-6.1.1.B below, to use any of the approaches specified in the securitisation framework. If a conventional bank licensee does not perform the level of the due diligence specified, it must risk weight the amount of the securitisation (or re-securitisation) exposure at 1,250% using the approach outlined in the Paragraphs CA-6.4.2 to CA-6.4.4.

                  January 2015

                • CA-6.1.1B

                  In order for a conventional bank licensee to use the securitisation framework, a conventional bank licensee must have the information specified below or risk weight the exposure at 1,250%:

                  (a) A conventional bank licensee must have a comprehensive understanding of the risk characteristics of its individual securitisation exposures, whether on-balance sheet or off-balance sheet, as well as the risk characteristics of the pools underlying its securitisation exposures;
                  (b) A conventional bank licensee must be able to access performance information on the underlying pools on an ongoing basis in a timely manner. Such information should include: exposure type, percentage of loans more than 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure, property type, occupancy, average credit score or other measures of creditworthiness, average loan-to-value ratio, and industry and geographic diversification. For re-securitisations, a conventional bank licensee must have not only information on the underlying securitisation tranches, such as the issuer name and credit quality, but also the characteristics and performance of the pools underlying the securitisation tranches; and
                  (c) A conventional bank licensee must have a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the conventional bank licensee's exposures to the transaction, such as the contractual waterfall and waterfall-related triggers, credit enhancements, liquidity enhancements, market value triggers, and deal-specific definitions of default.
                  January 2015

                • CA-6.1.2

                  Since securitisations may be structured in many different ways, the capital treatment of a securitisation exposure must be determined on the basis of its economic substance rather than its legal form. Similarly, CBB will look to the economic substance of a transaction to determine whether it should be subject to the securitisation framework for purposes of determining regulatory capital. Conventional bank licensees are encouraged to consult with the CBB when there is uncertainty about whether a given transaction should be considered a securitisation. For example, transactions involving cash flows from real estate (e.g. rents) may be considered specialised lending exposures, if warranted.

                  January 2015

                • CA-6.1.3

                  A traditional securitisation is a structure where the cash flow from an underlying pool of exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of credit risk. Payments to the investors depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the entity originating those exposures. The stratified/tranched structures that characterise securitisations differ from ordinary senior/subordinated debt instruments in that junior securitisation tranches can absorb losses without interrupting contractual payments to more senior tranches, whereas subordination in a senior/subordinated debt structure is a matter of priority of rights to the proceeds of liquidation.

                  January 2015

                • CA-6.1.4

                  A synthetic securitisation is a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of funded (e.g. credit-linked notes) or unfunded (e.g. credit default swaps) credit derivatives or guarantees that serve to hedge the credit risk of the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool.

                  January 2015

                • CA-6.1.5

                  Conventional bank licensees' exposures to a securitisation are hereafter referred to as "securitisation exposures". Securitisation exposures can include but are not restricted to the following: asset-backed securities, mortgage-backed securities, credit enhancements, liquidity facilities, interest rate or currency swaps, credit derivatives and tranched cover as described in Paragraph CA-4.5.11. Reserve accounts, such as cash collateral accounts, recorded as an asset by the originating conventional bank licensee must also be treated as securitisation exposures.

                  January 2015

                • CA-6.1.5A

                  A re-securitisation exposure is a securitisation exposure in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is a securitisation exposure. In addition, an exposure to one or more re-securitisation exposures is a re-securitisation exposure.

                  January 2015

                • CA-6.1.5B

                  Given the complexity of many securitisation transactions, licensees are encouraged to consult with the CBB when there is uncertainty about whether a particular structured credit position should be considered a re-securitisation exposure. The CBB will consider the exposure's economic substance when making a determination on whether a structured credit position is a re-securitisation exposure.

                  January 2015

                • CA-6.1.5C

                  Re-securitisation exposures include collateralised debt obligations (CDOs) of asset-backed securities (ABS) including, for example, a CDO backed by residential mortgage-backed securities (RMBS). Moreover, it also captures a securitisation exposure where the pool contains many individual mortgage loans and a single RMBS. This means that even if only one of the underlying exposures is a securitisation exposure, then any tranched position (such as senior or subordinated ABS) exposed to that pool is considered a re-securitisation exposure.

                  January 2015

                • CA-6.1.5D

                  Furthermore, when an instrument's performance is linked to one or more re-securitisation exposures, generally that instrument is a re-securitisation exposure. Thus a credit derivative providing credit protection for a CDO squared tranche is a re-securitisation exposure.

                  January 2015

                • CA-6.1.5E

                  The definition of re-securitisation also applies to ABCP programmes. The ratings based risk approach tables include weightings for both securitisation and re-securitisation exposures (see CA-6.4.8 onward).

                  January 2015

                • CA-6.1.6

                  Underlying instruments in the pool being securitised may include but are not restricted to the following: loans, commitments, asset-backed and mortgage-backed securities, corporate bonds, equity securities, and private equity investments. The underlying pool may include one or more exposures.

                  January 2015

              • CA-6.2 CA-6.2 Definitions and General Terminology

                • Originating Bank

                  • CA-6.2.1

                    For risk-based capital purposes, a conventional bank licensee is considered to be an originator with regard to a certain securitisation if it meets either of the following conditions:

                    (a) The conventional bank licensee originates directly or indirectly underlying exposures included in the securitisation; or
                    (b) The conventional bank licensee serves as a sponsor of an asset-backed commercial paper (ABCP) conduit or similar programme that acquires exposures from third-party entities. In the context of such programmes, a conventional bank licensee would generally be considered a sponsor and, in turn, an originator if it, in fact or in substance, manages or advises the programme, places securities into the market, or provides liquidity and/or credit enhancements.
                    January 2015

                • Asset Backed Commercial Paper (ABCP) Programme

                  • CA-6.2.2

                    An asset-backed commercial paper (ABCP) programme predominately issues commercial paper with an original maturity of one year or less that is backed by assets or other exposures held in a bankruptcy-remote, Special Purpose Securitisation Vehicle (SPSV).

                    January 2015

                • Clean-Up Call

                  • CA-6.2.3

                    A clean-up call is an option that permits the securitisation exposures (e.g. asset-backed securities) to be called before all of the underlying exposures or securitisation exposures have been repaid. In the case of traditional securitisations, this is generally accomplished by repurchasing the remaining securitisation exposures once the pool balance or outstanding securities have fallen below some specified level. In the case of a synthetic transaction, the clean-up call may take the form of a clause that extinguishes the credit protection.

                    January 2015

                • Credit Enhancement

                  • CA-6.2.4

                    A credit enhancement is a contractual arrangement in which the conventional bank licensee retains or assumes a securitisation exposure and, in substance, provides some degree of added protection to other parties to the transaction.

                    January 2015

                • Credit Enhancing Interest-Only Strip

                  • CA-6.2.5

                    A credit-enhancing interest-only strip (I/O) is an on-balance sheet asset that (i) represents a valuation of cash flows related to future margin income, and (ii) is subordinated.

                    January 2015

                • Early Amortisation

                  • CA-6.2.6

                    Early amortisation provisions are mechanisms that, once triggered, allow investors to be paid out prior to the originally stated maturity of the securities issued. For risk-based capital purposes, an early amortisation provision will be considered either controlled or non-controlled. A controlled early amortisation provision must meet all of the following conditions:

                    (a) The conventional bank licensee must have an appropriate capital/liquidity plan in place to ensure that it has sufficient capital and liquidity available in the event of an early amortisation;
                    (b) Throughout the duration of the transaction, including the amortisation period, there is the same pro-rata sharing of interest, principal, expenses, losses and recoveries based on the conventional bank licensee's and investors' relative shares of the receivables outstanding at the beginning of each month;
                    (c) The conventional bank licensee must set a period for amortisation that would be sufficient for at least 90% of the total debt outstanding at the beginning of the early amortisation period to have been repaid or recognised as in default; and
                    (d) The pace of repayment must not be any more rapid than would be allowed by straight-line amortisation over the period set out in criterion (c).
                    January 2015

                  • CA-6.2.7

                    An early amortisation provision that does not satisfy the conditions for a controlled early amortisation provision must be treated as a non-controlled early amortisation provision.

                    January 2015

                • Excess Spread

                  • CA-6.2.8

                    Excess spread is generally defined as gross finance charge collections and other income received by the trust or SPSV (specified in Paragraph CA-6.2.10) minus certificate interest, servicing fees, charge-offs, and other senior trust or SPSV expenses.

                    January 2015

                • Implicit Support

                  • CA-6.2.9

                    Implicit support arises when a conventional bank licensee provides support to a securitisation in excess of its predetermined contractual obligation.

                    January 2015

                • SPSV

                  • CA-6.2.10

                    An SPSV is a corporation, trust, or other entity organised for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPSV, and the structure of which is intended to isolate the SPSV from the credit risk of an originator or seller of exposures. SPSVs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.

                    January 2015

              • CA-6.3 CA-6.3 Operational Requirements for the Recognition of Risk Transference

                • CA-6.3.1

                  The following operational requirements are applicable to the standardised approach of the securitisation framework.

                  January 2015

                • Operational Requirements for Traditional Securitisations

                  • CA-6.3.2

                    An originating bank may exclude securitised exposures from the calculation of risk weighted assets under Paragraph CA-6.4.1, only if all of the following conditions have been met. Conventional bank licensees meeting these conditions must still hold regulatory capital against any securitisation exposures they retain:

                    (a) Significant credit risk associated with the securitised exposures has been transferred to third parties;
                    (b) The transferor does not maintain effective or indirect control35 over the transferred exposures. The assets are legally isolated from the transferor in such a way (e.g. through the sale of assets or through sub-participation) that the exposures are put beyond the reach of the transferor and its creditors, even in bankruptcy or receivership. These conditions must be supported by an opinion provided by a qualified legal counsel;
                    (c) The securities issued are not obligations of the transferor. Thus, investors who purchase the securities only have claim to the underlying pool of exposures;
                    (d) The transferee is an SPSV and the holders of the beneficial interests in that entity have the right to pledge or exchange them without restriction;
                    (e) Clean-up calls must satisfy the conditions set out in Paragraph CA-6.3.5; and
                    (f) The securitisation does not contain clauses that (i) require the originating bank to alter systematically the underlying exposures such that the pool's weighted average credit quality is improved unless this is achieved by selling assets to independent and unaffiliated third parties at market prices; (ii) allow for increases in a retained first loss position or credit enhancement provided by the originating bank after the transaction's inception; or (iii) increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the underlying pool.

                    35 The transferor is deemed to have maintained effective control over the transferred credit risk exposures if it: (i) is able to repurchase from the transferee the previously transferred exposures in order to realise their benefits; or (ii) is obligated to retain the risk of the transferred exposures. The transferor's retention of servicing rights to the exposures will not necessarily constitute indirect control of the exposures.

                    January 2015

                • Operational Requirements for Synthetic Securitisations

                  • CA-6.3.3

                    For synthetic securitisations, the use of CRM techniques (i.e. collateral, guarantees and credit derivatives) for hedging the underlying exposure may be recognised for risk-based capital purposes only if the conditions outlined below are satisfied:

                    (a) Credit risk mitigants must comply with the requirements as set out in Chapter CA-4 of this Module;
                    (b) Eligible collateral is limited to that specified in Paragraphs CA-4.3.1 and CA-4.3.2. Eligible collateral pledged by SPSVs may be recognised;
                    (c) Eligible guarantors are defined in Paragraph CA-4.5.7. Conventional bank licensees may not recognise SPSVs as eligible guarantors in the securitisation framework;
                    (d) Conventional bank licensees must transfer significant credit risk associated with the underlying exposure to third parties;
                    (e) The instruments used to transfer credit risk may not contain terms or conditions that limit the amount of credit risk transferred, such as those provided below:
                    (i) Clauses that materially limit the credit protection or credit risk transference (e.g. significant materiality thresholds below which credit protection is deemed not to be triggered even if a credit event occurs or those that allow for the termination of the protection due to deterioration in the credit quality of the underlying exposures);
                    (ii) Clauses that require the originating bank to alter the underlying exposures to improve the pool's weighted average credit quality;
                    (iii) Clauses that increase the conventional bank licensees' cost of credit protection in response to deterioration in the pool's quality;
                    (iv) Clauses that increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the reference pool; and
                    (v) Clauses that provide for increases in a retained first loss position or credit enhancement provided by the originating bank after the transaction's inception;
                    (f) An opinion must be obtained from a qualified legal counsel that confirms the enforceability of the contracts in all relevant jurisdictions; and
                    (g) Clean-up calls must satisfy the conditions set out in Paragraph CA-6.3.5.
                    January 2015

                  • CA-6.3.4

                    For synthetic securitisations, the effect of applying CRM techniques for hedging the underlying exposure are treated according to Chapter CA-4. In case there is a maturity mismatch, the capital requirement will be determined in accordance with Paragraphs CA-4.6.1 to CA-4.6.4. When the exposures in the underlying pool have different maturities, the longest maturity must be taken as the maturity of the pool. Maturity mismatches may arise in the context of synthetic securitisations when, for example, a conventional bank licensee uses credit derivatives to transfer part or all of the credit risk of a specific pool of assets to third parties. When the credit derivatives unwind, the transaction will terminate. This implies that the effective maturity of the tranches of the synthetic securitisation may differ from that of the underlying exposures. Originating banks of synthetic securitisations must treat such maturity mismatches in the following manner. A conventional bank licensee applying the standardised approach for securitisation must risk weight all retained positions that are unrated or rated below investment grade at 1,250%. For all other securitisation exposures, the conventional bank licensee must apply the maturity mismatch treatment set forth in Paragraphs CA-4.6.1 to CA-4.6.4.

                    January 2015

                • Operational Requirements and Treatment of Clean-Up Calls

                  • CA-6.3.5

                    For securitisation transactions that include a clean-up call, no capital will be required due to the presence of a clean-up call if the following conditions are met:

                    (a) The exercise of the clean-up call must not be mandatory, in form or in substance, but rather must be at the discretion of the originating bank;
                    (b) The clean-up call must not be structured to avoid allocating losses to credit enhancements or positions held by investors or otherwise structured to provide credit enhancement; and
                    (c) The clean-up call must only be exercisable when 10% or less of the original underlying portfolio, or securities issued remain, or, for synthetic securitisations, when 10% or less of the original reference portfolio value remains.
                    January 2015

                  • CA-6.3.6

                    Securitisation transactions that include a clean-up call that does not meet all of the criteria stated in Paragraph CA-6.3.5 result in a capital requirement for the originating bank. For a traditional securitisation, the underlying exposures must be treated as if they were not securitised. Additionally, conventional bank licensees must not recognise in regulatory capital any gain-on-sale, as defined in Paragraph CA-6.4.3. For synthetic securitisations, the bank purchasing protection must hold capital against the entire amount of the securitised exposures as if they did not benefit from any credit protection. If a synthetic securitisation incorporates a call (other than a clean-up call) that effectively terminates the transaction and the purchased credit protection on a specific date, the conventional bank licensee must treat the transaction in accordance with Paragraph CA-6.3.4 and Paragraphs CA-4.6.1 to CA-4.6.4.

                    January 2015

                  • CA-6.3.7

                    If a clean-up call, when exercised, is found to serve as a credit enhancement, the exercise of the clean-up call must be considered a form of implicit support provided by the conventional bank licensee and must be treated in accordance with the supervisory guidance pertaining to securitisation transactions.

                    January 2015

              • CA-6.4 CA-6.4 Treatment of Securitisation Exposures

                • Calculation of Capital Requirements

                  • CA-6.4.1

                    Except as stated in Paragraph CA-6.3.2, conventional bank licensees are required to hold regulatory capital against all of their securitisation exposures and re-securitisation exposures, including those arising from the provision of credit risk mitigants to a securitisation transaction, investments in asset-backed securities, retention of a subordinated tranche, and extension of a liquidity facility or credit enhancement, as set forth in the remainder of this section. Repurchased securitisation exposures must be treated as retained securitisation exposures.

                    January 2015

                  • (i) Deduction

                    • CA-6.4.2

                      [This Paragraph has been deleted in January 2015.]

                      January 2015

                    • CA-6.4.3

                      Conventional bank licensees must deduct from CET1 any increase in equity capital resulting from a securitisation transaction, such as that associated with expected future margin income (FMI) resulting in a gain-on-sale. Such an increase in capital is referred to as a "gain-on-sale" for the purposes of the securitisation framework.

                      January 2015

                    • CA-6.4.4

                      [This Paragraph has been deleted in January 2015.]

                      January 2015

                  • (ii) Implicit Support

                    • CA-6.4.5

                      When a conventional bank licensee provides implicit support to a securitisation, it must, at a minimum, hold capital against all of the exposures associated with the securitisation transaction as if they had not been securitised. Additionally, conventional bank licensees would not be permitted to recognise in regulatory capital any gain-on-sale, as defined in Paragraph CA-6.4.3. Furthermore, the conventional bank licensee is required to disclose publicly that (a) it has provided non-contractual support and (b) the capital impact of doing so.

                      January 2015

                • Operational Requirements for Use of External Credit Assessments

                  • CA-6.4.6

                    The following operational criteria concerning the use of external credit assessments apply in the standardised approach of the securitisation framework:

                    (a) To be eligible for risk-weighting purposes, the external credit assessment must take into account and reflect the entire amount of credit risk exposure the conventional bank licensee has with regard to all payments owed to it. For example, if a conventional bank licensee is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with timely repayment of both principal and interest;
                    (b) The external credit assessments must be from an eligible ECAI as recognised by the CBB in accordance with Section CA-3.4 with the following exception. In contrast with Subparagraph CA-3.4.1(c), an eligible credit assessment must be publicly available, on a non-selective basis and free of charge. In other words, a rating must be published in an accessible form and included in the ECAI's transition matrix. Also, loss and cashflow analysis as well as sensitivity of ratings to changes in the underlying ratings assumptions must be publicly available. Consequently, ratings that are made available only to the parties to a transaction do not satisfy this requirement;
                    (c) Eligible ECAIs must have a demonstrated expertise in assessing securitisations, which may be evidenced by strong market acceptance;
                    (d) A conventional bank licensee must apply external credit assessments from eligible ECAIs consistently across a given type of securitisation exposure. Furthermore, a conventional bank licensee cannot use the credit assessments issued by one ECAI for one or more tranches and those of another ECAI for other positions (whether retained or purchased) within the same securitisation structure that may or may not be rated by the first ECAI. Where two or more eligible ECAIs can be used and these assess the credit risk of the same securitisation exposure differently, Paragraphs CA-3.4.5 and CA-3.4.6 will apply;
                    (e) Where CRM is provided directly to an SPSV by an eligible guarantor defined in Paragraph CA-4.5.7 and is reflected in the external credit assessment assigned to a securitisation exposure(s), the risk weight associated with that external credit assessment should be used. In order to avoid any double counting, no additional capital recognition is permitted. If the CRM provider is not recognised as an eligible guarantor in Paragraph CA-4.5.7, the covered securitisation exposures should be treated as unrated; and
                    (f) In the situation where a credit risk mitigant is not obtained by the SPSV but rather applied to a specific securitisation exposure within a given structure (e.g. ABS tranche), the conventional bank licensee must treat the exposure as if it is unrated and then use the CRM treatment outlined in Chapter CA-4 to recognise the hedge.
                    January 2015

                  • CA-6.4.6A

                    A conventional bank licensee is not permitted to use any external credit assessment for risk-weighting purposes where the assessment is at least partly based on unfunded support provided by the conventional bank licensee. For example, if a conventional bank licensee buys ABCP where it provides an unfunded securitisation exposure extended to the ABCP programme (e.g. liquidity facility or credit enhancement), and that exposure plays a role in determining the credit assessment on the ABCP, the conventional bank licensee must treat the ABCP as if it were not rated. The conventional bank licensee must continue to hold capital against the other securitisation exposures it provides (e.g. against the liquidity facility and/or credit enhancement). The treatment described above is also applicable to exposures held in the trading book. A conventional bank licensee's capital requirement for such exposures held in the trading book can be no less than the amount required under the banking book treatment.

                    January 2015

                  • CA-6.4.6B

                    Conventional bank licensees are permitted to recognise overlap in their exposures, consistent with Paragraph CA-6.4.23. For example, a conventional bank licensee providing a liquidity facility supporting 100% of the ABCP issued by an ABCP programme and purchasing (for its own account) 20% of the outstanding ABCP of that programme could recognise an overlap of 20% (100% liquidity facility + 20% CP held − 100% CP issued = 20%). If a conventional bank licensee provided a liquidity facility that covered 90% of the outstanding ABCP and purchased 20% of the ABCP, the two exposures would be treated as if 10% of the two exposures overlapped (90% liquidity facility + 20% CP held – 100% CP issued = 10%). If a conventional bank licensee provided a liquidity facility that covered 50% of the outstanding ABCP and purchased 20% of the ABCP, the two exposures would be treated as if there were no overlap.

                    January 2015

                • Standardised Approach for Securitisation Exposures

                  • (i) Scope

                    • CA-6.4.7

                      Conventional bank licensees that apply the standardised approach to credit risk for the type of underlying exposure(s) securitised must use the standardised approach under the securitisation framework.

                      January 2015

                  • (ii) Risk Weights

                    • CA-6.4.8

                      The risk-weighted asset amount of a securitisation exposure is computed by multiplying the amount of the position by the appropriate risk weight determined in accordance with the following tables. For off-balance sheet exposures, conventional bank licensees must apply a CCF and then risk weight the resultant credit equivalent amount. If such an exposure is rated, a CCF of 100% must be applied.

                      Long term rating36 Securitisation Exposure Re-securitisation Exposure
                      AAA to AA– 20% 40%
                      A+ to A– 50% 100%
                      BBB+ to BBB– 100% 225%
                      BB+ to BB– 350% 650%
                      B+ and below or unrated 1,250% 1,250%
                      Short term rating Securitisation Exposure Re-securitisation Exposure
                      A-1/P-1 20% 40%
                      A-2/P-2 50% 100%
                      A-3/P-3 100% 225%
                      All other ratings or unrated 1,250% 1,250%

                      36 The rating designations used in the following tables are for illustrative purposes only and do not indicate any preference for, or endorsement of, any particular external assessment system.

                      January 2015

                    • CA-6.4.9

                      The capital treatment of positions retained by originators, liquidity facilities, credit risk mitigants, and securitisations of revolving exposures are identified separately. The treatment of clean-up calls is provided in Paragraphs CA-6.3.5 to CA-6.3.7.

                      January 2015

                    • Recognition of Ratings on Below-Investment Grade Exposures

                      • CA-6.4.10

                        Only third-party investors, as opposed to conventional bank licensees that serve as originators, may recognise external credit assessments that are equivalent to BB+ to BB- for risk weighting purposes of securitisation exposures.

                        January 2015

                    • Originators to Apply 1,250% Risk Weight to all Below-Investment Grade Exposures

                      • CA-6.4.11

                        Originating banks as defined in paragraph CA-6.2.1 must risk weight all retained securitisation exposures rated below investment grade (i.e. BBB-) at 1,250%.

                        January 2015

                  • (iii) Exceptions to General Treatment of Unrated Securitisation Exposures

                    • CA-6.4.12

                      As noted in the tables above, unrated securitisation exposures must be risk weighted at 1,250% with the following exceptions: (i) the most senior exposure in a securitisation, (ii) exposures that are in a second loss position or better in ABCP programmes and meet the requirements outlined in Paragraph CA-6.4.15, and (iii) eligible liquidity facilities.

                      January 2015

                    • Treatment of Unrated Most Senior Securitisation Exposures

                      • CA-6.4.13

                        If the most senior exposure in a securitisation of a traditional or synthetic securitisation is unrated, a conventional bank licensee that holds or guarantees such an exposure may determine the risk weight by applying the "look-through" treatment, provided the composition of the underlying pool is known at all times. Conventional bank licensees are not required to consider interest rate or currency swaps when determining whether an exposure is the most senior in a securitisation for the purpose of applying the "look-through" approach.

                        January 2015

                      • CA-6.4.14

                        In the look-through treatment, the unrated most senior position receives the average risk weight of the underlying exposures subject to CBB review. Where the conventional bank licensee is unable to determine the risk weights assigned to the underlying credit risk exposures, the unrated position must be risk-weighted at 1,250%.

                        January 2015

                    • Treatment of Exposures in a Second Loss Position or Better in ABCP Programmes

                      • CA-6.4.15

                        A 1,250% risk weighting is not required for those unrated securitisation exposures provided by sponsoring conventional bank licensees to ABCP programmes that satisfy the following requirements:

                        (a) The exposure is economically in a second loss position or better and the first loss position provides significant credit protection to the second loss position;
                        (b) The associated credit risk is the equivalent of investment grade or better; and
                        (c) The conventional bank licensee holding the unrated securitisation exposure does not retain or provide the first loss position.
                        January 2015

                      • CA-6.4.16

                        Where these conditions are satisfied, the risk weight is the greater of (i) 100% or (ii) the highest risk weight assigned to any of the underlying individual exposures covered by the facility.

                        January 2015

                    • Risk Weights for Eligible Liquidity Facilities

                      • CA-6.4.17

                        For eligible liquidity facilities as defined in Paragraph CA-6.4.19 and where the conditions for use of external credit assessments in Paragraph CA-6.4.6 are not met, the risk weight applied to the exposure's credit equivalent amount is equal to the highest risk weight assigned to any of the underlying individual exposures covered by the facility.

                        January 2015

                  • (iv) Credit Conversion Factors for Off-Balance Sheet Exposures

                    • CA-6.4.18

                      For risk-based capital purposes, conventional bank licensees must determine whether, according to the criteria outlined below, an off-balance sheet securitisation exposure qualifies as an 'eligible liquidity facility' or an 'eligible servicer cash advance facility'. All other off-balance sheet securitisation exposures will receive a 100% CCF.

                      January 2015

                    • Eligible Liquidity Facilities

                      • CA-6.4.19

                        Conventional bank licensees are permitted to treat off-balance sheet securitisation exposures as eligible liquidity facilities if the following minimum requirements are satisfied:

                        (a) The facility documentation must clearly identify and limit the circumstances under which it may be drawn. Draws under the facility must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements. In addition, the facility must not cover any losses incurred in the underlying pool of exposures prior to a draw, or be structured such that draw-down is certain (as indicated by regular or continuous draws);
                        (b) The facility must be subject to an asset quality test that precludes it from being drawn to cover credit risk exposures where the obligor is more than 90 days past due on any material risk in the banking group. In addition, if the exposures that a liquidity facility is required to fund are externally rated securities, the facility can only be used to fund securities that are externally rated investment grade at the time of funding;
                        (c) The facility cannot be drawn after all applicable (e.g. transaction-specific and programme-wide) credit enhancements from which the liquidity would benefit have been exhausted; and
                        (d) Repayment of draws on the facility (i.e. assets acquired under a purchase agreement or loans made under a lending agreement) must not be subordinated to any interests of any note holder in the programme (e.g. ABCP programme) or subject to deferral or waiver.
                        January 2015

                      • CA-6.4.20

                        Where these conditions are met, the conventional bank licensee may apply a 50% CCF to the eligible facility regardless of the maturity of the facility. However, if an external rating of the facility itself is used for risk-weighting the facility, a 100% CCF must be applied.

                        January 2015

                      • CA-6.4.21

                        [This Paragraph has been deleted in January 2012].

                        January 2015

                      • CA-6.4.22

                        [This Paragraph has been deleted in January 2012].

                        January 2015

                    • Treatment of Overlapping Exposures

                      • CA-6.4.23

                        A conventional bank licensee may provide several types of facilities that can be drawn under various conditions. The same conventional bank licensee may be providing two or more of these facilities. Given the different triggers found in these facilities, it may be the case that a conventional bank licensee provides duplicative coverage to the underlying exposures. In other words, the facilities provided by a conventional bank licensee may overlap since a draw on one facility may preclude (in part) a draw under the other facility. In the case of overlapping facilities provided by the same conventional bank licensee, the conventional bank licensee does not need to hold additional capital for the overlap. Rather, it is only required to hold capital once for the position covered by the overlapping facilities (whether they are liquidity facilities or credit enhancements). Where the overlapping facilities are subject to different conversion factors, the conventional bank licensee must attribute the overlapping part to the facility with the highest conversion factor. However, if overlapping facilities are provided by different banks, each conventional bank licensee must hold capital for the maximum amount of the facility (see also Paragraph CA-6.4.6A).

                        January 2015

                    • Eligible Servicer Cash Advance Facilities

                      • CA-6.4.24

                        If contractually provided for, servicers may advance cash to ensure an uninterrupted flow of payments to investors so long as the servicer is entitled to full reimbursement and this right is senior to other claims on cash flows from the underlying pool of exposures. A 0% CCF must be applied to such un-drawn servicer cash advances or facilities provided that these are unconditionally cancellable without prior notice.

                        January 2015

                    • Treatment of Credit Risk Mitigation for Securitisation Exposures

                      • CA-6.4.25

                        The treatment below applies to a conventional bank licensee that has obtained a credit risk mitigant on a securitisation exposure. Credit risk mitigants include guarantees, credit derivatives, collateral and on-balance sheet netting. Collateral in this context refers to that used to hedge the credit risk of a securitisation exposure rather than the underlying exposures of the securitisation transaction.

                        January 2015

                      • CA-6.4.26

                        When a conventional bank licensee other than the originator provides credit protection to a securitisation exposure, it must calculate a capital requirement on the covered exposure as if it were an investor in that securitisation. If a conventional bank licensee provides protection to an unrated credit enhancement, it must treat the credit protection provided as if it were directly holding the unrated credit enhancement.

                        January 2015

                    • Collateral

                      • CA-6.4.27

                        Eligible collateral is limited to that recognised under the standardised approach for CRM (Paragraphs CA-4.3.1 and CA-4.3.2). Collateral pledged by SPSVs may be recognised.

                        January 2015

                    • Guarantees and Credit Derivatives

                      • CA-6.4.28

                        Credit protection provided by the entities listed in Paragraph CA-4.5.7 may be recognised. SPSVs cannot be recognised as eligible guarantors. A conventional bank licensee must not recognise any support provided by itself (see also Paragraph CA-6.4.6).

                        January 2015

                      • CA-6.4.29

                        Where guarantees or credit derivatives fulfil the minimum operational conditions as specified in Paragraphs CA-4.5.1 to CA-4.5.6, conventional bank licensees can take account of such credit protection in calculating capital requirements for securitisation exposures.

                        January 2015

                      • CA-6.4.30

                        Capital requirements for the guaranteed/protected portion will be calculated according to CRM for the standardised approach as specified in Paragraphs CA-4.5.8 to CA-4.5.13.

                        January 2015

                    • Maturity Mismatches

                      • CA-6.4.31

                        For the purpose of setting regulatory capital against a maturity mismatch, the capital requirement will be determined in accordance with Paragraphs CA-4.6.1 to CA-4.6.4. When the exposures being hedged have different maturities, the longest maturity must be used.

                        January 2015

                  • (vi) Capital Requirement for Early Amortisation Provisions

                    • Scope

                      • CA-6.4.32

                        An originating bank is required to hold capital against all or a portion of the investors' interest (i.e. against both the drawn and un-drawn balances related to the securitised exposures) when:

                        (a) It sells exposures into a structure that contains an early amortisation feature; and
                        (b) The exposures sold are of a revolving nature. These involve exposures where the borrower is permitted to vary the drawn amount and repayments within an agreed limit under a line of credit (e.g. credit card receivables and corporate loan commitments).
                        January 2015

                      • CA-6.4.33

                        The capital requirement should reflect the type of mechanism through which an early amortisation is triggered.

                        January 2015

                      • CA-6.4.34

                        For securitisation structures wherein the underlying pool comprises revolving and term exposures, a conventional bank licensee must apply the relevant early amortisation treatment (outlined in Paragraphs CA-6.4.36 to CA-6.4.47) to that portion of the underlying pool containing revolving exposures.

                        January 2015

                      • CA-6.4.35

                        Conventional bank licensees are not required to calculate a capital requirement for early amortisations in the following situations:

                        (a) Replenishment structures where the underlying exposures do not revolve and the early amortisation ends the ability of the conventional bank licensee to add new exposures;
                        (b) Transactions of revolving assets containing early amortisation features that mimic term structures (i.e. where the risk on the underlying facilities does not return to the originating bank);
                        (c) Structures where a bank securitises one or more credit line(s) and where investors remain fully exposed to future draws by borrowers even after an early amortisation event has occurred; and
                        (d) The early amortisation clause is solely triggered by events not related to the performance of the securitised assets or the selling bank, such as material changes in tax laws or regulations.
                        January 2015

                    • Maximum Capital Requirement

                      • CA-6.4.36

                        For a conventional bank licensee subject to the early amortisation treatment, the total capital charge for all of its positions will be subject to a maximum capital requirement (i.e. a 'cap') equal to the greater of (i) that required for retained securitisation exposures, or (ii) the capital requirement that would apply had the exposures not been securitised. In addition, conventional bank licensees must deduct the entire amount of any gain-on-sale and credit enhancing I/Os arising from the securitisation transaction in accordance with Paragraphs CA-6.4.2 to CA-6.4.4.

                        January 2015

                    • Mechanics

                      • CA-6.4.37

                        The originator's capital charge for the investors' interest is determined as the product of (a) the investors' interest, (b) the appropriate CCF (as discussed below), and (c) the risk weight appropriate to the underlying exposure type, as if the exposures had not been securitised. As described below, the CCFs depend upon whether the early amortisation repays investors through a controlled or non-controlled mechanism. They also differ according to whether the securitised exposures are uncommitted retail credit lines (e.g. credit card receivables) or other credit lines (e.g. revolving corporate facilities). A line is considered uncommitted if it is unconditionally cancellable without prior notice.

                        January 2015

                  • (vii) Determination of CCFs for Controlled Early Amortisation Features

                    • CA-6.4.38

                      An early amortisation feature is considered controlled when the definition as specified in Paragraph CA-6.2.6 is satisfied.

                      January 2015

                    • Uncommitted Retail Exposures

                      • CA-6.4.39

                        For uncommitted retail credit lines (e.g. credit card receivables) in securitisations containing controlled early amortisation features, conventional bank licensees must compare the three-month average excess spread defined in Paragraph CA-6.2.8 to the point at which the conventional bank licensee is required to trap excess spread as economically required by the structure (i.e. excess spread trapping point).

                        January 2015

                      • CA-6.4.40

                        In cases where such a transaction does not require excess spread to be trapped, the trapping point is deemed to be 4.5 percentage points.

                        January 2015

                      • CA-6.4.41

                        The conventional bank licensee must divide the excess spread level by the transaction's excess spread trapping point to determine the appropriate segments and apply the corresponding conversion factors, as outlined in the following table.

                        Controlled Early Amortisation Features

                          Uncommitted Committed
                        Retail credit lines 3-month average excess spread Credit Conversion Factor (CCF)

                        133.33% of trapping point or more
                        0% CCF

                        less than 133.33% to 100% of trapping point
                        1% CCF

                        less than 100% to 75% of trapping point
                        2% CCF

                        less than 75% to 50% of trapping point
                        10% CCF

                        less than 50% to 25% of trapping point
                        20% CCF

                        less than 25%
                        40% CCF
                        90% CCF
                        Non-retail credit lines 90% CCF 90% CCF
                        January 2015

                      • CA-6.4.42

                        Conventional bank licensees are required to apply the conversion factors set out above for controlled mechanisms to the investors' interest referred to in Paragraph CA-6.4.37.

                        January 2015

                    • Other Exposures

                      • CA-6.4.43

                        All other securitised revolving exposures (i.e. those that are committed and all non-retail exposures) with controlled early amortisation features will be subject to a CCF of 90% against the off-balance sheet exposures.

                        January 2015

                  • (viii) Determination of CCFs for Non-Controlled Early Amortisation Features

                    • CA-6.4.44

                      Early amortisation features that do not satisfy the definition of a controlled early amortisation as specified in Paragraph CA-6.2.6 will be considered non-controlled and treated as follows.

                      January 2015

                    • Uncommitted Retail Exposures

                      • CA-6.4.45

                        For uncommitted retail credit lines (e.g. credit card receivables) in securitisations containing non-controlled early amortisation features, conventional bank licensees must make the comparison described in Paragraphs CA-6.4.38 and CA-6.4.40.

                        January 2015

                      • CA-6.4.46

                        The conventional bank licensee must divide the excess spread level by the transaction's excess spread trapping point to determine the appropriate segments and apply the corresponding conversion factors, as outlined in the following table.

                        Non-Controlled Early Amortisation Features

                          Uncommitted Committed
                        Retail credit lines 3-month average excess spread
                        Credit Conversion Factor (CCF)

                        133.33% or more of trapping point
                        0% CCF

                        less than 133.33% to 100% of trapping point
                        5% CCF

                        less than 100% to 75% of trapping point
                        15% CCF

                        less than 75% to 50% of trapping point
                        50% CCF

                        less than 50% of trapping point
                        100% CCF
                        100% CCF
                        Non-retail credit lines 100% CCF 100% CCF
                        January 2015

                    • Other Exposures

                      • CA-6.4.47

                        All other securitised revolving exposures (i.e. those that are committed and all non-retail exposures) with non-controlled early amortisation features will be subject to a CCF of 100% against the off-balance sheet exposures.

                        January 2015

                    • [Paragraphs CA-6.4.48 to CA-6.4.88 were deleted in January 2015]

          • PART 3: PART 3: Other Risks

            • CA-7 CA-7 Operational Risk

              • CA-7.1 CA-7.1 The Measurement Methodologies

                • CA-7.1.1

                  The framework outlined below presents two methods for calculating operational risk capital charges in a continuum of increasing sophistication and risk sensitivity:

                  (a) The Basic Indicator Approach; and
                  (b) The Standardised Approach.
                  January 2015

                • CA-7.1.2

                  Conventional bank licensees are encouraged to move towards standardised approach as they develop more sophisticated operational risk measurement systems and practices.

                  January 2015

                • CA-7.1.3

                  A conventional bank licensee will not be allowed to choose to revert to basic indicator approach once it has been approved for standardised approach without CBB's approval. However, if CBB determines that a conventional bank licensee using standardised approach no longer meets the qualifying criteria for standardised approach, it may require the conventional bank licensee to revert to basic indicator approach for some or all of its operations, until it meets the conditions specified by the CBB for returning to standardised approach.

                  January 2015

                • Basic Indicator Approach

                  • CA-7.1.4

                    Conventional bank licensees applying the Basic Indicator Approach must hold capital for operational risk equal to the average over the previous three years of a fixed percentage (denoted alpha) of positive annual gross income. Figures for any year in which annual gross income is negative or zero must be excluded from both the numerator and denominator when calculating the average.37 The charge may be expressed as follows:
                    KBIA = [∑(GI1.nα)]/n

                    where:

                    KBIA = the capital charge under the Basic Indicator Approach

                    GI = annual gross income, where positive, over the previous three years (audited financial years)

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

                    α = 15%, relating the industry wide level of required capital to the industry wide level of the indicator.


                    37 If negative gross income distorts a bank's Pillar 1 capital charge, CBB will consider appropriate supervisory action.

                    January 2015

                  • CA-7.1.5

                    Gross income is defined as net interest income plus net non-interest income.38 This measure should: (i) be gross of any provisions (e.g. for unpaid interest); (ii) be gross of operating expenses, including fees paid to outsourcing service providers39; (iii) exclude realised profits/losses from the sale of securities in the banking book;40 and (iv) exclude extraordinary or irregular items as well as income derived from insurance.


                    38 As defined under International Financial Reporting Standards as applicable in the Kingdom of Bahrain.

                    39 In contrast to fees paid for services that are outsourced, fees received by banks that provide outsourcing services shall be included in the definition of gross income.

                    40 Realised profits/losses from securities classified as "held to maturity" and "available for sale", which typically constitute items of the banking book, are also excluded from the definition of gross income.

                    January 2015

                  • CA-7.1.6

                    In case of a bank with negative gross income for the previous three years, a newly licensed bank with less than 3 years of operations, or a merger, acquisition or material restructuring, the CBB shall discuss with the concerned licensed bank an alternative method for calculating the operational risk capital charge. For example, a newly licensed bank may be required to use the projected gross income in its 3-year business plan. Another approach that the CBB may consider is to require such licensed banks to observe a higher CAR.

                    January 2015

                  • CA-7.1.7

                    Conventional bank licensees applying this approach are encouraged to comply with the principles set in Section OM-8.2 of Operational Risk Management Module.

                    January 2015

                • The Standardised Approach

                  • CA-7.1.8

                    In the Standardised Approach, banks' activities are divided into eight business lines: corporate finance, trading & sales, retail banking, commercial banking, payment & settlement, agency services, asset management, and retail brokerage. The business lines are defined in detail in Appendix CA-9. The conventional bank licensee must meet the requirements detailed in Section OM-8.3 to qualify for the use of standardised approach.

                    January 2015

                  • CA-7.1.9

                    Within each business line, gross income is a broad indicator that serves as a proxy for the scale of business operations and thus the likely scale of operational risk exposure within each of these business lines. The capital charge for each business line is calculated by multiplying gross income by a factor (denoted beta) assigned to that business line. Beta serves as a proxy for the industry-wide relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that business line. It should be noted that in the Standardised Approach, 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. An example of calculation of gross income is provided in Appendix CA-10.

                    January 2015

                  • CA-7.1.10

                    The total capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, negative capital charges (resulting from negative gross income) in any business line can not off-set positive capital charges in other business lines. Where the aggregate capital charge across all business lines within a given year is negative, then the input to the numerator for that year will be zero.41 The total capital charge may be expressed as:

                    KTSA = {∑ years 1-3 max[(GI1-8 X β1-8, 0]}/3

                    where:

                    KTSA = the capital charge under the Standardised Approach

                    GI 1-8 = annual gross income in a given year, as defined above in the Basic Indicator Approach, for each of the eight business lines

                    β1-8 = a fixed percentage, relating the level of required capital to the level of the gross income for each of the eight business lines.

                    The values of the betas are detailed below.

                    Business Lines Beta Factors
                    Corporate Finance (β1) 18%
                    Trading and Sales (β2) 18%
                    Retail Banking (β3) 12%
                    Commercial Banking (β4) 15%
                    Payment and Settlement (β5) 18%
                    Agency Services (β6) 15%
                    Asset Management (β7) 12%
                    Retail Brokerage (β8) 12%

                    41 As under the Basic Indicator Approach, if negative gross income distorts a bank's Pillar 1 capital charge under the Standardised Approach, CBB will consider appropriate supervisory action.

                    January 2015

            • CA-8 CA-8 Market Risk — Trading Book

              • CA-8.1 CA-8.1 Definition of the Trading Book

                • CA-8.1.1

                  "Market risk" is defined as the risk of losses in on- and off-balance sheet positions arising from movements in market prices. The risks that are subject to the market risk capital requirement are:

                  (a) Equity position risk in the trading book (see Chapter CA-10);42
                  (b) Interest rate risk in trading positions in financial instruments in the trading book (see Chapter CA-9);
                  (c) Foreign exchange risk (see Chapter CA-11); and
                  (d) Commodities risk (see Chapter CA-12).

                  42 Equity positions in the banking book are dealt with under Paragraph CA-3.2.26.

                  January 2015

                • CA-8.1.2

                  A trading book consists of positions in financial instruments and commodities held either with trading intent or in order to hedge other elements of the trading book, along with open foreign exchange positions in both the banking and the trading book. To be eligible for trading book capital treatment, financial instruments must either be free of any restrictive covenants on their tradability or able to be hedged completely. In addition, positions must be frequently and accurately valued, and the portfolio must be actively managed (open equity stakes in hedge funds, private equity investments, positions in a securitisation warehouse and real estate holdings do not meet the definition of the trading book, owing to significant constraints on the ability of banks to liquidate these positions and value them reliably on a daily basis. Such holdings must therefore be held in the conventional bank licensee's banking book and treated as equity holding in corporates, except real estate which must be treated as per Paragraph CA-3.2.29).

                  January 2015

                • CA-8.1.3

                  A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments include both primary financial instruments (or cash instruments) and derivative financial instruments. A financial asset is any asset that is cash, the right to receive cash or another financial asset; or the contractual right to exchange financial assets on potentially favourable terms, or an equity instrument. A financial liability is the contractual obligation to deliver cash or another financial asset or to exchange financial liabilities under conditions that are potentially unfavourable.

                  January 2015

                • CA-8.1.4

                  Positions held with trading intent are those held intentionally for short-term resale and/or with the intent of benefiting from actual or expected short-term price movements or to lock in arbitrage profits, and may include for example proprietary positions, positions arising from client servicing (e.g. matched principal broking) and market making. It is therefore possible that conventional bank licensees may sometimes not have a trading book as defined above. Nonetheless the conventional bank licensee's strategy and business plan must take account of the requirements of this Chapter in case a conventional bank licensee does take on positions with trading intent.

                  January 2015

                • CA-8.1.5

                  Conventional bank licensees must have clearly defined policies and procedures for determining which exposures to include in, and to exclude from, the trading book for purposes of calculating their regulatory capital, to ensure compliance with the criteria for trading book set forth in this Section and taking into account the conventional bank licensee's risk management capabilities and practices. The conventional bank licensee must have well-documented procedures to comply with stated policies, which must be fully documented and subject to periodic internal audit.

                  January 2015

                • CA-8.1.6

                  The policies and procedures referred to in Paragraph CA-8.1.5 must, at a minimum, address the following general considerations:

                  (a) The activities the conventional bank licensee considers to be trading and as constituting part of the trading book for regulatory capital purposes;
                  (b) The extent to which an exposure can be marked-to-market daily by reference to an active, liquid two-way market;
                  (c) For exposures that are marked-to-model, the extent to which the conventional bank licensee can:
                  (i) Identify the material risks of the exposure;
                  (ii) Hedge the material risks of the exposure and the extent to which hedging instruments would have an active, liquid two-way market; and
                  (iii) Derive reliable estimates for the key assumptions and parameters used in the model;
                  (d) The extent to which the conventional bank licensee can and is required to generate valuations for the exposure that can be validated externally in a consistent manner;
                  (e) The extent to which legal restrictions or other operational requirements would impede the conventional bank licensee's ability to effect an immediate liquidation of the exposure;
                  (f) The extent to which the conventional bank licensee is required to, and can, actively risk manage the exposure within its trading operations; and
                  (g) The extent to which the conventional bank licensee may transfer risk or exposures between the banking and the trading books and criteria for such transfers.

                  The list above is not intended to provide a series of tests that a product or group of related products must pass to be eligible for inclusion in the trading book. Rather, the list provides a minimum set of key points that must be addressed by the policies and procedures for overall management of a conventional bank licensee's trading book.

                  January 2015

                • CA-8.1.7

                  The basic requirements for positions eligible to receive trading book capital treatment are as follows:

                  (a) Clearly documented trading strategy for the position/instrument or portfolios, approved by senior management (which would include expected holding horizon);
                  (b) Clearly defined policies and procedures for the active management of the position, which must include:
                  (i) Positions are managed on a trading desk;
                  (ii) Position limits are set and monitored for appropriateness;
                  (iii) Dealers have the autonomy to enter into/manage the position within agreed limits and according to the agreed strategy;
                  (iv) Positions are marked to market at least daily and when marking to model the parameters must be assessed on a daily basis;
                  (v) Positions are reported to senior management as an integral part of the institution's risk management process; and
                  (vi) Positions are actively monitored with reference to market information sources (assessment must be made of the market liquidity or the ability to hedge positions or the portfolio risk profiles). This would include assessing the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market, etc.; and
                  (c) Clearly defined policy and procedures to monitor the positions against the conventional bank licensee's trading strategy including the monitoring of turnover and stale positions in the conventional bank licensee's trading book.
                  January 2015

                • CA-8.1.8

                  When a conventional bank licensee hedges a banking book credit risk exposure using a credit derivative booked in its trading book (i.e. using an internal hedge), the banking book exposure is not deemed to be hedged for capital purposes unless the conventional bank licensee purchases from an eligible third party protection provider a credit derivative meeting the requirements of Paragraph CA-4.5.3 vis-à-vis the banking book exposure. Where such third party protection is purchased and is recognised as a hedge of a banking book exposure for regulatory capital purposes, neither the internal nor external credit derivative hedge would be included in the trading book for regulatory capital purposes.

                  January 2015

                • CA-8.1.8A

                  Positions in the conventional bank licensee's own regulatory capital instruments are deducted from capital (as detailed in Chapter CA-2.4). Positions in other banks', securities firms', and other financial entities' eligible regulatory capital instruments, as well as intangible assets, are subject to the treatment set down in Chapter CA-2.4.

                  January 2015

                • CA-8.1.9

                  Term trading-related repo-style transactions that a conventional bank licensee accounts for in its banking book may be included in the conventional bank licensee's trading book for regulatory capital purposes so long as all such repo-style transactions are included. For this purpose, trading-related repo-style transactions are defined as only those that meet the requirements of Paragraphs CA-8.1.4 and CA-8.1.7 and both legs are in the form of either cash or securities includable in the trading book.

                  January 2015

                • CA-8.1.10

                  Regardless of where they are booked, all repo-style transactions are subject to a banking book counterparty credit risk charge.

                  January 2015

                • CA-8.1.11

                  For the purposes of this framework, the correlation trading portfolio incorporates securitisation exposures and n-th-to-default credit derivatives that meet the following criteria:

                  (a) The positions are neither re-securitisation positions, nor derivatives of securitisation exposures that do not provide a pro-rata share in the proceeds of a securitisation tranche (this therefore excludes options on a securitisation tranche, or a synthetically leveraged super-senior tranche); and
                  (b) All reference entities are single-name products, including single-name credit derivatives, for which a liquid two-way market exists. This will include commonly traded indices based on these reference entities. A two-way market is deemed to exist where there are independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at such price within a relatively short time conforming to trade custom.

                  Positions which reference an underlying that would be treated as a retail exposure, a residential mortgage exposure or a commercial mortgage exposure under the standardised approach to credit risk are not included in the correlation trading portfolio. Positions which reference a claim on a special purpose entity are not included either. A conventional bank licensee may also include in the correlation trading portfolio positions that hedge the positions described above and which are neither securitisation exposures nor n-th-to-default credit derivatives and where a liquid two-way market as described above exists for the instrument or its underlyings.

                  January 2015

              • CA-8.2

                [This Chapter has been moved to Chapter CA-16 in January 2012]

                January 2015

              • CA-8.3 CA-8.3 Treatment of Counterparty Credit Risk in the Trading Book

                • CA-8.3.1

                  Conventional bank licensees must calculate the counterparty credit risk charge for OTC derivatives, repo-style and other transactions booked in the trading book, separate from the capital charge for general market risk and specific risk.43 The risk weights to be used in this calculation must be consistent with those used for calculating the capital requirements in the banking book. Thus, conventional bank licensees must use the standardised approach risk weights in the trading book.


                  43 The treatment for unsettled foreign exchange and securities trades is set forth in Paragraph CA-3.3.13.

                  January 2015

                • CA-8.3.2

                  In the trading book, for repo-style transactions, all instruments, which are included in the trading book, may be used as eligible collateral. Those instruments which fall outside the banking book definition of eligible collateral are subject to a haircut at the level applicable to non-main index equities listed on recognised exchanges (as noted in Paragraph CA-4.3.7). Where conventional bank licensees are applying a VaR approach to measuring exposure for repo-style transactions, they also may apply this approach in the trading book in accordance with Paragraphs CA-4.3.22 to CA-4.3.25 and Appendix CA-2.

                  January 2015

                • CA-8.3.3

                  The calculation of the counterparty credit risk charge for collateralised OTC derivative transactions is the same as the rules prescribed for such transactions booked in the banking book.

                  January 2015

                • CA-8.3.4

                  The calculation of the counterparty charge for repo-style transactions must follow the rules in Paragraphs CA-4.3.3 to CA-4.3.25 and Appendix CA-2.

                  January 2015

                • Credit Derivatives

                  • CA-8.3.5

                    The counterparty credit risk charge for single name credit derivative transactions in the trading book must be calculated applying the following potential future exposure add-on factors:

                      Protection buyer Protection seller
                    Total Return Swap    
                    "Qualifying" reference obligation 5% 5%
                    "Non-qualifying" reference obligation 10% 10%
                    Credit Default Swap    
                    "Qualifying" reference obligation 5% 5%**
                    "Non-qualifying" reference obligation 10% 10%**

                    There will be no difference depending on residual maturity.

                    The definition of "qualifying" is the same as for the treatment of specific risk in chapter CA-9.

                    ** The protection seller of a credit default swap is only subject to the add-on factor where it is subject to closeout upon the insolvency of the protection buyer while the underlying is still solvent. Add-on must then be capped to the amount of unpaid premiums.

                    January 2015

                  • CA-8.3.6

                    Where the credit derivative is a first to default transaction, the add-on is determined by the lowest credit quality underlying in the basket, i.e. if there are any non-qualifying items in the basket, the non-qualifying reference obligation add-on is used. For second and subsequent to default transactions, underlying assets must continue to be allocated according to the credit quality, i.e. the second lowest credit quality determines the add-on for a second to default transaction etc.

                    January 2015

            • CA-9 CA-9 Market Risk — Interest Rate Risk — (STA)

              • CA-9.1 CA-9.1 Introduction

                • CA-9.1.1

                  This Chapter describes the standardised approach for the measurement of the interest rate risk in the conventional bank licensee's trading book, in order to determine the capital requirement for this risk. The interest rate exposure captured includes exposure arising from interest-bearing and discounted financial instruments, derivatives which are based on the movement of interest rates, foreign exchange forwards, and interest rate exposure embedded in derivatives which are based on non-interest rate related instruments.

                  January 2015

                • CA-9.1.2

                  For the guidance of the conventional bank licensees, and without being exhaustive, the following list includes financial instruments in the trading book to which interest rate risk capital requirements will apply, irrespective of whether or not the instruments carry coupons:

                  (a) Bonds/loan stocks, debentures etc;
                  (b) Non-convertible preference shares;
                  (c) Convertible securities such as preference shares and bonds, which are treated as debt instruments44;
                  (d) Mortgage backed securities and other securitised assets45;
                  (e) Certificates of Deposit;
                  (f) Treasury bills, local authority bills, banker's acceptances;
                  (g) Commercial paper;
                  (h) Euronotes, medium term notes, etc;
                  (i) Floating rate notes, FRCDs etc;
                  (j) Foreign exchange forward positions;
                  (k) Derivatives based on the above instruments and interest rates; and
                  (l) Interest rate exposure embedded in other financial instruments.

                  44 See Section CA-10.1 for an explanation of the circumstances in which convertible securities should be treated as equity instruments. In other circumstances, they should be treated as debt instruments.

                  45 Traded mortgage securities and mortgage derivative products possess unique characteristics because of the risk of pre-payment. It is possible that including such products within the standardised methodology as if they were similar to other securitised assets may not capture all the risks of holding positions in them. Banks which have traded mortgage securities and mortgage derivative products should discuss their proposed treatment with the CBB and obtain the CBB's prior written approval for it.

                  January 2015

                • CA-9.1.3

                  A security which is the subject of a repurchase or securities lending agreement must be treated as if it were still owned by the lender of the security, i.e. it is treated in the same manner as other securities positions.

                  January 2015

                • CA-9.1.4

                  The minimum capital requirement is expressed in terms of two separately calculated charges, one applying to the "specific risk" of each security, whether it is a short or a long position, and the other to the interest rate risk in the portfolio (termed "general market risk") where long and short positions in different securities or instruments can be offset. The conventional bank licensees must, however, determine the specific risk capital charge for the correlation trading portfolio as follows: The conventional bank licensee computes (i) the total specific risk capital charges that would apply just to the net long positions from the net long correlation trading exposures combined, and (ii) the total specific risk capital charges that would apply just to the net short positions from the net short correlation trading exposures combined. The larger of these total amounts is then the specific risk capital charge for the correlation trading portfolio.

                  January 2015

                • CA-9.1.4A

                  [This Paragraph was deleted in January 2015.]

                  January 2015

                • CA-9.1.5

                  The specific risk capital requirement recognises that individual instruments may change in value for reasons other than shifts in the yield curve of a given currency. The general risk capital requirement reflects the price change of these products caused by parallel and non-parallel shifts in the yield curve, as well as the difficulty of constructing perfect hedges.

                  January 2015

                • CA-9.1.6

                  There is general market risk inherent in all interest rate risk positions. This may be accompanied by one or more out of specific interest rate risk, counterparty risk, equity risk and foreign exchange risk, depending on the nature of the position. Conventional bank licensees must consider carefully which risks are generated by each individual position. It should be recognised that the identification of the risks will require the application of the appropriate level of technical skills and professional judgment.

                  January 2015

                • CA-9.1.7

                  Conventional bank licensees which have the intention and capability to use internal models for the measurement of general interest rate risk and, hence, for the calculation of the capital requirement, must seek the prior written approval of the CBB for those models. The CBB's detailed rules for the recognition and use of internal models are included in Chapter CA-14. Conventional bank licensees which do not use internal models must adopt the standardised approach to calculate the interest rate risk capital requirement, as set out in detail in this Chapter.

                  January 2015

              • CA-9.2 CA-9.2 Specific Risk Calculation

                • CA-9.2.1

                  The capital charge for specific risk is designed to protect against a movement in the price of an individual instrument, owing to factors related to the individual issuer.

                  January 2015

                • CA-9.2.2

                  In measuring the specific risk for interest rate related instruments, a conventional bank licensee may net, by value, long and short positions (including positions in derivatives) in the same debt instrument to generate the individual net position in that instrument. Instruments will be considered to be the same where the issuer is the same, they have an equivalent ranking in a liquidation, and the currency, the coupon and the maturity are the same.

                  January 2015

                • CA-9.2.3

                  The specific risk capital requirement is determined by weighting the current market value of each individual net position, whether long or short, according to its allocation among the following broad categories:

                  Categories External credit assessment Specific risk capital charge
                  Government (including GCC governments) AAA to AA-

                  A+ to BBB-








                  BB+ to B-

                  Below B-

                  Unrated
                  0%

                  0.25% (residual term to final maturity 6 months or less)

                  1.00% (residual term to final maturity greater than 6 and up to and including 24 months)

                  1.60% (residual term to final maturity exceeding 24 months)

                  8.00%

                  12.00%

                  8.00%
                  Qualifying   0.25% (residual term to final maturity 6 months or less)

                  1.00% (residual term to final maturity greater than 6 and up to and including 24 months)

                  1.60% (residual term to final maturity exceeding 24 months)
                  Other Similar to credit risk charges under the standardised approach, e.g.:

                  BB+ to BB-

                  Below BB-

                  Unrated
                  8.00%

                  12.00%

                  8.00%
                  January 2015

                • CA-9.2.4

                  When the government paper is denominated in the domestic currency and funded by the conventional bank licensee in the same currency, a 0% specific risk charge may be applied.

                  January 2015

                • CA-9.2.5

                  Central "government" debt instruments include all forms of government paper, including bonds, treasury bills and other short-term instruments.

                  January 2015

                • CA-9.2.6

                  However the CBB reserves the right to apply a specific risk weight to securities issued by certain foreign governments, especially to securities denominated in a currency other than that of the issuing government.

                  January 2015

                • CA-9.2.7

                  The "qualifying" category includes securities issued by or fully guaranteed by public sector entities and multilateral development banks (refer to Paragraph CA-3.2.8), plus other securities that are:

                  (a) Rated investment grade by at least two internationally recognised credit rating agencies (to be agreed with the CBB);
                  (b) Deemed to be of comparable investment quality by the reporting bank, provided that the issuer is rated investment grade by at least two internationally recognised credit rating agencies (to be agreed with the CBB);
                  (c) Rated investment grade by one credit rating agency and not less than investment grade by any internationally recognised credit rating agencies (to be agreed with the CBB); or
                  (d) Unrated (subject to the approval of the CBB), but deemed to be of comparable investment quality by the reporting bank and where the issuer has securities listed on a recognised stock exchange, may also be included.
                  January 2015

                • Specific Risk Rules for Unrated Debt Securities

                  • CA-9.2.8

                    Unrated securities may be included in the "qualifying" category when they are (subject to CBB's approval) unrated, but deemed to be of comparable investment quality by the reporting bank, and the issuer has securities listed on a recognised stock exchange.

                    January 2015

                • Specific Risk Rules for Non-qualifying Issuers

                  • CA-9.2.9

                    Instruments issued by a non-qualifying issuer receive the same specific risk charge as a non-investment grade corporate borrower under the standardised approach for credit risk under Chapter CA-4.

                    January 2015

                  • CA-9.2.10

                    However, since this may in certain cases considerably underestimate the specific risk for debt instruments which have a high yield to redemption relative to government debt securities, CBB will have the discretion, on a case by case basis:

                    (a) To apply a higher specific risk charge to such instruments; and/or
                    (b) To disallow offsetting for the purposes of defining the extent of general market risk between such instruments and any other debt instruments.
                    January 2015

                  • CA-9.2.11

                    In that respect, securitisation exposures subject to the securitisation framework set forth in Chapter CA-6 (e.g. equity tranches that absorb first loss), as well as securitisation exposures that are unrated liquidity lines or letters of credit must be subject to a capital charge that is no less than the charge set forth in the securitisation framework.

                    January 2015

                • Specific Risk Rules for Positions Covered under the Securitisation Framework

                  • CA-9.2.11A

                    The specific risk of securitisation positions as defined in Paragraphs CA-6.1.1 to CA-6.1.6 which are held in the trading book is to be calculated according to the method used for such positions in the banking book unless specified otherwise below. To that effect, the risk weight has to be calculated as specified below and applied to the net positions in securitisation instruments in the trading book. The total specific risk capital charge for the correlation trading portfolio is to be computed according to Paragraph CA-9.2.17, and the total specific risk capital charge for securitisation exposures is to be computed according to Paragraph CA-9.1.4.

                    January 2015

                  • CA-9.2.11B

                    The specific risk capital charges for positions covered under the standardised approach for securitisation exposures are defined in the table below. These charges must be applied by conventional bank licensees using the standardised approach for credit risk. For positions with long-term ratings of B+ and below and short-term ratings other than A-1/P-1, A-2/P-2, A-3/P-3, a 1,250% risk weighting as defined in Paragraph CA-6.4.8 is required. A 1,250% weighting is also required for unrated positions with the exception of the circumstances described in Paragraphs CA-6.4.12 to CA-6.4.16. The operational requirements for the recognition of external credit assessments outlined in Paragraph CA-6.4.6 apply.

                    January 2015

                • Specific Risk Capital Charges under the Standardised Approach Based on External Credit Ratings

                  External Credit Assessment AAA to AA- A-1/P-1 A+ to A- A-2/P-2 BBB+ BBB- A-3/P-3 BB+ to BB- Below BB- and below A-3/P-3 or unrated
                  Securitisation Exposures 1.6% 4% 8% 28% Deduction
                  Re-securitisation Exposures 3.2% 8% 18% 52% Deduction
                  January 2015

                  • CA-9.2.11C

                    The specific risk capital charges for unrated positions under the securitisation framework as defined in Paragraphs CA-6.1.1 to CA-6.1.6 must be calculated as set out below, subject to CBB approval. The capital charge can be calculated as 12% of the weighted average risk weight that would be applied to the securitised exposures under the standardised approach, multiplied by a concentration ratio. If the concentration ratio is 12.5 or higher the position has to be deducted from capital as defined in Paragraph CA-6.4.2. This concentration ratio is equal to the sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the tranches junior to or pari passu with the tranche in which the position is held including that tranche itself.

                    The resulting specific risk capital charge must not be lower than any specific risk capital charge applicable to a rated more senior tranche. If a conventional bank licensee is unable to determine the specific risk capital charge as described above or prefers not to apply the treatment described above to a position, it must deduct that position from capital.

                    January 2015

                  • CA-9.2.11D

                    A position subject to deduction according to Paragraphs CA-9.2.11B to CA-9.2.11C may be excluded from the calculation of the capital charge for general market risk.

                    January 2015

                  • CA-9.2.11E

                    [This Paragraph was deleted in January 2015.]

                    January 2015

                • Specific Risk Capital Charges for Positions Hedged by Credit Derivatives

                  • CA-9.2.12

                    Full allowance will be recognised when the values of two legs (i.e. long and short) always move in the opposite direction and broadly to the same extent. This would be the case in the following situations:

                    (a) The two legs consist of completely identical instruments; or
                    (b) A long cash position is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference obligation and the underlying exposure (i.e. the cash position)46.

                    In these cases, no specific risk capital requirement applies to both sides of the position.


                    46 The maturity of the swap itself may be different from that of the underlying exposure.

                    January 2015

                  • CA-9.2.13

                    An 80% offset will be recognised when the value of two legs (i.e. long and short) always moves in the opposite direction but not broadly to the same extent. This would be the case when a long cash position is hedged by a credit default swap or a credit linked note (or vice versa) and there is an exact match in terms of the reference obligation, the maturity of both the reference obligation and the credit derivative, and the currency to the underlying exposure. In addition, key features of the credit derivative contract (e.g. credit event definitions, settlement mechanisms) should not cause the price movement of the credit derivative to materially deviate from the price movements of the cash position. To the extent that the transaction transfers risk (i.e. taking account of restrictive payout provisions such as fixed payouts and materiality thresholds), an 80% specific risk offset will be applied to the side of the transaction with the higher capital charge, while the specific risk requirement on the other side will be zero.

                    January 2015

                  • CA-9.2.14

                    Partial allowance will be recognised when the value of the two legs (i.e. long and short) usually moves in the opposite direction. This would be the case in the following situations:

                    (a) The position is captured in Paragraph CA-9.2.12 under (b), but there is an asset mismatch between the reference obligation and the underlying exposure. Nonetheless, the position meets the requirements in Paragraph CA-4.5.3 (g);
                    (b) The position is captured in Paragraph CA-9.2.12 under (a) or CA-9.2.13 but there is a currency or maturity mismatch47 between the credit protection and the underlying asset; or
                    (c) The position is captured in Paragraph CA-9.2.13 but there is an asset mismatch between the cash position and the credit derivative. However, the underlying asset is included in the (deliverable) obligations in the credit derivative documentation.

                    47 Currency mismatches should feed into the normal reporting of foreign exchange risk.

                    January 2015

                  • CA-9.2.15

                    In each of these cases in Paragraphs CA-9.2.12 to CA-9.2.14, the following rule applies. Rather than adding the specific risk capital requirements for each side of the transaction (i.e. the credit protection and the underlying asset) only the higher of the two capital requirements will apply.

                    January 2015

                  • CA-9.2.16

                    In cases not captured in Paragraphs CA-9.2.12 to CA-9.2.14, a specific risk capital charge must be assessed against both sides of the position.

                    January 2015

                  • CA-9.2.17

                    An n-th-to-default credit derivative is a contract where the payoff is based on the n-th asset to default in a basket of underlying reference instruments. Once the n-th default occurs the transaction terminates and is settled:

                    (a) The capital charge for specific risk for a first-to-default credit derivative is the lesser of (1) the sum of the specific risk capital charges for the individual reference credit instruments in the basket, and (2) the maximum possible credit event payment under the contract. Where a conventional bank licensee has a risk position in one of the reference credit instruments underlying a first-to-default credit derivative and this credit derivative hedges the conventional bank licensee's risk position, the conventional bank licensee is allowed to reduce with respect to the hedged amount both the capital charge for specific risk for the reference credit instrument and that part of the capital charge for specific risk for the credit derivative that relates to this particular reference credit instrument. Where a conventional bank licensee has multiple risk positions in reference credit instruments underlying a first-to-default credit derivative this offset is allowed only for that underlying reference credit instrument having the lowest specific risk capital charge;
                    (b) The capital charge for specific risk for an n-th-to-default credit derivative with n greater than one is the lesser of (1) the sum of the specific risk capital charges for the individual reference credit instruments in the basket but disregarding the (n-1) obligations with the lowest specific risk capital charges; and (2) the maximum possible credit event payment under the contract. For n-th-to-default credit derivatives with n greater than 1 no offset of the capital charge for specific risk with any underlying reference credit instrument is allowed;
                    (c) If a first or other n-th-to-default credit derivative is externally rated, then the protection seller must calculate the specific risk capital charge using the rating of the derivative and apply the respective securitisation risk weights as specified in Paragraph CA-9.2.11B; and
                    (d) The capital charge against each net n-th-to-default credit derivative position applies irrespective of whether the conventional bank licensee has a long or short position, i.e. obtains or provides protection.
                    January 2015

              • CA-9.3 CA-9.3 General Market Risk Calculation

                • CA-9.3.1

                  The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest rates, i.e. the risk of parallel and non-parallel shifts in the yield curve. A choice between two principal methods of measuring the general market risk is permitted, a "maturity" method and a "duration" method. In each method, the capital charge is the sum of the following four components:

                  (a) The net short or long position in the whole trading book;
                  (b) A small proportion of the matched positions in each time-band (the "vertical disallowance");
                  (c) A larger proportion of the matched positions across different time-bands (the "horizontal disallowance"); and
                  (d) A net charge for positions in options, where appropriate (see Chapter CA-13).
                  January 2015

                • CA-9.3.2

                  Separate maturity ladders must be used for each currency and capital charges must be calculated for each currency separately and then summed, by applying the prevailing foreign exchange spot rates, with no off-setting between positions of opposite sign.

                  January 2015

                • CA-9.3.3

                  In the case of those currencies in which the value and volume of business is insignificant, separate maturity ladders for each currency are not required. Instead, the conventional bank licensee may construct a single maturity ladder and slot, within each appropriate time-band, the net long or short position for each currency. However, these individual net positions are to be summed within each time-band, irrespective of whether they are long or short positions, to arrive at the gross position figure for the time-band.

                  January 2015

                • CA-9.3.4

                  A combination of the two methods (referred to under Paragraph CA-9.3.1) is not permitted.

                  January 2015

              • CA-9.4 CA-9.4 Maturity Method

                • CA-9.4.1

                  A worked example of the maturity method is included in Appendix CA-11. The various time-bands and their risk weights, relevant to the maturity method, are illustrated in Subparagraph CA-9.4.2(a).

                  January 2015

                • CA-9.4.2

                  The steps in the calculation of the general market risk for interest rate positions, under this method, are set out below:

                  (a) Individual long or short positions in interest-rate related instruments, including derivatives, are slotted into a maturity ladder comprising thirteen time-bands (or fifteen time-bands in the case of zero-coupon and deep-discount instruments, defined as those with a coupon of less than 3%), on the following basis:
                  (i) Fixed rate instruments are allocated according to their residual term to maturity (irrespective of embedded puts and calls), and whether their coupon is below 3%;
                  (ii) Floating rate instruments are allocated according to the residual term to the next repricing date;
                  (iii) Positions in derivatives, and all positions in repos, reverse repos and similar products are decomposed into their components within each time band. Derivative instruments are covered in greater detail in Sections CA-9.6 to CA-9.9;
                  (iv) Opposite positions of the same amount in the same issues (but not different issues by the same issuer), whether actual or notional, can be omitted from the interest rate maturity framework, as well as closely matched swaps, forwards, futures and FRAs which meet the conditions set out in Section CA-9.8. In other words, these positions are netted within their relevant time-bands; and
                  (v) The CBB's advice must be sought on the treatment of instruments that deviate from the above structures, or which may be considered sufficiently complex to warrant the CBB's attention.
                  January 2015

                • Maturity Method: Time-Bands and Risk Weights

                    Coupon 3% or more Coupon < 3% Risk weight
                  Zone 1 1 month or less 1 month or less 0.00%
                  1 to 3 months 1 to 3 months 0.20%
                  3 to 6 months 3 to 6 months 0.40%
                  6 to 12 months 6 to 12 months 0.70%
                  Zone 2 1 to 2 years 1 to 1.9 years 1.25%
                  2 to 3 years 1.9 to 2.8 years 1.75%
                  3 to 4 years 2.8 to 3.6 years 2.25%
                  Zone 3 4 to 5 years 3.6 to 4.3 years 2.75%
                  5 to 7 years 4.3 to 5.7 years 3.25%
                  7 to 10 years 5.7 to 7.3 years 3.75%
                  10 to 15 years 7.3 to 9.3 years 4.50%
                  15 to 20 years 9.3 to 10.6 years 5.25%
                  > 20 years 10.6 to 12 years 6.00%
                    12 to 20 years 8.00%
                    > 20 years 12.50%
                  (b) The market values of the individual long and short net positions in each maturity band are multiplied by the respective risk weighting factors given in Subparagraph CA-9.4.2(a);
                  (c) Matching of positions within each maturity band (i.e. vertical matching) is done as follows:
                  (i) Where a maturity band has both weighted long and short positions, the extent to which the one offsets the other is called the matched weighted position. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a band) is called the unmatched weighted position for that band;
                  (d) Matching of positions, across maturity bands, within each zone (i.e. horizontal matching — level 1), is done as follows:
                  (i) Where a zone has both unmatched weighted long and short positions for various bands, the extent to which the one offsets the other is called the matched weighted position for that zone. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a zone) is called the unmatched weighted position for that zone;
                  (e) Matching of positions, across zones (i.e. horizontal matching — level 2), is done as follows:
                  (i) The unmatched weighted long or short position in zone 1 may be offset against the unmatched weighted short or long position in zone 2. The extent to which the unmatched weighted positions in zones 1 and 2 are offsetting is described as the matched weighted position between zones 1 and 2;
                  (ii) After step (i) above, any residual unmatched weighted long or short position in zone 2 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 2 and 3 are offsetting is described as the matched weighted position between zones 2 and 3;

                  The calculations in steps (i) and (ii) above may be carried out in reverse order (i.e. zones 2 and 3, followed by zones 1 and 2).
                  (iii) After steps (i) and (ii) above, any residual unmatched weighted long or short position in zone 1 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 1 and 3 are offsetting is described as the matched weighted position between zones 1 and 3;
                  (f) Any residual unmatched weighted positions, following the matching within and between maturity bands and zones as described above, will be summed; and
                  (g) The general interest rate risk capital requirement is the sum of:
                  (i) Matched weighted positions in all maturity bands x 10%;
                  (ii) Matched weighted positions in zone 1 x 40%;
                  (iii) Matched weighted positions in zone 2 x 30%;
                  (iv) Matched weighted positions in zone 3 x 30%;
                  (v) Matched weighted positions between zones 1 & 2 x 40%;
                  (vi) Matched weighted positions between zones 2 & 3 x 40%;
                  (vii) Matched weighted positions between zones 1 & 3 x 100%; and
                  (viii) Residual unmatched weighted positions x 100%.

                  Item (i) is referred to as the vertical disallowance, items (ii) through (iv) as the first set of horizontal disallowances, and items (v) through (vii) as the second set of horizontal disallowances.
                  January 2015

              • CA-9.5 CA-9.5 Duration Method

                • CA-9.5.1

                  The duration method is an alternative approach to measuring the exposure to parallel and non-parallel shifts in the yield curve, and recognises the use of duration as an indicator of the sensitivity of individual positions to changes in market yields. Under this method, conventional bank licensees may use a duration-based system for determining their general interest rate risk capital requirements for traded debt instruments and other sources of interest rate exposures including derivatives. A worked example of the duration method is included in Appendix CA-12. The various time-bands and assumed changes in yield, relevant to the duration method, are illustrated below.

                  January 2015

                • Duration Method: Time-Bands and Assumed Changes in Yield

                    Time-band Assumed change in yield
                  Zone 1 1 month or less 1.00
                  1 to 3 months 1.00
                  3 to 6 months 1.00
                  6 to 12 months 1.00
                  Zone 2 1 to 1.9 years 0.90
                  1.9 to 2.8 years 0.80
                  2.8 to 3.6 years 0.75
                  Zone 3 3.6 to 4.3 years 0.75
                  4.3 to 5.7 years 0.70
                  5.7 to 7.3 years 0.65
                  7.3 to 9.3 years 0.60
                  9.3 to 10.6 years 0.60
                  10.6 to 12 years 0.60
                  12 to 20 years 0.60
                  > 20 years 0.60
                  January 2015

                • CA-9.5.2

                  Conventional bank licensees must notify the CBB of the circumstances in which they elect to use this method. Once chosen, the duration method must be consistently applied, in accordance with the requirements of Section CA-9.3.

                  January 2015

                • CA-9.5.3

                  Where a conventional bank licensee has chosen to use the duration method, it is possible that it will not be suitable for certain instruments. In such cases, the conventional bank licensee must seek the advice of the CBB or obtain approval for application of the maturity method to the specific category(ies) of instruments, in accordance with the provisions of Section CA-9.3.

                  January 2015

                • CA-9.5.4

                  The steps in the calculation of the general market risk for interest rate positions, under this method, are set out below:

                  (a) The conventional bank licensee must determine the Yield-to-Maturity (YTM) for each individual net position in fixed rate and floating rate instruments, based on the current market value. The basis of arriving at individual net positions is explained in Section CA-9.4. The YTM for fixed rate instruments is determined without any regard to whether the instrument is coupon bearing, or whether the instrument has any embedded options. In all cases, YTM for fixed rate instruments is calculated with reference to the final maturity date and, for floating rate instruments, with reference to the next repricing date;
                  (b) The conventional bank licensee must calculate, for each debt instrument, the modified duration (M) on the basis of the following formula:

                  M = D / (1+r)

                  where,

                  D (duration) =


                  r = YTM % per annum expressed as a decimal
                  C = Cash flow at time t
                  t = time at which cash flows occur, in years
                  m = time to maturity, in years
                  (c) Individual net positions, at current market value, are allocated to the time-bands illustrated in Paragraph CA-9.5.1, based on their modified duration;
                  (d) The conventional bank licensee must then calculate the modified duration-weighted position for each individual net position by multiplying its current market value by the modified duration and the assumed change in yield;
                  (e) Matching of positions within each time band (i.e. vertical matching) is done as follows:
                  (i) Where a time band has both weighted long and short positions, the extent to which the one offsets the other is called the matched weighted position. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a band) is called the unmatched weighted position for that band;
                  (f) Matching of positions, across time bands, within each zone (i.e. horizontal matching - level 1), is done as follows:
                  (i) Where a zone has both unmatched weighted long and short positions for various bands, the extent to which the one offsets the other is called the matched weighted position for that zone. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a zone) is called the unmatched weighted position for that zone;
                  (g) Matching of positions, across zones (i.e. horizontal matching -level 2), is done as follows:
                  (i) The unmatched weighted long or short position in zone 1 may be offset against the unmatched weighted short or long position in zone 2. The extent to which the unmatched weighted positions in zones 1 and 2 are offsetting is described as the matched weighted position between zones 1 and 2;
                  (ii) After step (i) above, any residual unmatched weighted long or short position in zone 2 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 2 and 3 are offsetting is described as the matched weighted position between zones 2 and 3;

                  The calculations in steps (i) and (ii) above may be carried out in reverse order (i.e. zones 2 and 3, followed by zones 1 and 2); and
                  (iii) After steps (a) and (b) above, any residual unmatched weighted long or short position in zone 1 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 1 and 3 are offsetting is described as the matched weighted position between zones 1 and 3;
                  (h) Any residual unmatched weighted positions, following the matching within and between maturity bands and zones as described above, will be summed; and
                  (i) The general interest rate risk capital requirement is the sum of:
                  (i) Matched weighted positions in all maturity bands x 5%;
                  (ii) Matched weighted positions in zone 1 x 40%;
                  (iii) Matched weighted positions in zone 2 x 30%;
                  (iv) Matched weighted positions in zone 3 x 30%;
                  (v) Matched weighted positions between zones 1 & 2 x 40%;
                  (vi) Matched weighted positions between zones 2 & 3 x 40%;
                  (vii) Matched weighted positions between zones 1 & 3 x 100%; and
                  (viii) Residual unmatched weighted positions x 100%.

                  Item (i) is referred to as the vertical disallowance, items (ii) through (iv) as the first set of horizontal disallowances, and items (v) through (vii) as the second set of horizontal disallowances.
                  January 2015

              • CA-9.6 CA-9.6 Derivatives

                • CA-9.6.1

                  Conventional bank licensees which propose to use internal models to measure the interest rate risk inherent in derivatives must seek the prior written approval of the CBB for applying those models. The use of internal models to measure market risk, and the CBB's rules applicable to them, are discussed in detail in Chapter CA-14.

                  January 2015

                • CA-9.6.2

                  Where a conventional bank licensee, with the prior written approval of the CBB, uses an interest rate sensitivity model, the output of that model is used, by the duration method, to calculate the general market risk as described in Section CA-9.5.

                  January 2015

                • CA-9.6.3

                  Where a conventional bank licensee does not propose to use models, it must use the techniques described in the following Paragraphs, for measuring the market risk on interest rate derivatives. The measurement system must include all interest rate derivatives and off-balance-sheet instruments in the trading book which react to changes in interest rates (e.g. forward rate agreements, other forward contracts, bond futures, interest rate and cross-currency swaps, options and forward foreign exchange contracts). Where a conventional bank licensee has obtained the approval of the CBB for the use of non-interest rate derivatives models, the embedded interest rate exposures must be incorporated in the standardised measurement framework described in Sections CA-9.7 to CA-9.9.

                  January 2015

                • CA-9.6.4

                  Derivative positions attract specific risk only when they are based on an underlying instrument or security. For instance, where the underlying exposure is an interest rate exposure, as in a swap based upon inter-bank rates, there is no specific risk, but only counterparty risk. A similar treatment applies to FRAs, forward foreign exchange contracts and interest rate futures. However, for a swap based on a bond yield, or a futures contract based on a debt security or an index representing a basket of debt securities, the credit risk of the issuer of the underlying bond generates a specific risk capital requirement. Future cash flows derived from positions in derivatives generate counterparty risk requirements related to the counterparty in the trade, in addition to position risk requirements (specific and general market risk) related to the underlying security.

                  January 2015

                • CA-9.6.5

                  A summary of the rules for dealing with interest rate derivatives (other than options) is set out in Section CA-9.9. The treatment of options, being a complex issue, is dealt with in detail in Chapter CA-13.

                  January 2015

              • CA-9.7 CA-9.7 Calculation of Derivative Positions

                • CA-9.7.1

                  The derivatives must be converted to positions in the relevant underlying and become subject to specific and general market risk charges as described in Sections CA-9.2 and CA-9.3, respectively. For the purpose of calculation by the standard formulae, the amounts reported are the market values of the principal amounts of the underlying or of the notional underlying. For instruments where the apparent notional amount differs from the effective notional amount, conventional bank licensees must use the latter.

                  January 2015

                • CA-9.7.2

                  The remaining Paragraphs in this Section include the guidelines for the calculation of positions in different categories of interest rate derivatives. Conventional bank licensees which need further assistance in the calculation, particularly in relation to complex instruments, should contact the CBB in writing.

                  January 2015

                • Forward Foreign Exchange Contracts

                  • CA-9.7.3

                    A forward foreign exchange position is decomposed into legs representing the paying and receiving currencies. Each of the legs is treated as if it were a zero coupon bond, with zero specific risk, in the relevant currency and included in the measurement framework as follows:

                    (a) If the maturity method is used, each leg is included at the notional amount; and
                    (b) If the duration method is used, each leg is included at the present value of the notional zero coupon bond.
                    January 2015

                • Deposit Futures and FRAs

                  • CA-9.7.4

                    Deposit futures, forward rate agreements and other instruments where the underlying is a money market exposure is split into two legs as follows:

                    (a) The first leg represents the time to expiry of the futures contract, or settlement date of the FRA as the case may be;
                    (b) The second leg represents the time to expiry of the underlying instrument;
                    (c) Each leg is treated as a zero coupon bond with zero specific risk; and
                    (d) For deposit futures, the size of each leg is the notional amount of the underlying money market exposure. For FRAs, the size of each leg is the notional amount of the underlying money market exposure discounted to present value, although in the maturity method, the notional amount may be used without discounting.

                    For example, under the maturity method, a single 3-month Euro$ 1,000,000 deposit futures contract expiring in 3 months' time has one leg of $ 1,000,000 representing the 8 months to contract expiry, and another leg of $ 1,000,000 in the 11 months' time-band representing the time to expiry of the deposit underlying the futures contract.

                    January 2015

                • Bond Futures and Forward Bond Transactions

                  • CA-9.7.5

                    Bond futures, forward bond transactions and the forward leg of repos, reverse repos and other similar transactions must apply the two-legged approach. A forward bond transaction is one where the settlement is for a period other than the prevailing norm for the market:

                    (a) The first leg is a zero coupon bond with zero specific risk. Its maturity is the time to expiry of the futures or forward contract. Its size is the cash flow on maturity discounted to present value, although in the maturity method, the cash flow on maturity may be used without discounting;
                    (b) The second leg is the underlying bond. Its maturity is that of the underlying bond for fixed rate bonds, or the time to the next reset for floating rate bonds. Its size is as set out in (c) and (d) below;
                    (c) For forward bond transactions, the underlying bond and amount is used at the present spot price;
                    (d) For bond futures, the principal amounts for each of the two legs is reckoned as the futures price times the notional underlying bond amount;
                    (e) Where a range of deliverable instruments may be delivered to fulfil a futures contract (at the option of the "short"), then the following rules are used to determine the principal amount, taking account of any conversion factors defined by the exchange:
                    (i) The "long" may use one of the deliverable bonds, or the notional bond on which the contract is based, as the underlying instrument, but this notional long leg may not be offset against a short cash position in the same bond; and
                    (ii) The "short" may treat the notional underlying bond as if it were one of the deliverable bonds, and it may be offset against a short cash position in the same bond;
                    (f) For futures contracts based on a corporate bond index, the positions is included at the market value of the notional underlying portfolio of securities;
                    (g) A repo (or sell-buy or stock lending) involving exchange of a security for cash must be represented as a cash borrowing — i.e. a short position in a government bond with maturity equal to the repo and coupon equal to the repo rate. A reverse repo (or buy-sell or stock borrowing) must be represented as a cash loan — i.e. a long position in a government bond with maturity equal to the reverse repo and coupon equal to the repo rate. These positions are referred to as "cash legs"; and
                    (h) It should be noted that, where a security owned by the conventional bank licensee (and included in its calculation of market risk) is repo'd, it continues to contribute to the conventional bank licensee's interest rate or equity position risk calculation.
                    January 2015

                • Swaps

                  • CA-9.7.6

                    Swaps are treated as two notional positions in government securities with the relevant maturities:

                    (a) Interest rate swaps are decomposed into two legs, and each leg is allocated to the maturity band equating to the time remaining to repricing or maturity. For example, an interest rate swap in which a conventional bank licensee is receiving floating rate interest and paying fixed is treated as a long position in a floating rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed rate instrument of maturity equivalent to the residual life of the swap;
                    (b) For swaps that pay or receive a fixed or floating interest rate against some other reference price, e.g. a stock index, the interest rate component must be slotted into the appropriate repricing or maturity category, with the equity component being included in the equity risk measurement framework as described in Chapter CA-10;
                    (c) For cross currency swaps, the separate legs are included in the interest rate risk measurement for the currencies concerned, as having a fixed/floating leg in each currency. Alternatively, the two parts of a currency swap transaction are split into forward foreign exchange contracts and treated accordingly;
                    (d) Where a swap has a deferred start, and one or both legs have been fixed, then the fixed leg(s) is sub-divided into the time to the commencement of the leg and the actual swap leg with fixed or floating rate. A swap is deemed to have a deferred start when the commencement of the interest rate calculation periods is more than two business days from the transaction date, and one or both legs have been fixed at the time of the commitment. However, when a swap has a deferred start and neither leg has been fixed, there is no interest rate exposure, albeit there is counterparty exposure; and
                    (e) Where a swap has a different structure from those discussed above, it may be necessary to adjust the underlying notional principal amount, or the notional maturity of one or both legs of the transaction.
                    January 2015

                  • CA-9.7.7

                    Conventional bank licensees with large swap books may use alternative formulae for these swaps to calculate the positions to be included in the maturity or duration ladder. One method would be to first convert the cash flows required by the swap into their present values. For this purpose, each cash flow must be discounted using the zero coupon yields, and a single net figure for the present value of the cash flows entered into the appropriate time-band using procedures that apply to zero or low coupon (less than 3%) instruments. An alternative method is to calculate the sensitivity of the net present value implied by the change in yield used in the duration method (as set out in Section CA-9.5), and allocate these sensitivities into the appropriate time-bands.

                    January 2015

                  • CA-9.7.8

                    Conventional bank licensees which propose to use the approaches described in Paragraph CA-9.7.7, or any other similar alternative formulae, must obtain the prior written approval of the CBB.

                    January 2015

                  • CA-9.7.9

                    The CBB will consider the following factors before approving any alternative methods for calculating the swap positions:

                    (a) Whether the systems proposed to be used are accurate;
                    (b) Whether the positions calculated fully reflect the sensitivity of the cash flows to interest rate changes and are entered into the appropriate time-bands; and
                    (c) Whether the positions are denominated in the same currency.
                    January 2015

              • CA-9.8 CA-9.8 Netting of Derivative Positions

                • Permissible Offsetting of Fully Matched Positions for Both Specific and General Market Risk

                  • CA-9.8.1

                    Conventional bank licensees may exclude from the interest rate risk calculation, altogether, the long and short positions (both actual and notional) in identical instruments with exactly the same issuer, coupon, currency and maturity. A matched position in a future or a forward and its corresponding underlying may also be fully offset, albeit the leg representing the time to expiry of the future is included in the calculation.

                    January 2015

                  • CA-9.8.2

                    When the future or the forward comprises a range of deliverable instruments, offsetting of positions in the futures or forward contract and its underlying is only permitted in cases where there is a readily identifiable underlying security which is most profitable for the trader with a short position to deliver. The price of this security, sometimes called the "cheapest-to-deliver", and the price of the future or forward contract must, in such cases, move in close alignment. No offsetting is allowed between positions in different currencies. The separate legs of cross-currency swaps or forward foreign exchange contracts are treated as notional positions in the relevant instruments and included in the appropriate calculation for each currency.

                    January 2015

                • Permissible Offsetting of Closely Matched Positions for General Market Risk Only

                  • CA-9.8.3

                    For the purpose of calculation of the general market risk, in addition to the permissible offsetting of fully matched positions as described in Paragraph CA-9.8.1, opposite positions giving rise to interest rate exposure can be offset if they relate to the same underlying instruments, are of the same nominal value and are denominated in the same currency and, in addition, fulfil the following conditions:

                    (a) For futures:
                    Offsetting positions in the notional or underlying instruments to which the futures contract relates must be for identical products and mature within seven days of each other;
                    (b) For swaps and FRAs:
                    The reference rate (for floating rate positions) must be identical and the coupons must be within 15 basis points of each other; and
                    (c) For swaps, FRAs and forwards:
                    The next interest fixing date or, for fixed coupon positions or forwards, the residual maturity must correspond within the following limits:
                    •   Less than one month:
                    same day;
                    •   Between one month and one year:
                    within 7 days;
                    •   Over one year:
                    within 30 days.
                    January 2015

              • CA-9.9 CA-9.9 Calculation of Capital Charge for Derivatives

                • CA-9.9.1

                  After calculating the derivatives positions, taking account of the permissible offsetting of matched positions, as explained in Section CA-9.8, the capital charges for specific and general market risk for interest rate derivatives are calculated in the same manner as for cash positions, as described earlier in this Chapter.

                  January 2015

                • Summary of Treatment of Interest Rate Derivatives

                  Instrument Specific risk charge* General market risk charge
                  Exchange-traded futures    
                  - Government** debt security
                  No Yes, as two positions
                  - Corporate debt security
                  Yes Yes, as two positions
                  - Index on interest rates (e.g. LIBOR)
                  No Yes, as two positions
                  - Index on basket of debt securities
                  Yes Yes, as two positions
                  OTC forwards    
                  - Government** debt security
                  No Yes, as two positions
                  - Corporate debt security
                  Yes Yes, as two positions
                  - Index on interest rates
                  No Yes, as two positions
                  FRAs No Yes, as two positions
                  Swaps    
                  - Based on inter-bank rates
                  No Yes, as two positions
                  - Based on Government** bond yields
                  No Yes, as two positions
                  - Based on corporate bond yields
                  Yes Yes, as two positions
                  Forward foreign exchange
                  No Yes, as one position in each currency
                  Options   Either (a) or (b) as below (see chapter CA-13 for a detailed description):
                  - Government** debt security
                  - Corporate debt security
                  - Index on interest rates
                  - FRAs, swaps
                  No

                  Yes

                  No

                  No
                  (a) Carve out together with the associated hedging positions, and use:
                  -simplified approach; or
                  -scenario analysis; or
                  -internal models (see chapter CA-14).
                  (b) General market risk charge according to the delta-plus method (gamma and vega should receive separate capital charges).
                  * This is the specific risk charge relating to the issuer of the instrument. Under the credit risk rules, there remains a separate capital charge for the counterparty risk.

                  ** As defined in Section CA-9.2.
                  January 2015

            • CA-10 CA-10 Market Risk — Equity Position Risk — (STA)

              • CA-10.1 CA-10.1 Introduction

                • CA-10.1.1

                  This Chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in equities in the conventional bank licensee's trading book.

                  January 2015

                • CA-10.1.2

                  For the guidance of the conventional bank licensees, and without being exhaustive, the following list includes financial instruments in the trading book, including forward positions, to which equity position risk capital requirements apply:

                  (a) Common stocks, whether voting or non-voting;
                  (b) Depository receipts (which should be included in the measurement framework in terms of the underlying shares);
                  (c) Convertible preference securities (non-convertible preference securities are treated as bonds);
                  (d) Convertible debt securities which convert into equity instruments and are, therefore, treated as equities (see Paragraph CA-10.1.3 below);
                  (e) Commitments to buy or sell equity securities; and
                  (f) Derivatives based on the above instruments.
                  January 2015

                • CA-10.1.3

                  Convertible debt securities must be treated as equities where:

                  (a) The first date at which the conversion may take place is less than three months ahead, or the next such date (where the first date has passed) is less than a year ahead; and
                  (b) The convertible is trading at a premium of less than 10%, where the premium is defined as the current marked-to-market value of the convertible less the marked-to-market value of the underlying equity, expressed as a percentage of the latter.

                  In other instances, convertibles must be treated as either equity or debt securities, based reasonably on their market behaviour.

                  January 2015

                • CA-10.1.4

                  For instruments that deviate from the structures described in Paragraphs CA-10.1.2 and CA-10.1.3, or which could be considered complex, each conventional bank licensees must agree on a written policy statement with the CBB about the intended treatment, on a case-by-case basis. In some circumstances, the treatment of an instrument may be uncertain, for example bonds whose coupon payments are linked to equity indices. The position risk of such instruments must be broken down into its components and allocated appropriately between the equity, interest rate and foreign exchange risk categories. Advice must be sought from the CBB in cases of doubt, particularly when a conventional bank licensee is trading an instrument for the first time.

                  January 2015

                • CA-10.1.5

                  Where equities are part of a forward contract, a future or an option (i.e. a quantity of equities to be received or delivered), any interest rate or foreign currency exposure from the other leg of the contract must be included in the measurement framework as described in Chapters CA-9 and CA-11, respectively.

                  January 2015

                • CA-10.1.6

                  As with interest rate related instruments, the minimum capital requirement for equities is expressed in terms of two separately calculated charges, one applying to the "specific risk" of holding a long or short position in an individual equity, and the other to the "general market risk" of holding a long or short position in the market as a whole.

                  January 2015

                • CA-10.1.7

                  Conventional bank licensees must follow the standardised approach to calculate the equity position risk capital requirement, as set out in detail in this Chapter.

                  January 2015

              • CA-10.2 CA-10.2 Calculation of Equity Positions

                • CA-10.2.1

                  A conventional bank licensee may net long and short positions in the same equity instrument, arising either directly or through derivatives, to generate the individual net position in that instrument. For example, a future in a given equity may be offset against an opposite cash position in the same equity, albeit the interest rate risk arising out of the future must be calculated separately in accordance with the rules set out in Chapter CA-9.

                  January 2015

                • CA-10.2.2

                  A conventional bank licensee may net long and short positions in one tranche of an equity instrument against another tranche only where the relevant tranches:

                  (a) Rank pari passu in all respects; and
                  (b) Become fungible within 180 days, and thereafter the equity instruments of one tranche can be delivered in settlement of the other tranche.
                  January 2015

                • CA-10.2.3

                  Positions in depository receipts may only be netted against positions in the underlying stock if the stock is freely deliverable against the depository receipt. If a conventional bank licensee takes a position in depository receipts against an opposite position in the underlying equity in different markets (i.e. arbitrage), it may offset the position provided that any costs on conversion are fully taken into account. Furthermore, the foreign exchange risk arising out of these positions must be included in the measurement framework as set out in Chapter CA-11.

                  January 2015

                • CA-10.2.4

                  More detailed guidance on the treatment of equity derivatives is set out in Section CA-10.5.

                  January 2015

                • CA-10.2.5

                  Equity positions, arising either directly or through derivatives, must be allocated to the country in which each equity is listed. Where an equity is listed in more than one country, the conventional bank licensee must discuss the appropriate country allocation with the CBB.

                  January 2015

              • CA-10.3 CA-10.3 Specific Risk Calculation

                • CA-10.3.1

                  Specific risk is defined as the conventional bank licensee's gross equity positions (i.e. the sum of all long equity positions and of all short equity positions), and is calculated for each country or equity market. For each national market in which the conventional bank licensee holds equities, it must sum the market values of its individual net positions as determined in accordance with Section CA-10.2, irrespective of whether they are long or short positions, to produce the overall gross equity position for that market.

                  January 2015

                • CA-10.3.2

                  The capital charge for specific risk is 8%.

                  January 2015

              • CA-10.4 CA-10.4 General Risk Calculation

                • CA-10.4.1

                  The general market risk is the difference between the sum of the long positions and the sum of the short positions (i.e. the overall net position) in each national equity market. In other words, to calculate the general market risk, the conventional bank licensee must sum the market value of its individual net positions for each national market, as determined in accordance with Section CA-10.2, taking into account whether the positions are long or short.

                  January 2015

                • CA-10.4.2

                  The general market equity risk measure is 8% of the overall net position in each national market.

                  January 2015

              • CA-10.5 CA-10.5 Equity Derivatives

                • CA-10.5.1

                  For the purpose of calculating the specific and general market risk by the standardised approach, equity derivative positions must be converted into notional underlying equity positions, whether long or short. All equity derivatives and off-balance-sheet positions which are affected by changes in equity prices must be included in the measurement framework. This includes futures and swaps on both individual equities and on stock indices.

                  January 2015

                • CA-10.5.2

                  The following guidelines apply to the calculation of positions in different categories of equity derivatives. Conventional bank licensees which need further assistance in the calculation, particularly in relation to complex instruments, must contact the CBB:

                  (a) Futures and forward contracts relating to individual equities must be included in the calculation at current market prices;
                  (b) Futures relating to stock indices must be included in the calculation, at the marked-to-market value of the notional underlying equity portfolio, i.e. as a single position based on the sum of the current market values of the underlying instruments;
                  (c) Equity swaps are treated as two notional positions. For example, an equity swap in which a conventional bank licensee is receiving an amount based on the change in value of one particular equity or stock index, and paying a different index is treated as a long position in the former and a short position in the latter. Where one of the swap legs involves receiving/paying a fixed or floating interest rate, that exposure must be slotted into the appropriate time-band for interest rate related instruments as set out in Chapter CA-9. The stock index leg must be covered by the equity treatment as set out in this Chapter; and
                  (d) Equity options and stock index options are either "carved out" together with the associated underlying instruments, or are incorporated in the general market risk measurement framework, described in this Chapter, based on the delta-plus method. The treatment of options, being a complex issue, is dealt with in detail in Chapter CA-13.
                  January 2015

                • CA-10.5.3

                  A summary of the treatment of equity derivatives is set out in Paragraph CA-10.5.8.

                  January 2015

                • Specific Risk on Positions in Equity Indices

                  • CA-10.5.4

                    Positions in highly liquid equity indices whether they arise directly or through derivatives, attract a 2% capital charge in addition to the general market risk, to cover factors such as execution risk.

                    January 2015

                  • CA-10.5.5

                    For positions in equity indices not regarded as highly liquid, the specific risk capital charge is the highest specific risk charge that would apply to any of its components, as set out in Section CA-10.3.

                    January 2015

                  • CA-10.5.6

                    In the case of the futures-related arbitrage strategies set out below, the specific risk capital charge described above may be applied to only one index with the opposite position exempt from a specific risk capital charge. The strategies are as follows:

                    (a) Where a conventional bank licensee takes an opposite position in exactly the same index, at different dates or in different market centres; and
                    (b) Where a conventional bank licensee takes opposite positions in contracts at the same date in different but similar indices, provided the two indices contain at least 90% common components.
                    January 2015

                  • CA-10.5.7

                    Where a conventional bank licensee engages in a deliberate arbitrage strategy, in which a futures contract on a broad-based index matches a basket of stocks, it is allowed to carve out both positions from the standardised methodology on the following conditions:

                    (a) The trade has been deliberately entered into, and separately controlled; and
                    (b) The composition of the basket of stocks represents at least 90% of the index when broken down into its notional components.

                    In such a case, the minimum capital requirement is limited to 4% (i.e. 2% of the gross value of the positions on each side) to reflect divergence and execution risks. This applies even if all of the stocks comprising the index are held in identical proportions. Any excess value of the stocks comprising the basket over the value of the futures contract or vice versa is treated as an open long or short position.

                    January 2015

                • Counterparty Risk

                  • CA-10.5.8

                    Derivative positions may also generate counterparty risk exposure related to the counterparty in the trade, in addition to position risk requirements (specific and general) related to the underlying instrument, e.g. counterparty risk related to OTC trades through margin payments, fees payable or settlement exposures. The credit risk capital requirements apply to such counterparty risk exposure.

                    January 2015

                • Summary of Treatment of Equity Derivatives

                  Instrument Specific risk charge* General market risk charge
                  Exchange-traded or OTC futures    
                  - Individual equity Yes Yes, as underlying
                  - Index Yes
                  (see CA-10.5)
                  Yes, as underlying
                  Options    
                  - Individual equity

                  - Index
                  Yes

                  Yes
                  Either (a) or (b) as below (Chapter CA-13 for a detailed description):
                  (a) Carve out together with the associated hedging positions, and use:
                  - simplified approach; or
                  - scenario analysis; or
                  - internal models (Chapter CA-15).
                  (b) General market risk charge according to the delta-plus method (gamma and vega should receive separate capital charges).
                  * This is the specific risk charge relating to the issuer of the instrument. Under the credit risk rules, there remains a separate capital charge for the counterparty risk.
                  January 2015

            • CA-11 CA-11 Market Risk — Foreign Exchange Risk — (STA)

              • CA-11.1 CA-11.1 Introduction

                • CA-11.1.1

                  A conventional bank licensee which holds net open positions (whether long or short) in foreign currencies is exposed to the risk that exchange rates may move against it. The open positions may be either trading positions or, simply, exposures caused by the conventional bank licensee's overall assets and liabilities.

                  January 2015

                • CA-11.1.2

                  This Chapter describes the standardised method for calculation of the conventional bank licensee's foreign exchange risk, and the capital required against that risk. The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold48 and, as a second step, the measurement of the risks inherent in the conventional bank licensee's mix of long and short positions in different currencies.


                  48 Positions in gold must be treated as if they were foreign currency positions, rather than as commodity positions, because the volatility of gold is more in line with that of foreign currencies and most banks manage it in similar manner to foreign currencies.

                  January 2015

                • CA-11.1.3

                  The open positions and the capital requirements are calculated with reference to the entire business, i.e. the banking and trading books combined.

                  January 2015

                • CA-11.1.4

                  The open positions are calculated with reference to the conventional bank licensee's base currency, which will be either BD or US$.

                  January 2015

                • CA-11.1.5

                  Conventional bank licensees which have the intention and capability to use internal models for the measurement of their foreign exchange risk and, hence, for the calculation of the capital requirement, must obtain the prior written approval of the CBB for those models. The CBB's detailed rules for the recognition and use of internal models are included in chapter CA-14. Conventional bank licensees which do not use internal models must follow the standardised approach, as set out in detail in this Chapter.

                  January 2015

                • CA-11.1.6

                  In addition to foreign exchange risk, positions in foreign currencies may be subject to interest rate risk and credit risk which must be treated separately.

                  January 2015

                • CA-11.1.7

                  For the purposes of calculating "Foreign Exchange Risk" only, positions in those GCC currencies which are pegged to US$, are treated as positions in US$.

                  January 2015

              • CA-11.2 CA-11.2 De Minimis Exemptions

                • CA-11.2.1

                  A conventional bank licensee doing negligible business in foreign currencies and which does not take foreign exchange positions for its own account may, at the discretion of the CBB evidenced by the CBB's prior written approval, be exempted from calculating the capital requirements on these positions.

                  January 2015

                • CA-11.2.1A

                  The CBB is likely to be guided by the following criteria in deciding to grant exemption to any conventional bank licensee under Paragraph CA-11.2.1:

                  (a) The conventional bank licensee's holdings or taking of positions in foreign currencies, including gold, defined as the greater of the sum of the gross long positions and the sum of the gross short positions in all foreign currencies and gold, does not exceed 100% of its Total Capital; and
                  (b) The conventional bank licensee's overall net open position, as defined in Paragraph CA-11.3.1, does not exceed 2% of its Total Capital as defined in Chapter CA-2.
                  January 2015

                • CA-11.2.2

                  The criteria listed in Paragraph CA-11.2.1A are only intended to be guidelines, and a conventional bank licensee will not automatically qualify for exemptions upon meeting them. The CBB may also, in its discretion, fix a minimum capital requirement for a conventional bank licensee which is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.

                  January 2015

                • CA-11.2.3

                  The CBB may, at a future date, revoke an exemption previously granted to a conventional bank licensee, if the CBB is convinced that the conditions on which the exemption was granted no longer exist.

                  January 2015

              • CA-11.3 CA-11.3 Calculation of Net Open Positions

                • CA-11.3.1

                  A conventional bank licensee's exposure to foreign exchange risk in any currency is its net open position in that currency, which is calculated by summing the following items:

                  (a) The net spot position in the currency (i.e. all asset items less all liability items, including accrued interest, other income and expenses, denominated in the currency in question, assets are included gross of provisions for bad and doubtful debts, except in cases where the provisions are maintained in the same currency as the underlying assets);
                  (b) The net forward position in the currency (i.e. all amounts to be received less all amounts to be paid under forward foreign exchange contracts, in the concerned currency, including currency futures and the principal on currency swaps not included in the spot position);
                  (c) Guarantees and similar off-balance-sheet contingent items that are certain to be called and are likely to be irrecoverable where the provisions, if any, are not maintained in the same currency;
                  (d) Net future income/expenses not yet accrued but already fully hedged by forward foreign exchange contracts may be included provided that such anticipatory hedging is part of the conventional bank licensee's formal written policy and the items are included on a consistent basis;
                  (e) Profits (i.e. the net value of income and expense accounts) held in the currency in question;
                  (f) Specific provisions held in the currency in question where the underlying asset is in a different currency, net of assets held in the currency in question where a specific provision is held in a different currency; and
                  (g) The net delta-based equivalent of the total book of foreign currency options (subject to a separately calculated capital charge for gamma and vega as described in Chapter CA-13, alternatively, options and their associated underlying positions are dealt with by one of the other methods described in Chapter CA-13).
                  January 2015

                • CA-11.3.2

                  All assets and liabilities, as described in Paragraph CA-11.3.1, must be included at closing mid-market spot exchange rates. Marked-to-market items must be included on the basis of the current market value of the positions. However, conventional bank licensees which base their normal management accounting on net present values must use the net present values of each position, discounted using current interest rates and valued at current spot rates, for measuring their forward currency and gold positions.

                  January 2015

                • CA-11.3.3

                  Net positions in composite currencies, such as the SDR, may either be broken down into the component currencies according to the quotas in force and included in the net open position calculations for the individual currencies, or treated as a separate currency. In any case, the mechanism for treating composite currencies must be consistently applied.

                  January 2015

                • CA-11.3.4

                  For calculating the net open position in gold, the conventional bank licensee must first express the net position (spot plus forward) in terms of the standard unit of measurement (i.e. ounces or grams) and, then, convert it at the current spot rate into the base currency.

                  January 2015

                • CA-11.3.5

                  Forward currency and gold positions must be valued at current spot market exchange rates. Applying forward exchange rates is inappropriate as it will result in the measured positions reflecting current interest rate differentials, to some extent.

                  January 2015

                • CA-11.3.6

                  Where gold is part of a forward contract (i.e. quantity of gold to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract must be reported as set out in Chapter CA-9 or Section CA-11.1, respectively.

                  January 2015

                • Structural Positions

                  • CA-11.3.7

                    Positions of a structural, i.e. non-dealing, nature as set out below, may be excluded from the calculation of the net open currency positions:

                    (a) Positions are taken deliberately in order to hedge, partially or totally, against the adverse effects of exchange rate movements on the conventional bank licensee's CAR;
                    (b) Positions related to items that are deducted from the conventional bank licensee's capital when calculating its capital base in accordance with the rules and guidelines in this Module, such as investments in non-consolidated subsidiaries; and
                    (c) Retained profits held for payout to parent.
                    January 2015

                  • CA-11.3.7A

                    The CBB will consider approving the exclusion of the above positions for the purpose of calculating the capital requirement, only if the following conditions are met:

                    (a) The conventional bank licensee provides adequate documentary evidence to the CBB which establishes the fact that the positions proposed to be excluded are, indeed, of a structural, i.e. non-dealing, nature and are merely intended to protect the conventional bank licensee's CAR. For this purpose, the CBB may ask for written representations from the conventional bank licensee's management or directors; and
                    (b) Any exclusion of a position is consistently applied, with the treatment of the hedge remaining the same for the life of the associated assets or other items.
                    January 2015

                • Derivatives

                  • CA-11.3.8

                    A currency swap is treated as a combination of a long position in one currency and a short position in the second currency.

                    January 2015

                  • CA-11.3.9

                    There are a number of alternative approaches to the calculation of the foreign exchange risk in options. As stated in Section CA-11.1, with the CBB's prior written approval, a conventional bank licensee may choose to use internal models to measure the options risk. Extra capital charges will apply to those option risks that the conventional bank licensee's internal model does not capture. The standardised framework for the calculation of options risks and the resultant capital charges is described, in detail, in Chapter CA-13. Where, as explained in Paragraph CA-11.3.1, the option delta value is incorporated in the net open position, the capital charges for the other option risks are calculated separately.

                    January 2015

              • CA-11.4 CA-11.4 Calculation of the Overall Net Open Positions

                • CA-11.4.1

                  The net long or short position in each currency is converted, at the spot rate, into the reporting currency. The overall net open position is measured by aggregating the following:

                  (a) The sum of the net short positions or the sum of the net long positions, whichever is greater; plus
                  (b) The net position (short or long) in gold, regardless of sign.
                  January 2015

                • CA-11.4.2

                  Where the conventional bank licensee is assessing its foreign exchange risk on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the conventional bank licensee. In such cases, the internal limit for that branch/subsidiary, in each currency, may be used as a proxy for the positions. The branch/subsidiary limits must be added, without regard to sign, to the net open position in each currency involved. When this simplified approach to the treatment of currencies with marginal operations is adopted, the conventional bank licensee must adequately monitor the actual positions of the branch/subsidiary against the limits, and revise the limits, if necessary, based on the results of the ex-post monitoring.

                  January 2015

              • CA-11.5 CA-11.5 Calculation of the Capital Charge

                • CA-11.5.1

                  The capital charge is 8% of the overall net open position.

                  January 2015

                • CA-11.5.2

                  The table below illustrates the calculation of the overall net open position and the capital charge:

                  January 2015

                • Example of the Calculation of the Foreign Exchange Overall Net Open Position and the Capital Charge

                  • CA-11.5.3

                    GBP EURO CA$ US$ JPY Gold
                    +100 +150 +50 -180 -20 -20
                    +300 -200 20
                    The capital charge is 8% of the higher of either the sum of the net long currency positions or the sum of the net short positions (i.e. 300) and of the net position in gold (i.e. 20) = 320 x 8% = 25.6
                    January 2015

            • CA-12 CA-12 Market Risk — Commodities Risk — (STA)

              • CA-12.1 CA-12.1 Introduction

                • CA-12.1.1

                  This Chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in commodities, including precious metals, but excluding gold (which is treated as a foreign currency according to the methodology explained in Chapter CA-11).

                  January 2015

                • CA-12.1.2

                  The commodities position risk and the capital charges are calculated with reference to the entire business of a conventional bank licensee, i.e., the banking and trading books combined.

                  January 2015

                • CA-12.1.3

                  The price risk in commodities is often more complex and volatile than that associated with currencies and interest rates. Commodity markets may also be less liquid than those for interest rates and currencies and, as a result, changes in supply and demand can have a more dramatic effect on price and volatility. Conventional bank licensees need also to guard against the risk that arises when a short position falls due before the long position. Owing to a shortage of liquidity in some markets, it might be difficult to close the short position and the conventional bank licensee might be "squeezed by the market". All these market characteristics, of commodities, can make price transparency and the effective hedging of risks more difficult.

                  January 2015

                • CA-12.1.4

                  For spot or physical trading, the directional risk arising from a change in the spot price is the most important risk. However, conventional bank licensees applying portfolio strategies involving forward and derivative contracts are exposed to a variety of additional risks, which may well be larger than the risk of a change in spot prices (directional risk). These include:

                  (a) 'Basis risk', i.e., the risk that the relationship between the prices of similar commodities alters through time;
                  (b) 'Interest rate risk', i.e., the risk of a change in the cost of carry for forward positions and options; and
                  (c) 'Forward gap risk', i.e., the risk that the forward price may change for reasons other than a change in interest rates.
                  January 2015

                • CA-12.1.5

                  The capital charges for commodities risk envisaged by the rules within this Chapter are intended to cover the risks identified in Paragraph CA-12.1.4. In addition, however, conventional bank licensees face credit counterparty risk on over-the-counter derivatives, which must be incorporated into their credit risk capital requirements. Furthermore, the funding of commodities positions may well open a conventional bank licensee to interest rate or foreign exchange risk which is captured within the measurement framework set out in Chapters CA-9 and CA-11, respectively.49


                  49 Where a commodity is part of a forward contract (i.e.. a quantity of commodity to be received or to be delivered), any interest rate or foreign exchange risk from the other leg of the contract must be captured, within the measurement framework set out in Chapters CA-9 and CA-11, respectively. However, positions which are purely of a stock financing nature (i.e., a physical stock has been sold forward and the cost of funding has been locked in until the date of the forward sale) may be omitted from the commodities risk-calculation although they will be subject to the interest rate and counterparty risk capital requirements.

                  January 2015

                • CA-12.1.6

                  Conventional bank licensees which have the intention and capability to use internal models for the measurement of their commodities risks and, hence, for the calculation of the capital requirement, must seek the prior written approval of the CBB for those models. The CBB's detailed rules for the recognition and use of internal models are included in Chapter CA-14. It is essential that the internal models methodology captures the directional risk, forward gap and interest rate risks, and the basis risk which are defined in Paragraph CA-12.1.4. It is also particularly important that models take proper account of market characteristics, notably the delivery dates and the scope provided to traders to close out positions.

                  January 2015

                • CA-12.1.7

                  Conventional bank licensees which do not propose to use internal models must adopt either the maturity ladder approach or the simplified approach to calculate their commodities risk and the resultant capital charges. Both these approaches are described in Sections CA-12.3 and CA-12.4, respectively.

                  January 2015

              • CA-12.2 CA-12.2 Calculation of Commodities Positions

                • Netting

                  • CA-12.2.1

                    Conventional bank licensees must first express each commodity position (spot plus forward) in terms of the standard unit of measurement (i.e., barrels, kilograms, grams etc.). Long and short positions in a commodity are reported on a net basis for the purpose of calculating the net open position in that commodity. For markets which have daily delivery dates, any contracts maturing within ten days of one another may be offset. The net position in each commodity is then converted, at spot rates, into the conventional bank licensee's reporting currency.

                    January 2015

                  • CA-12.2.2

                    Positions in different commodities cannot be offset for the purpose of calculating the open positions as described in Paragraph CA-12.2.1 above. However, where two or more sub-categories50 of the same category are, in effect, deliverable against each other, netting between those sub-categories is permitted. Furthermore, if two or more sub-categories of the same category are considered as close substitutes for each other, and minimum correlation of 0.9 between their price movements is clearly established over a minimum period of one year, the conventional bank licensee may, with the prior written approval of the CBB, net positions in those sub-categories. Conventional bank licensees which wish to net positions based on correlations, in the manner discussed above, must satisfy the CBB of the accuracy of the method which it proposes to adopt.


                    50 Commodities can be grouped into clans, families, sub-groups and individual commodities. For example, a clan might be Energy Commodities, within which Hydro-Carbons is a family with Crude Oil being a sub-group and West Texas Intermediate, Arabian Light and Brent being individual commodities.

                    January 2015

                • Derivatives

                  • CA-12.2.3

                    All commodity derivatives and off-balance-sheet positions which are affected by changes in commodity prices must be included in the measurement framework for commodities risks. This includes commodity futures, commodity swaps, and options where the "delta plus" method is used51. In order to calculate the risks, commodity derivatives are converted into notional commodities positions and assigned to maturities as follows:

                    (a) Futures and forward contracts relating to individual commodities must be incorporated in the measurement framework as notional amounts of barrels, kilograms etc., and must be assigned a maturity with reference to their expiry date;
                    (b) Commodity swaps where one leg is a fixed price and the other one is the current market price, must be incorporated as a series of positions equal to the notional amount of the contract, with one position corresponding to each payment on the swap and slotted into the maturity time-bands accordingly. The positions would be long positions if the conventional bank licensee is paying fixed and receiving floating, and short positions if vice versa. (If one of the legs involves receiving/paying a fixed or floating interest rate, that exposure must be slotted into the appropriate repricing maturity band for the calculation of the interest rate risk, as described in Chapter CA-9); and
                    (c) Commodity swaps where the legs are in different commodities must be incorporated in the measurement framework of the respective commodities separately, without any offsetting. Offsetting will only be permitted if the conditions set out in Paragraphs CA-12.2.1 and CA-12.2.2 are met.

                    51 For banks applying other approaches to measure options risks, all Options and the associated underlying instruments must be excluded from both the maturity ladder approach and the simplified approach. The treatment of options is described, in detail, in Chapter CA-13.

                    January 2015

              • CA-12.3 CA-12.3 Maturity Ladder Approach

                • CA-12.3.1

                  A worked example of the maturity ladder approach is set out in Appendix CA-13 and the table in Paragraph CA-12.3.2 illustrates the maturity time-bands of the maturity ladder for each commodity.

                  January 2015

                • CA-12.3.2

                  The steps in the calculation of the commodities risk by the maturity ladder approach are:

                  (a) The net positions in individual commodities, expressed in terms of the standard unit of measurement, are first slotted into the maturity ladder. Physical stocks are allocated to the first time-band. A separate maturity ladder is used for each commodity as defined in Section CA-12.2 earlier in this Chapter. The net positions in commodities are calculated as explained in Section CA-12.2;
                  (b) Long and short positions in each time-band are matched. The sum of the matched long and short positions is multiplied first by the spot price of the commodity, and then by a spread rate of 1.5% for each time-band as set out in the table below. This represents the capital charge in order to capture forward gap and interest rate risk within a time-band (which, together, are sometimes referred to as curvature/spread risk);

                  Time-bands52
                  0 – 1 months
                  1 – 3 months
                  3 – 6 months

                  6 – 12 months
                  1 – 2 years
                  2 – 3 years
                  over 3 years
                  (c) The residual (unmatched) net positions from nearer time-bands are then carried forward to offset opposite positions (i.e. long against short, and vice versa) in time-bands that are further out. However, a surcharge of 0.6% of the net position carried forward is added in respect of each time-band that the net position is carried forward, to recognise that such hedging of positions between different time-bands is imprecise. The surcharge is in addition to the capital charge for each matched amount created by carrying net positions forward, and is calculated as explained in step (b) above; and
                  (d) At the end of step (c) above, there will be either only long or only short positions, to which a capital charge of 15% applies. The CBB recognises that there are differences in volatility between different commodities, but has, nevertheless, decided that one uniform capital charge for open positions in all commodities apply in the interest of simplicity of the measurement, and given the fact that conventional bank licensees normally run rather small open positions in commodities. Conventional bank licensees must submit, in writing, details of their commodities business, to enable the CBB to evaluate whether the models approach should be adopted by the conventional bank licensee, to capture the market risk on this business.

                  52 For instruments, the maturity of which is on the boundary of two maturity time-bands, the instrument must be placed into the earlier maturity band. For example, instruments with a maturity of exactly one year are placed into the 6 to 12 months time-band.

                  January 2015

              • CA-12.4 CA-12.4 Simplified Approach

                • CA-12.4.1

                  By the simplified approach, the capital charge of 15% of the net position, long or short, in each commodity is applied to capture directional risk. Net positions in commodities are calculated as explained in Section CA-12.2.

                  January 2015

                • CA-12.4.2

                  An additional capital charge equivalent to 3% of the conventional bank licensee's gross positions, long plus short, in each commodity is applied to protect the conventional bank licensee against basis risk, interest rate risk and forward gap risk. In valuing the gross positions in commodity derivatives for this purpose, conventional bank licensees must use the current spot price.

                  January 2015

            • CA-13 CA-13 Market Risk — Treatment of Options — (STA)

              • CA-13.1 CA-13.1 Introduction

                • CA-13.1.1

                  It is recognised that the measurement of the price risk of options is inherently a difficult task, which is further complicated by the wide diversity of conventional bank licensees' activities in options. The CBB has decided that the following approaches must be adopted to the measurement of options risks:

                  (a) Conventional bank licensees which solely use purchased options are permitted to use the simplified (carve-out) approach described later in this Chapter; and
                  (b) Conventional bank licensees which also write options must use either the delta-plus (buffer) approach or the scenario approach, or alternatively use a comprehensive risk management model. The CBB's detailed rules for the recognition and use of internal models are included in Chapter CA-14.
                  January 2015

                • CA-13.1.2

                  The scenario approach and the internal models approach are generally regarded as more satisfactory for managing and measuring options risk, as they assess risk over a range of outcomes rather than focusing on the point estimate of the 'Greek' risk parameters as in the delta-plus approach. The more significant the level and/or complexity of the conventional bank licensee's options trading activities, the more the conventional bank licensee will be expected to use a sophisticated approach to the measurement of options risks. The CBB will monitor the conventional bank licensees' options trading activities, and the adequacy of the risk measurement framework adopted.

                  January 2015

                • CA-13.1.3

                  Where written option positions are hedged by perfectly matched long positions in exactly the same options, no capital charge for market risk is required in respect of those matched positions.

                  January 2015

              • CA-13.2 CA-13.2 Simplified Approach (Carve-Out)

                • CA-13.2.1

                  In the simplified approach, positions for the options and the associated underlying (hedges), cash or forward, are entirely omitted from the calculation of capital charges by the standardised methodology and are, instead, "carved out" and subject to separately calculated capital charges that incorporate both general market risk and specific risk. The capital charges thus generated are then added to the capital charges for the relevant risk category, i.e., interest rate related instruments, equities, foreign exchange and commodities as described in Chapters CA-9, CA-10, CA-11 and CA-12 respectively.

                  January 2015

                • CA-13.2.2

                  The capital charges for the carved out positions are as set out in the table below. As an example of how the calculation would work, if a conventional bank licensee holds 100 shares currently valued at $ 10 each, and also holds an equivalent put option with a strike price of $11, the capital charge would be as follows:
                  [$ 1,000 x 16%53] minus [($ 11 – $ 10)54 x 100] = $ 60

                  A similar methodology applies to options whose underlying is a foreign currency, an interest rate related instrument or a commodity.


                  53 8% specific risk plus 8% general market risk.

                  54 The amount the option is "in the money".

                  January 2015

                • Simplified Approach: Capital Charges

                  Position Treatment
                  Long cash and long put

                  or


                  Short cash and long call (i.e., hedged positions)
                  The capital charge is:

                  [Market value of underlying instrument55 x Sum of specific and general market risk charges56 for the underlying] minus [Amount, if any, the option is in the money57]

                  The capital charge calculated as above is bounded at zero, i.e., it cannot be a negative number.
                  Long call

                  or


                  Long put
                  (i.e., naked option positions)
                  The capital charge is the lesser of:
                  i) Market value of the underlying instrument x Sum of specific and general market risk charges for the underlying; and
                  ii) Market value of the option58.

                  55 In some cases such as foreign exchange, it may be unclear which side is the "underlying instrument"; this must be taken to be the asset which would be received if the option were exercised. In addition, the nominal value must be used for items where the market value of the underlying instrument could be zero, e.g., caps and floors, swaptions etc.

                  56 Some options (e.g., where the underlying is an interest rate, a currency or a commodity) bear no specific risk, but specific risk is present in the case of options on certain interest rate related instruments (e.g., options on a corporate debt security or a corporate bond index — see Chapter CA-9 for the relevant capital charges), and in the case of options on equities and stock indices (see Chapter CA-10 for the relevant capital charges). The capital charge for currency options is 8% and for options on commodities is 15%.

                  57 For options with a residual maturity of more than six months, the strike price must be compared with the forward, not the current, price. A bank unable to do this must take the "in the money" amount to be zero.

                  58 Where the position does not fall within the trading book options on certain foreign exchange and commodities positions not belonging to the trading book), it is acceptable to use the book value instead of the market value.

                  January 2015

              • CA-13.3 CA-13.3 Delta-Plus Method (Buffer Approach)

                • CA-13.3.1

                  Conventional bank licensees which write options are allowed to include delta-weighted option positions within the standardised methodology set out in Chapters CA-9 through CA-12. Each option must be reported as a position equal to the market value of the underlying multiplied by the delta. The delta must be calculated by an adequate model with appropriate documentation of the process and controls, to enable the CBB to review such models, if considered necessary. A worked example of the delta-plus method is set out in Appendix CA-14.

                  January 2015

                • CA-13.3.2

                  Since delta does not sufficiently cover the risks associated with options positions, there will be additional capital buffers to cover gamma (which measures the rate of change of delta) and vega (which measures the sensitivity of the value of an option with respect to a change in volatility), in order to calculate the total capital charge. The gamma and vega buffers must be calculated by an adequate exchange model or the conventional bank licensee's proprietary options pricing model, with appropriate documentation of the process and controls, to enable the CBB to review such models, if considered necessary.

                  January 2015

                • Treatment of Delta

                  • CA-13.3.3

                    The treatment of the delta-weighted positions, for the calculation of the capital charges arising from delta risk, is summarised in Paragraphs CA-13.3.4 to CA-13.3.9.

                    January 2015

                • Where the Underlying is a Debt Security or an Interest Rate

                  • CA-13.3.4

                    The delta-weighted option positions are slotted into the interest rate time-bands as set out in Chapter CA-9. A two-legged approach must be used as for other derivatives, as explained in Chapter CA-9, requiring one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures. A few examples to elucidate the two-legged treatment are set out below:

                    (a) A bought call option on a June three-month interest rate future will, in April, be considered, on the basis of its delta-equivalent value, to be a long position with a maturity of five months and a short position with a maturity of two months;
                    (b) A written option with the same underlying as in (a) above, will be included in the measurement framework as a long position with a maturity of two months and a short position with a maturity of five months; and
                    (c) A two months call option on a bond future where delivery of the bond takes place in September will be considered in April, as being long the bond and short a five months deposit, both positions being delta-weighted.
                    January 2015

                  • CA-13.3.5

                    Floating rate instruments with caps or floors are treated as a combination of floating rate securities and a series of European-style options. For example, the holder of a three-year floating rate bond indexed to six-month LIBOR with a cap of 10% must treat it as:

                    (a) A debt security that reprices in six months; and
                    (b) A series of five written call options on an FRA with a reference rate of 10%, each with a negative sign at the time the underlying FRA takes effect and a positive sign at the time the underlying FRA matures.
                    January 2015

                  • CA-13.3.6

                    The rules applying to closely matched positions, set out in Paragraph CA-9.8.2, also apply in this respect.

                    January 2015

                • Where the Underlying is an Equity Instrument

                  • CA-13.3.7

                    The delta-weighted positions are incorporated in the measure of market risk described in Chapter CA-10. For purposes of this calculation, each national market is treated as a separate underlying.

                    January 2015

                • Options on Foreign Exchange and Gold Positions

                  • CA-13.3.8

                    The net delta-based equivalent of the foreign currency and gold options are incorporated in the measurement of the exposure for the respective currency or gold position, as described in Chapter CA-11.

                    January 2015

                • Options on Commodities

                  • CA-13.3.9

                    The delta-weighted positions are incorporated in the measurement of the commodities risk by the simplified approach or the maturity ladder approach, as described in Chapter CA-12.

                    January 2015

                • Calculation of the Gamma and Vega Buffers

                  • CA-13.3.10

                    As explained in Paragraph CA-13.3.2, in addition to the above capital charges to cover delta risk, conventional bank licensees are required to calculate additional capital charges to cover the gamma and vega risks. The additional capital charges are calculated as follows:

                    Gamma

                    (a) For each individual option position (including hedge positions), a gamma impact is calculated according to the following formula derived from the Taylor series expansion:

                    Gamma impact = 0.5 x Gamma x VU

                    where VU = variation of the underlying of the option, calculated as in (b) below;
                    (b) VU is calculated as follows:
                    (i) For interest rate options59, where the underlying is a bond, the market value of the underlying is multiplied by the risk weights set out in Section CA-9.4. An equivalent calculation is carried out where the underlying is an interest rate, based on the assumed changes in yield as set out in the table in Section CA-9.5;
                    (ii) For options on equities and equity indices, the market value of the underlying is multiplied by 8%;
                    (iii) For foreign exchange and gold options, the market value of the underlying is multiplied by 8%; and
                    (iv) For commodities options, the market value of the underlying is multiplied by 15%;
                    (c) For the purpose of the calculation of the gamma buffer, the following positions are treated as the same underlying:
                    (i) For interest rates, each time-band as set out in the table in Section CA-9.4. Positions must be slotted into separate maturity ladders by currency. Conventional bank licensees using the duration method must use the time-bands as set out in the table in Section CA-9.5;
                    (ii) For equities and stock indices, each individual national market;
                    (iii) For foreign currencies and gold, each currency pair and gold; and
                    (iv) For commodities, each individual commodity as defined in Section CA-12.2;
                    (d) Each option on the same underlying will have a gamma impact that is either positive or negative. These individual gamma impacts are summed, resulting in a net gamma impact for each underlying that is either positive or negative. Only those net gamma impacts that are negative are included in the capital calculation;
                    (e) The total gamma capital charge is the sum of the absolute value of the net negative gamma impacts calculated for each underlying as explained in (d) above;

                    Vega

                    (f) For volatility risk (vega), conventional bank licensees are required to calculate the capital charges by multiplying the sum of the vegas for all options on the same underlying, as defined above, by a proportional shift in volatility of ±25%; and
                    (g) The total vega capital charge is the sum of the absolute value of the individual vega capital charges calculated for each underlying.
                    January 2015

                    59 For interest rate and equity options, the present set of rules do not attempt to capture specific risk when calculating gamma capital Charges. See Section CA-13.4 for an explanation of the CBB's views on this subject.

                  • CA-13.3.11

                    The capital charges for delta, gamma and vega risks described in Paragraphs CA-13.3.1 through CA-13.3.10 are in addition to the specific risk capital charges which are determined separately by multiplying the delta-equivalent of each option position by the specific risk weights set out in Chapters CA-9 through CA-12.

                    January 2015

                  • CA-13.3.12

                    To summarise, capital requirements for, say OTC options, applying the delta-plus method are as follows:

                    (a) Counterparty risk capital charges (on purchased options only), calculated in accordance with the credit risk rules (see also Appendix CA-2); PLUS
                    (b) Specific risk capital charges (calculated as explained in Paragraph CA-13.3.11); PLUS
                    (c) Delta risk capital charges (calculated as explained in Paragraphs CA-13.3.3 through CA-13.3.9); PLUS
                    (d) Gamma and vega capital buffers (calculated as explained in Paragraph CA-13.3.10).
                    January 2015

              • CA-13.4 CA-13.4 Scenario Approach

                • CA-13.4.1

                  As stated in Section CA-13.1, conventional bank licensees which have a significant level of options trading activities, or have complex options trading strategies, must use more sophisticated methods for measuring and monitoring the options risks. Conventional bank licensees with the appropriate capability will be permitted, with the prior approval of the CBB, to base the market risk capital charge for options portfolios and associated hedging positions on scenario matrix analysis. Before giving its approval, the CBB will closely review the accuracy of the analysis that is constructed. Furthermore, like in the case of internal models, the conventional bank licensees' use of scenario analysis as part of the standardised methodology will also be subject to external validation, and to those of the qualitative standards listed in Chapter CA-14 which are appropriate given the nature of the business.

                  January 2015

                • CA-13.4.2

                  The scenario matrix analysis involves specifying a fixed range of changes in the option portfolio's risk factors and calculating changes in the value of the option portfolio at various points along this "grid" or "matrix". For the purpose of calculating the capital charge, the conventional bank licensee must revalue the option portfolio using matrices for simultaneous changes in the option's underlying rate or price and in the volatility of that rate or price. A different matrix is set up for each individual underlying as defined in Section CA-13.3. As an alternative, in respect of interest rate options, conventional bank licensees which are significant traders in such options are permitted to base the calculation on a minimum of six sets of time- bands. When applying this alternative method, not more than three of the time-bands as defined in Chapter CA-9 must be combined into any one set.

                  January 2015

                • CA-13.4.3

                  The first dimension of the matrix involves a specified range of changes in the option's underlying rate or price. The CBB has set the range, for each risk category, as follows:

                  (a) Interest rate related instruments — The range for interest rates is consistent with the assumed changes in yield set out in Section CA-9.5. Those conventional bank licensees applying the alternative method of grouping time-bands into sets, as explained in Paragraph CA-13.4.2, must use, for each set of time-bands, the highest of the assumed changes in yield applicable to the individual time-bands in that group. If, for example, the time-bands 3 to 4 years, 4 to 5 years and 5 to 7 years are combined, the highest assumed change in yield of these three bands would be 0.75 which would be applicable to that set;
                  (b) For equity instruments, the range is ±8%;
                  (c) For foreign exchange and gold, the range is ±8%; and
                  (d) For commodities, the range is ±15%.

                  For all risk categories, at least seven observations (including the current observation) must be used to divide the range into equally spaced intervals.

                  January 2015

                • CA-13.4.4

                  The second dimension of the matrix entails a change in the volatility of the underlying rate or price. A single change in the volatility of the underlying rate or price equal to a shift in volatility of ±25% is applied.

                  January 2015

                • CA-13.4.5

                  The CBB will closely monitor the need to reset the parameters for the amounts by which the price of the underlying instrument and volatility must be shifted to form the rows and columns of the scenario matrix. The parameters set, as above, only reflect general market risk (see Paragraphs CA-13.4.10 to CA-13.4.12).

                  January 2015

                • CA-13.4.6

                  After calculating the matrix, each cell contains the net profit or loss of the option and the underlying hedge instrument. The general market risk capital charge for each underlying is then calculated as the largest loss contained in the matrix.

                  January 2015

                • CA-13.4.7

                  In addition to the capital charge calculated as above, the specific risk capital charge is determined separately by multiplying the delta-equivalent of each option position by the specific risk weights set out in Chapters CA-9 through CA-12.

                  January 2015

                • CA-13.4.8

                  To summarise, capital requirements for, say OTC options, applying the scenario approach are as follows:

                  (a) Counterparty risk capital charges (on purchased options only), calculated in accordance with the credit risk rules (see also Appendix CA-2); PLUS
                  (b) Specific risk capital charges (calculated as explained in Paragraph CA-13.4.7); PLUS
                  (c) Directional and volatility risk capital charges (i.e., the worst case loss from a given scenario matrix analysis).
                  January 2015

                • CA-13.4.9

                  Conventional bank licensees doing business in certain classes of complex exotic options (e.g. barrier options involving discontinuities in deltas etc.), or in options at the money that are close to expiry, are required to use either the scenario approach or the internal models approach, both of which can accommodate more detailed revaluation approaches. The CBB expects the concerned conventional bank licensees to work with it closely to produce an agreed method, within the framework of these rules. If a conventional bank licensee uses scenario matrix analysis, it must be able to demonstrate that no substantially larger loss could fall between the nodes.

                  January 2015

                • CA-13.4.10

                  In drawing up the delta-plus and the scenario approaches, the CBB's present set of rules do not attempt to capture specific risk other than the delta-related elements (which are captured as explained in Paragraphs CA-13.4.7 and CA-13.4.11). The CBB recognises that introduction of those other specific risk elements will make the measurement framework much more complex. On the other hand, the simplifying assumptions used in these rules will result in a relatively conservative treatment of certain options positions.

                  January 2015

                • CA-13.4.11

                  In addition to the options risks described earlier in this Chapter, the CBB is conscious of the other risks also associated with options, e.g., rho or interest rate risk (the rate of change of the value of the option with respect to the interest rate) and theta (the rate of change of the value of the option with respect to time). While not proposing a measurement system for those risks at present, the CBB expects conventional bank licensees undertaking significant options business, at the very least, to monitor such risks closely. Additionally, conventional bank licensees are permitted to incorporate rho into their capital calculations for interest rate risk, if they wish to do so.

                  January 2015

                • CA-13.4.12

                  The CBB will closely review the treatment of options for the calculation of market risk capital charges, particularly in the light of the aspects described in Paragraphs CA-13.4.10 and CA-13.4.11.

                  January 2015

            • CA-14 CA-14 Market Risk — Use of Internal Models

              • CA-14.1 CA-14.1 Introduction

                • CA-14.1.1

                  As stated in Chapter CA-1, as an alternative to the standardised approach to the measurement of market risks (which is described in Chapters CA-9 through CA-13), and subject to the explicit prior approval of the CBB, conventional bank licensees will be allowed to use risk measures derived from their own internal models.

                  January 2015

                • CA-14.1.2

                  This Chapter describes the seven sets of conditions that should be met before a conventional bank licensee is allowed to-use the internal models approach, namely:

                  (a) General criteria regarding the adequacy of the risk management system;
                  (b) Qualitative standards for internal oversight of the use of models, notably by senior management;
                  (c) Guidelines for specifying an appropriate set of market risk factors (i.e., the market rates and prices that affect the value of a conventional bank licensee's positions);
                  (d) Quantitative standards setting out the use of common minimum statistical parameters for measuring risk;
                  (e) Guidelines for stress testing;
                  (f) Validation procedures for external oversight of the use of models; and
                  (g) Rules for conventional bank licensees which use a mixture of the internal models approach and the standardised approach.
                  January 2015

                • CA-14.1.3

                  The standardised methodology, described in Chapters CA-9 through CA-13, uses a "building-block" approach in which the specific risk and the general market risk arising from debt and equity positions are calculated separately. The focus of most internal models is a conventional bank licensee's general market risk exposure, typically leaving specific risk (i.e., exposures to specific issuers of debt securities and equities) to be measured largely through separate credit risk measurement systems. Conventional bank licensees applying models are subject to separate capital charges for the specific risk not captured by their models, which must be calculated by the standardised methodology.

                  January 2015

                • CA-14.1.4

                  While the models recognition criteria described in this chapter are primarily intended for comprehensive Value-at-Risk (VaR) models, nevertheless, the same set of criteria will be applied, to the extent that it is appropriate, to other pre-processing or valuation models the output of which is fed into the standardised measurement system, e.g., interest rate sensitivity models (from which the residual positions are fed into the duration ladders) and option pricing models (for the calculation of the delta, gamma and vega sensitivities).

                  January 2015

                • CA-14.1.5

                  As a number of strict conditions are required to be met before internal models can be recognised by the CBB, including external validation. Conventional bank licensees that are contemplating applying internal models must submit their detailed written proposals for the CBB's approval.

                  January 2015

                • CA-14.1.6

                  As the model approval process will encompass a review of both the model and its operating environment, it is not the case that a commercially produced model which is recognised for one conventional bank licensee will automatically be recognised for another bank.

                  January 2015

              • CA-14.2 CA-14.2 General Criteria

                • CA-14.2.1

                  The CBB will give its approval for the use of internal models to measure market risks only if, in addition to the detailed requirements described later in this chapter, it is satisfied that the following general criteria are met:

                  (a) That the conventional bank licensee's risk management system is conceptually sound and is implemented with integrity;
                  (b) That the conventional bank licensee has, in the CBB's view, sufficient numbers of staff skilled in the use of sophisticated models not only in the trading area but also in the risk control, audit and the back office areas;
                  (c) That the conventional bank licensee's models have, in the CBB's judgement, a proven track record of reasonable accuracy in measuring risk. The CBB recognises that the use of internal models is, for most banks in Bahrain, a relatively new development and, therefore, it is difficult to establish a track record of reasonable accuracy. The CBB, therefore, will require a period of initial monitoring and live testing of a conventional bank licensee's internal model before it is used for supervisory capital purposes; and
                  (d) That the conventional bank licensee regularly conducts stress tests as outlined in Section CA-14.7 and conducts back-testing as described in Section CA-14.6.
                  January 2015

              • CA-14.3 CA-14.3 Qualitative Standards

                • CA-14.3.1

                  In order to ensure that conventional bank licensees using models have market risk management systems that are conceptually sound and implemented with integrity, the CBB has set the following qualitative criteria that conventional bank licensees are required to meet before they are permitted to use the models-based approach for calculating capital charge. Apart from influencing the CBB's decision to permit a conventional bank licensee to use internal models, where such permission is granted, the extent to which the conventional bank licensee meets the qualitative criteria will further influence the level at which the CBB will set the multiplication factor for that conventional bank licensee, referred to in Section CA-14.5. Only those conventional bank licensees whose models, in the CBB's judgement, are in full compliance with the qualitative criteria will be eligible for application of the minimum multiplication factor of 3. The qualitative criteria include the following:

                  (a) The conventional bank licensee must have an independent risk management unit that is responsible for the design and implementation of the conventional bank licensee's risk management system. The unit must produce and analyse daily reports on the output of the conventional bank licensee's risk measurement model, including an evaluation of the relationship between the measures of risk exposure and the trading limits. This unit must be independent from the business trading units and must report directly to the senior management of the conventional bank licensee;
                  (b) The independent risk management unit must conduct a regular back-testing programme, i.e. an ex-post comparison of the risk measure generated by the model against the actual daily changes in portfolio value over longer periods of time, as well as hypothetical changes based on static positions. See CA-14.5.1 (j);
                  (c) The unit must also conduct the initial and on-going validation of the internal model. Further guidance on validation of internal models is given in Section CA-14.12;
                  (d) The board of directors and senior management of the conventional bank licensee must be actively involved in the risk management process and must regard such process as an essential aspect of the business to which significant resources need to be devoted. In this regard, the daily reports prepared by the independent risk management unit must be reviewed by a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual traders and reductions in the conventional bank licensee's overall risk exposure;
                  (e) The conventional bank licensee's internal model must be closely integrated into the day-to-day risk management process of the conventional bank licensee. Its output must, accordingly, be an integral part of the process of planning, monitoring and controlling the conventional bank licensee's market risk profile;
                  (f) The risk measurement system must be used in conjunction with the internal trading and exposure limits. In this regard, the trading limits must be related to the conventional bank licensee's risk measurement model in a manner that is consistent over time and that is well-understood by both traders and senior management;
                  (g) A routine and rigorous programme of stress testing, along the general lines set out in Section CA-14.6, must be in place as a supplement to the risk analysis based on the day-to-day output of the conventional bank licensee's s risk measurement model. The results of stress testing must be reviewed periodically by senior management and must be reflected in the policies and limits set by management and the board of directors. Where stress tests reveal particular vulnerability to a given set of circumstances, prompt steps must be taken to manage those risks appropriately (e.g., by hedging against that outcome or reducing the size of the conventional bank licensee's exposures);
                  (h) The conventional bank licensee must have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operation of the risk measurement system. The conventional bank licensee's risk measurement system must be well documented, for example, through a risk management manual that describes the basic principles of the risk management system and that provides an explanation of the empirical techniques used to measure market risk; and
                  (i) An independent review of the risk measurement system must be carried out regularly in the conventional bank licensee's own internal auditing process. This review must include both the activities of the business trading units and of the independent risk management unit. A review, by the internal auditor, of the overall risk management process must take place at regular intervals (ideally not less than once every six months) and must specifically address, at a minimum:
                  (i) The adequacy of the documentation of the risk management system and process;
                  (ii) The organisation of the risk management unit;
                  (iii) The integration of market risk measures into daily risk management;
                  (iv) The approval process for risk pricing models and valuation systems used by front- and back-office personnel;
                  (v) The validation of any significant changes in the risk measurement process;
                  (vi) The scope of market risks captured by the risk measurement model;
                  (vii) The integrity of the management information system;
                  (viii) The accuracy and completeness of position data;
                  (ix) The verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;
                  (x) The accuracy and appropriateness of volatility and correlation assumptions;
                  (xi) The accuracy of valuation and risk transformation calculations; and
                  (xii) The verification of the model's accuracy through frequent back-testing as described in (b) above and in Appendix CA-15.
                  January 2015

              • CA-14.4 CA-14.4 Specification of Market Risk Factors

                • CA-14.4.1

                  An important part of a conventional bank licensee's internal market risk measurement system is the specification of an appropriate set of market risk factors, i.e. the market rates and prices that affect the value of the conventional bank licensee's trading positions. The risk factors contained in a market risk measurement system must be sufficient to capture the risks inherent in the conventional bank licensee's portfolio of on- and off-balance-sheet trading positions. Conventional bank licensees must follow the CBB's guidelines, set out below, for specifying the risk factors for their internal models. Where a conventional bank licensee has difficulty in specifying the risk factors for any currency or market within a risk category, in accordance with the following guidelines, the conventional bank licensee must immediately contact the CBB. The CBB will review and discuss the specific circumstances of each such case with the concerned bank, and will decide alternative methods of calculating the risks which are not captured by the conventional bank licensee's model:

                  (a) Factors that are deemed relevant for pricing must be included as risk factors in the value-at-risk model. Where a risk factor is incorporated in a pricing model but not in the value-at-risk model, the conventional bank licensees must justify this omission to the satisfaction of the CBB. In addition, the value-at-risk model must capture nonlinearities for options and other relevant products (e.g. mortgage backed securities, tranched exposures or n-th-to-default credit derivatives), as well as correlation risk and basis risk (e.g. between credit default swaps and bonds). Moreover, the CBB has to be satisfied that proxies are used which show a good track record for the actual position held (i.e. an equity index for a position in an individual stock).
                  (b) For interest rates:
                  (i) There must be a set of risk factors corresponding to interest rates in each currency in which the conventional bank licensee has interest-rate-sensitive on- or off-balance-sheet positions;
                  (ii) The risk measurement system must model the yield curve using one of a number of generally accepted approaches, for example, by estimating forward rates of zero coupon yields. The yield curve must be divided into various maturity segments in order to capture variation in the volatility of rates along the yield curve; there will typically be one risk factor corresponding to each maturity segment. For material exposures to interest rate movements in the major currencies and markets, conventional bank licensees must model the yield curve using a minimum of six factors. However, the number of risk factors used must ultimately be driven by the nature of the conventional bank licensee's trading strategies. For instance, a conventional bank licensee which has a portfolio of various types of securities across many points of the yield curve and which engages in complex arbitrage strategies would require a greater number of risk factors to capture interest rate risk accurately;
                  (iii) The risk measurement system must incorporate separate risk factors to capture spread risk (e.g. between bonds and swaps). A variety of approaches may be used to capture the spread risk arising from less than perfectly correlated movements between government and other fixed-income interest rates, such as specifying a completely separate yield curve for non-government fixed-income instruments (for instance, swaps or municipal securities) or estimating the spread over government rates at various points along the yield curve;
                  (c) For exchange rates (which includes gold):
                  (i) The risk measurement system should incorporate risk factors corresponding to the individual foreign currencies in which the conventional bank licensee's positions are denominated. Since the value-at-risk figure calculated by the risk measurement system will be expressed in the conventional bank licensee's reporting currency, any net position denominated in a currency other than the reporting currency will introduce a foreign exchange risk. Thus, there must be risk factors corresponding to the exchange rate between the reporting currency and each other currency in which the conventional bank licensee has a significant exposure;
                  (d) For equity prices:
                  (i) There must be risk factors corresponding to each of the equity markets in which the conventional bank licensee holds significant positions;
                  (ii) At a minimum, there must be a risk factor that is designed to capture market-wide movements in equity prices (e.g., a market index). Positions in individual securities or in sector indices may be expressed in "beta-equivalents" relative to this market-wide index;
                  (iii) A somewhat more detailed approach would be to have risk factors corresponding to various sectors of the overall equity market (for instance, industry sectors or cyclical and non-cyclical sectors). As above, positions in individual stocks within each sector could be expressed in "beta-equivalents" relative to the sector index;
                  (iv) The most extensive approach would be to have risk factors corresponding to the volatility of individual equity issues; and
                  (v) The sophistication and nature of the modelling technique for a given market must correspond to the conventional bank licensee's exposure to the overall market as well as its concentration in individual equity issues in that market; and
                  (e) For commodity prices:
                  (i) There must be risk factors corresponding to each of the commodity markets in which the conventional bank licensee holds significant positions (also see Section CA-12.1);
                  (ii) For conventional bank licensees with relatively limited positions in commodity-based instruments, a straightforward specification of risk factors is acceptable. Such a specification would likely entail one risk factor for each commodity price to which the conventional bank licensee is exposed. In cases where the aggregate positions are reasonably small, it may be acceptable to use a single risk factor for a relatively broad sub-category of commodities (for instance, a single risk factor for all types of oil). However, conventional bank licensees which propose to use this simplified approach must obtain the prior written approval of the CBB; and
                  (iii) For more active trading, the model must also take account of variation in the "convenience yield" between derivatives positions such as forwards and swaps and cash positions in the commodity.
                  January 2015

              • CA-14.5 CA-14.5 Quantitative Standards

                • CA-14.5.1

                  The following minimum quantitative standards apply for the purpose of calculating the capital charge:

                  (a) "Value-at-risk" must be computed on a daily basis;
                  (b) In calculating the value-at-risk, a 99th percentile, one-tailed confidence interval must be used;
                  (c) In calculating the value-at-risk, an instantaneous price shock equivalent to a 10-day movement in prices must be used, i.e., the minimum "holding period" is ten trading days. Conventional bank licensees may use value-at-risk numbers calculated according to shorter holding periods scaled up to ten days, for example, by the square root of time (for the treatment of options, also see (h) below). A conventional bank licensee using this approach must justify the reasonableness of its approach to the satisfaction of the CBB during the annual model review process performed by the external auditor;
                  (d) The minimum historical observation period (sample period) for calculating value-at-risk is one year. For conventional bank licensees which use a weighting scheme or other methods for the historical observation period, the "effective" observation period must be at least one year (i.e., the weighted average time lag of the individual observations cannot be less than 6 months), and the method results in a capital charge at least equivalent to a one year observation period.

                  The CBB may, as an exceptional case, require a conventional bank licensee to calculate its value-at-risk applying a shorter observation period if, in the CBB's judgement, this is justified by a significant upsurge in price volatility;
                  (e) Conventional bank licensees must update their data sets no less frequently than once every week and must also reassess them whenever market prices are subject to material changes. The updating process must be flexible enough to allow for more frequent updates;
                  (f) No particular type of model is prescribed by the CBB. So long as each model used captures all the material risks run by the conventional bank licensee, as set out in Section CA-14.4, conventional bank licensees is free to use models based, for example, on variance-covariance matrices, historical simulations, or Monte Carlo simulations;
                  (g) Conventional bank licensees must have discretion to recognise empirical correlations within broad risk categories (i.e., interest rates, exchange rates, equity prices and commodity prices, including related options volatilities in each risk factor category). Conventional bank licensees are not permitted to recognise empirical correlations across broad risk categories without the prior approval of the CBB. Conventional bank licensees may apply, on a case-by-case basis, for empirical correlations across broad risk categories to be recognised by the CBB, subject to its satisfaction with the soundness and integrity of the conventional bank licensee's system for measuring those correlations;
                  (h) Conventional bank licensees' models must accurately capture the unique risks associated with options within each of the broad risk categories. The following criteria apply to the measurement of options risk:
                  (i) Conventional bank licensees' models must capture the non-linear price characteristics of options positions;
                  (ii) Conventional bank licensees must ultimately move towards the application of a full 10-day price shock to options positions or positions that display option-like characteristics. In the interim period, conventional bank licensees may adjust their capital measure for options risk through other methods, e.g., periodic simulations or stress testing;
                  (iii) Each conventional bank licensee's risk measurement system must have a set of risk factors that captures the volatilities of the rates and prices underlying the option positions, i.e., vega risk. Conventional bank licensees with relatively large and/or complex options portfolios must have detailed specifications of the relevant volatilities. This means that conventional bank licensees must measure the volatilities of options positions broken down by different maturities;
                  (i) In addition, a conventional bank licensee must calculate a 'stressed value-at-risk' measure. This measure is intended to replicate a value-at-risk calculation that would be generated on the conventional bank licensee's current portfolio if the relevant market factors were experiencing a period of stress; and must therefore be based on the 10-day, 99th percentile, one-tailed confidence interval value-at-risk measure of the current portfolio, with model inputs calibrated to historical data from a continuous 12-month period of significant financial stress relevant to the conventional bank licensee's portfolio. The period used must be approved by the CBB and regularly reviewed. As an example, for many portfolios, a 12-month period relating to significant losses in 2007/2008 would adequately reflect a period of such stress, although other periods relevant to the current portfolio must be considered by the conventional bank licensee;
                  (j) As no particular model is prescribed under Subparagraph (f), different techniques might need to be used to translate the model used for value-at-risk into one that delivers a stressed value-at-risk. For example, conventional bank licensees must consider applying anti-thetic data, or applying absolute rather than relative volatilities to deliver an appropriate stressed value-at-risk. The stressed value-at-risk must be calculated at least weekly;
                  (k) Each conventional bank licensee must meet, on a daily basis, a capital requirement expressed as the sum of:
                  (i) The higher of (1) its previous day's value-at-risk number measured according to the parameters specified in this Section (VaRt-1); and (2) an average of the daily value-at-risk measures on each of the preceding sixty business days (VaR avg), multiplied by a multiplication factor (mc); plus.
                  (ii) The higher of (1) its latest available stressed-value-at-risk number calculated according to (i) above (sVaRt-1); and (2) an average of the stressed value-at-risk numbers calculated according to (i) above over the preceding sixty business days (sVaRavg), multiplied by a multiplication factor (ms).

                  Therefore, the capital requirement (c) is calculated according to the following formula:

                  c =max {VaRt-1; mc · VaRavg} + max { sVaRt-1; ms · sVaRavg};
                  (l) The multiplication factors mc and ms is set by the CBB, separately for each individual conventional bank licensee, on the basis of the CBB's assessment of the quality of the conventional bank licensee's risk management system, subject to an absolute minimum of 3 for mc and an absolute minimum of 3 for ms. Conventional bank licensees must add to these factors set by the CBB, a "plus" directly related to the ex-post performance of the model, thereby introducing a built-in positive incentive to maintain the predictive quality of the model. The plus will range from 0 to 1 based on the outcome of the conventional bank licensee's back-testing. The back-testing results applicable for calculating the plus are based on value-at-risk only and not stressed value-at-risk. If the back-testing results are satisfactory and the conventional bank licensee meets all of the qualitative standards referred in Section CA-14.3 above, the plus factor could be zero. Appendix 15 presents in detail the approach to be followed for back-testing and the plus factor. Conventional bank licensees must strictly comply with this approach; and
                  (m) As stated earlier in Section CA-14.1, conventional bank licensees applying models are also subject to a capital charge to cover specific risk (as defined under the standardised approach) of interest rate related instruments and equity instruments. The manner in which the specific risk capital charge is to be calculated is set out in Section CA-14.10.
                  January 2015

              • CA-14.6 CA-14.6 Back-Testing

                • CA-14.6.1

                  The contents of this Section outline the key requirements as set out in Appendix 15. The appendix presents in detail the approach to be followed for back-testing by the conventional bank licensees.

                  January 2015

                • Key Requirements

                  • CA-14.6.2

                    The contents of this Section lay down recommendations for carrying out back-testing procedures in order to determine the accuracy and robustness of conventional bank licensee's internal models for measuring market risk capital requirements. These back-testing procedures typically consist of a periodic comparison of the conventional bank licensee's daily value-at-risk measures with the subsequent daily profit or loss ("trading outcome"). The procedure involves calculating and identifying the number of times over the prior 250 business days that observed daily trading losses exceed the conventional bank licensee's one-day, 99% confidence level VaR estimate (so-called "exceptions").

                    January 2015

                  • CA-14.6.3

                    Based on the number of exceptions identified from the back-testing procedures, the conventional bank licensees will be classified into three exception categories for the determination of the "scaling factor" to be applied to the conventional bank licensees' market risk measure generated by its internal models. The three categories, termed as zones and distinguished by colours into a hierarchy of responses, are listed below:

                    (a) Green zone;
                    (b) Yellow zone; and
                    (c) Red zone.
                    January 2015

                  • CA-14.6.4

                    The green zone corresponds to back-testing results that do not themselves suggest a problem with the quality or accuracy of a conventional bank licensee's internal model. The yellow zone encompasses results that do raise questions in this regard, but where such a conclusion is not definitive. The red zone indicates a back-testing result that almost certainly indicates a problem with a conventional bank licensee's risk model.

                    January 2015

                  • CA-14.6.5

                    The corresponding "scaling factors" applicable to conventional bank licensees falling into respective zones based on their back-testing results are shown in Table 2 of Appendix CA-15.

                    January 2015

              • CA-14.7 CA-14.7 Stress Testing

                • CA-14.7.1

                  Conventional bank licensees that use the internal models approach for calculating market risk capital requirements must have in place a rigorous and comprehensive stress testing programme. Stress testing to identify events or influences that could greatly impact the conventional bank licensee is a key component of a conventional bank licensee's assessment of its capital position.

                  January 2015

                • CA-14.7.2

                  Conventional bank licensees' stress scenarios must cover a range of factors that can create extraordinary losses or gains in trading portfolios, or make the control of risk in those portfolios very difficult. These factors include low-probability events in all major types of risks, including the various components of market, credit and operational risks. Stress scenarios must shed light on the impact of such events on positions that display both linear and non-linear characteristics (i.e., options and instruments that have option-like characteristics).

                  January 2015

                • CA-14.7.3

                  Conventional bank licensees' stress tests must be both of a quantitative and qualitative nature, incorporating both market risk and liquidity aspects of market disturbances. Quantitative criteria must identify plausible stress scenarios to which conventional bank licensees could be exposed. Qualitative criteria must emphasise that two major goals of stress testing are to evaluate the capacity of the conventional bank licensee's capital to absorb potential large losses and to identify steps the conventional bank licensee can take to reduce its risk and conserve capital. This assessment is integral to setting and evaluating the conventional bank licensee's management strategy and the results of stress testing must be routinely communicated to senior management and, periodically, to the conventional bank licensee's board of directors.

                  January 2015

                • CA-14.7.4

                  Conventional bank licensees must combine the use of stress scenarios as advised under Subparagraphs (a), (b) and (c) by the CBB, with stress tests developed by the conventional bank licensees themselves to reflect their specific risk characteristics. The CBB may ask conventional bank licensees to provide information on stress testing in three broad areas, as follows:

                  (a) Scenarios requiring no simulation by the bank:

                  Conventional bank licensees must have information on the largest losses experienced during the reporting period available for review by the CBB. This loss information will be compared with the level of capital that results from a conventional bank licensee's internal measurement system. For example, it could provide the CBB with a picture of how many days of peak day losses would have been covered by a given value-at-risk estimate;
                  (b) Scenarios requiring simulation by the bank:

                  Conventional bank licensees must subject their portfolios to a series of simulated stress scenarios and provide the CBB with the results. These scenarios could include testing the current portfolio against past periods of significant disturbance, for example, the 9/11 attacks on the USA, the 1987 equity market crash, the Exchange Rate Mechanism crises of 1992 and 1993 or the fall in the international bond markets in the first quarter of 1994, the 1998 Russian financial crisis, the 2000 bursting of the technology stock bubble or the 2007/2008 sub-prime crisis, incorporating both the large price movements and the sharp reduction in liquidity associated with these events. A second type of scenario would evaluate the sensitivity of the conventional bank licensee's market risk exposure to changes in the assumptions about volatilities and correlations. Applying this test would require an evaluation of the historical range of variation for volatilities and correlations and evaluation of the conventional bank licensee's current positions against the extreme values of the historical range. Due consideration must be given to the sharp variation that, at times, has occurred in a matter of days in periods of significant market disturbance. For example, the above-mentioned situations involved correlations within risk factors approaching the extreme values of 1 and -1 for several days at the height of the disturbance; and
                  (c) Scenarios developed by the bank to capture the specific characteristics of its portfolio:

                  In addition to the general scenarios prescribed by the CBB under Subparagraphs (a) and (b), each conventional bank licensee must also develop its own stress scenarios which it identifies as most adverse based on the characteristics of its portfolio (e.g., any significant political or economic developments that may result in a sharp move in oil prices). Conventional bank licensees must provide the CBB with a description of the methodology used to identify and carry out the scenarios as well as with a description of the results derived from these stress tests.
                  January 2015

                • CA-14.7.5

                  Once a stress scenario has been identified, it must be used for conducting stress tests at least once every quarter, as long as the scenario continues to be relevant to the conventional bank licensee's portfolio.

                  January 2015

                • CA-14.7.6

                  The results of all stress tests must be reviewed by senior management within 15 days from the time they are available, and must be promptly reflected in the policies and limits set by management and the board of directors. Moreover, if the testing reveals particular vulnerability to a given set of circumstances, the CBB requires the conventional bank licensee to take prompt steps to manage those risks appropriately (e.g., by hedging against that outcome or reducing the size of its exposures).

                  January 2015

                • CA-14.7.7

                  Conventional bank licensees must conduct, at least weekly, a set of pre-determined stress-tests for the correlation trading portfolio encompassing shocks to default rates, recovery rates, credit spreads, and correlations. Appendix CA-19 provides guidance on the stress testing that must be undertaken to satisfy this requirement.

                  January 2015

              • CA-14.8 CA-14.8 External Validation of Models

                • CA-14.8.1

                  Before granting its approval for the use of internal models by a conventional bank licensee, the CBB requires that the models be validated by both the internal and external auditors of the conventional bank licensee. The CBB will review the validation procedures performed by the internal and external auditors, and may independently carry out further validation procedures.

                  January 2015

                • CA-14.8.2

                  The internal validation procedures to be carried out by the internal auditor are set out in Section CA-14.3. As stated in that Section, the internal auditor's review of the overall risk management process must take place at regular intervals (not less than once every six months). The internal auditor must make a report to senior management and the board of directors, in writing, of the results of the validation procedures. The report must be made available to the CBB for its review.

                  January 2015

                • CA-14.8.3

                  The validation of the models by the external auditor must include, at a minimum, the following steps:

                  (a) Verifying and ensuring that the internal validation processes described in Section CA-14.3 are operating satisfactorily;
                  (b) Ensuring that the formulae used in the calculation process as well as for the pricing of options and other complex instruments are validated by a qualified unit, which in all cases must be independent from the trading area;
                  (c) Checking and ensuring that the structure of the internal models is adequate with respect to the conventional bank licensee's activities and geographical coverage;
                  (d) Checking the results of the conventional bank licensee's back-testing of its internal measurement system (i.e., comparing value-at-risk estimates with actual profits and losses) to ensure that the model provides a reliable measure of potential losses over time; and
                  (e) Making sure that data flows and processes associated with the risk measurement system are transparent and accessible.
                  January 2015

                • CA-14.8.4

                  The external auditor must carry out their validation/review procedures, at a minimum, once every year. Based on the above procedures, the external auditor must make a report, in writing, on the accuracy of the conventional bank licensee's models, including all significant findings of their work. The report must be addressed to the senior management and/or the board of directors of the conventional bank licensee, and a copy of the report must be made available to the CBB. The mandatory annual review by the external auditor must be carried out during the third quarter of the calendar year, and the CBB expects to receive their final report by 30 September of each year. The results of additional validation procedures carried out by the external auditor at other times during the year must be made available to the CBB promptly.

                  January 2015

                • CA-14.8.5

                  Conventional bank licensees are required to ensure that external auditors and the CBB's representatives are in a position to have easy access, whenever they judge it necessary and under appropriate procedures, to the models' specifications and parameters as well as to the results of, and the underlying inputs to, their value-at-risk calculations.

                  January 2015

              • CA-14.9 CA-14.9 Letter of Model Recognition

                • CA-14.9.1

                  As stated in Section CA-14.1, conventional bank licensees which propose to use internal models for the calculation of their market risk capital requirements must submit their detailed proposals, in writing, to the CBB. The CBB will review these proposals, and upon ensuring that the conventional bank licensee's internal models meet all the criteria for recognition set out earlier in this Chapter, and after satisfying itself with the results of validation procedures carried out by the internal and external auditors and/or by itself, will issue a letter of model recognition to the conventional bank licensees.

                  January 2015

                • CA-14.9.2

                  The letter of model recognition is specific. It will set out the products covered, the method for calculating capital requirements on the products and the conditions of model recognition. In the case of preprocessing models, the conventional bank licensee will also be told how the output of recognised models must feed into the processing of other interest rate, equity, foreign exchange and commodities risk. The conditions of model recognition may include additional reporting requirements. The CBB's prior written approval must be obtained for any modifications proposed to be made to the models previously recognised by the CBB. In cases where a conventional bank licensee proposes to apply the model to new but similar products, it must obtain the CBB's prior approval. In some cases, the CBB may be able to give provisional approval for the model to be applied to a new class of products, in others it will be necessary to revisit the conventional bank licensee.

                  January 2015

                • CA-14.9.3

                  The CBB may withdraw its approval granted for any conventional bank licensee's model if it believes that the conditions based on which the approval was granted are no longer valid or have changed significantly.

                  January 2015

              • CA-14.10 CA-14.10 Combination of Internal Models and the Standardised Methodology

                • CA-14.10.1

                  Unless a conventional bank licensee's exposure to a particular risk factor is insignificant, the internal models approach, in principle, require conventional bank licensees to have an integrated risk measurement system that captures the broad risk factor categories (i.e., interest rates, exchange rates (which includes gold), equity prices and commodity prices, with related options volatilities being included in each risk factor category). Thus, conventional bank licensees which start to use models for one or more risk factor categories, over a reasonable period of time, must extend the models to all their market risks.

                  January 2015

                • CA-14.10.2

                  A conventional bank licensee which has obtained the CBB's approval for the use of one or more models is no longer able to revert to measuring the risk measured by those models according to the standardised methodology (unless the CBB withdraws its approval for the model(s), as explained in Section CA-14.9). However, what constitutes a reasonable period of time for an individual conventional bank licensee which uses a combination of internal models and the standardised methodology to move to a comprehensive model, will be decided by the CBB after taking into account the relevant circumstances of the conventional bank licensee.

                  January 2015

                • CA-14.10.3

                  Notwithstanding the goal of moving to comprehensive internal models as set out in Paragraph CA-14.10.1, for conventional bank licensees which, for the time being, will be applying a combination of internal models and the standardised methodology, the following conditions apply:

                  (a) Each broad risk factor category must be assessed by applying a single approach (either internal models or the standardised approach), i.e., no combination of the two methods will, in principle, be permitted within a risk factor category or across a conventional bank licensee's different entities for the same type of risk;
                  (b) All of the criteria laid down in this Chapter apply to the models being used;
                  (c) Conventional bank licensees may not modify the combination of the two approaches which they are applying, without justifying to the CBB that they have a valid reason for doing so, and obtaining the CBB's prior written approval;
                  (d) No element of market risk may escape measurement, i.e. the exposure for all the various risk factors, whether calculated according to the standardised approach or internal models, would have to be captured; and
                  (e) The capital charges assessed under the standardised approach and under the models approach must be aggregated applying the simple sum method.
                  January 2015

              • CA-14.11 CA-14.11 Treatment of Specific Risk

                • CA-14.11.1

                  The conventional bank licensee is allowed to include its securitisation exposures and n-th-to-default credit derivatives in the trading book in its value-at-risk measure. Notwithstanding, it is still required to hold additional capital for these products according to the standardised measurement methodology.

                  [Paragraphs CA-14.11.1A to CA-14.11.12 were deleted in January 2015.]

                  January 2015

              • CA-14.12 CA-14.12 Model Validation Standards

                • CA-14.12.1

                  It is important that conventional bank licensees have processes in place to ensure that their internal models have been adequately validated by suitably qualified parties independent of the development process to ensure that they are conceptually sound and adequately capture all material risks. This validation must be conducted when the model is initially developed and when any significant changes are made to the model. The validation must also be conducted on a periodic basis but especially where there have been any significant structural changes in the market or changes to the composition of the portfolio which might lead to the model no longer being adequate. More extensive model validation is particularly important where specific risk is also modelled and is required to meet the further specific risk criteria. As techniques and best practices evolve, conventional bank licensees must avail themselves of these advances. Model validation must not be limited to back-testing, but must, at a minimum, also include the following:

                  (a) Tests to demonstrate that any assumptions made within the internal model are appropriate and do not underestimate risk. This may include the assumption of the normal distribution, the use of the square root of time to scale from a one day holding period to a 10 day holding period or where extrapolation or interpolation techniques are used, or pricing models;
                  (b) Further to the regulatory back-testing programmes, testing for model validation must use hypothetical changes in portfolio value that would occur were end-of-day positions to remain unchanged. It therefore excludes fees, commissions, bid-ask spreads, net interest income and intra-day trading. Moreover, additional tests are required, which may include, for instance:
                  (i) Testing carried out using hypothetical changes in portfolio value that would occur were end-of-day positions to remain unchanged. It therefore excludes fees, commissions, bid-ask spreads, net interest income and intra-day trading;
                  (ii) Testing carried out for longer periods than required for the regular back-testing programme (e.g. 3 years). The longer time period generally improves the power of the back-testing. A longer time period may not be desirable if the VaR model or market conditions have changed to the extent that historical data is no longer relevant;
                  (iii) Testing carried out using confidence intervals other than the 99 percent interval required under the quantitative standards; and
                  (iv) Testing of portfolios below the overall bank level; and
                  (c) The use of hypothetical portfolios to ensure that the model is able to account for particular structural features that may arise, for example:
                  (i) Where data histories for a particular instrument do not meet the quantitative standards and where the conventional bank licensee has to map these positions to proxies, then the conventional bank licensee must ensure that the proxies produce conservative results under relevant market scenarios;
                  (ii) Ensuring that material basis risks are adequately captured. This may include mismatches between long and short positions by maturity or by issuer; and
                  (iii) Ensuring that the model captures concentration risk that may arise in an undiversified portfolio.
                  January 2015

              • CA-14.13 Principles for Calculating the Incremental Risk Charge (IRC)

                This section was deleted with effect from January 2015 as it is no longer required.

                January 2015

            • CA-15 CA-15 Leverage Ratio and Gearing Requirements

              • CA-15.1 CA-15.1 Rationale and Objective

                • CA-15.1.1

                  The requirements in this Chapter are applicable to Bahraini conventional bank licensees.

                  Amended: October 2018
                  January 2015

                • Scope and Factors Leading to Leverage

                  • CA-15.1.2

                    The use of non-equity funds to fund assets is referred to as financial leverage. It allows a financial institution to increase the potential returns on its equity capital, with an associated increase in the riskiness of the equity capital and its exposure to losses since the non-equity funds are either not, or only partially risk-absorbent. Consequently, leverage is commonly accomplished through the use of borrowed funds, debt capital or derivative instruments, etc. It is common for banks to engage in leverage by borrowing to fund asset growth, with the aim of increasing their return on equity.

                    Added: October 2018

                  • CA-15.1.3

                    The leverage ratio serves as a supplementary measure to the risk-based capital requirements of the rest of this Module. The leverage ratio is a simple, transparent ratio and is intended to achieve the following objectives:

                    (a) To constrain the build-up of leverage in the banking sector, helping avoid destabilising deleveraging processes which can damage the broader financial system and the economy;
                    (b) To reinforce the risk-based requirements with a simple, non-risk based "backstop" measure; and
                    (c) To serve as a broad measure of both the on and off-balance sheet sources of bank leverage and, thus, its risk profile.
                    Added: October 2018

              • CA-15.2 CA-15.2 Definition, Calculation and Scope of the Leverage Ratio

                • Leverage Ratio Requirement and Computational Details

                  • CA-15.2.1

                    Bahraini conventional bank licensees must meet a 3% leverage ratio minimum requirement at all times, calculated on a consolidated basis.

                    Added: October 2018

                  • CA-15.2.2

                    The leverage ratio is expressed as a percentage as follows:

                    Tier One Capital
                    Total Exposures

                    The Numerator is Tier One Capital described in Paragraph CA-1.1.2. The Denominator is Total Exposures described in Section CA-15.3.

                    Added: October 2018

                  • CA-15.2.3

                    The leverage ratio framework follows the same scope of regulatory consolidation for Tier One Capital and Total Exposures as is used in CA-B.1.2A, except as described in CA-15.2.4 below.

                    Added: October 2018

                  • CA-15.2.4

                    Where a banking, financial, insurance or commercial entity is outside the scope of regulatory consolidation, only the investment in the capital of such entities (i.e. only the carrying value of the investment, as opposed to the underlying assets and other exposures of the investee) is to be included in the total exposures measure. However, investments in the capital of such entities that are deducted from Tier One Capital must also be deducted from the exposures measure for the purpose of the leverage ratio calculation.

                    Added: October 2018

                  • CA-15.2.5

                    Bahraini conventional bank licensees identified as DSIBs must also meet a leverage ratio buffer requirement of 50% of HLA buffer (currently set at 1.5%), consistent with the capital measure required to meet the requirements of Module DS.

                    Added: October 2018

              • CA-15.3 CA-15.3 Exposure Measure

                • General Measurement Principles

                  • CA-15.3.1

                    Total Exposures for the purpose of CA-15.2.2 is the sum of the following exposures:

                    (a) On-balance sheet exposures;
                    (b) Derivative exposures;
                    (c) Securities financing transactions; and
                    (d) Off-balance sheet items as identified in this Section.
                    Added: October 2018

                  • CA-15.3.2

                    For purposes of Paragraph CA-15.3.1 the exposure measures should be consistent with financial statements where appropriate.

                    Added: October 2018

                • On-balance Sheet Exposures

                  • CA-15.3.3

                    On-balance sheet exposures include all on-balance assets in their exposure measure, including on balance sheet derivatives' collateral and collateral for Securities Financing Transactions (SFTs), with the exception of SFT assets and on-balance sheet derivatives that are covered in Paragraphs CA-15.3.13 to CA-15.3.23 and CA-15.3.24 to CA-15.3.42 respectively.

                    Added: October 2018

                  • CA-15.3.4

                    On-balance sheet assets must be measured using their accounting balance sheet values (i.e. unweighted) less deductions for associated specific provisions. On-balance sheet, non-derivative exposures are net of specific provisions and valuation adjustments (e.g. credit valuation adjustments under IFRS).

                    Added: October 2018

                  • CA-15.3.5

                    Items (such as goodwill) that are deducted completely from Tier One Capital must be deducted from Total Exposures.

                    Added: October 2018

                  • CA-15.3.6

                    According to the treatment outlined in Paragraphs CA-2.4.20 to CA-2.4.24, where a financial entity is not included in the regulatory scope of consolidation in CA-B.1.2A, only the investment in the capital of such entities (i.e. only the carrying value of the investment, as opposed to the underlying assets and other exposures of the investee) is to be included in the leverage ratio exposure measure. The amount of any investment in the capital of that entity that is totally or partially deducted from CET1 or from AT1 capital of the Bahraini conventional bank licensee following the corresponding deduction approach in Paragraphs CA-2.4.20 to CA-2.4.26 must be excluded from the leverage ratio measure.

                    Added: October 2018

                  • CA-15.3.7

                    Unless specified differently below, Bahraini conventional bank licensees must not take into account physical guarantees or credit risk mitigation techniques to reduce the leverage ratio exposure measure, nor may banks net assets and liabilities.

                    Added: October 2018

                  • CA-15.3.8

                    Any item deducted from Tier 1 capital according to Module CA and regulatory adjustments other than those related to liabilities must be deducted from the leverage ratio exposure measure. Two examples follow:

                    a) Where a banking, financial or insurance entity is not included in the regulatory scope of consolidation as set out in Section CA-2.4, the amount of any investment in the capital of that entity that is totally or partially deducted from Common Equity Tier 1 (CET1) capital or from Additional Tier 1 capital of the bank following the corresponding deduction approach therein must also be deducted from the leverage ratio exposure measure; and
                    b) Prudent valuation adjustments (PVAs) for exposures to less liquid positions, other than those related to liabilities, that are deducted from Tier 1 capital as per Paragraph CA-16.1.11A must be deducted from the leverage ratio exposure measure.
                    Added: October 2018

                  • CA-15.3.9

                    Gains/losses on fair valued liabilities or accounting value adjustments on derivative liabilities due to changes in the bank's own credit risk are not deducted from the leverage ratio exposure measure.

                    Added: October 2018

                  • CA-15.3.10

                    Netting of loans and deposits is not allowed.

                    Added: October 2018

                  • CA-15.3.11

                    For the purpose of the leverage ratio exposure measure, Bahraini conventional bank licensees using trade date accounting must reverse out any offsetting between cash receivables for unsettled sales and cash payables for unsettled purchases of financial assets that may be recognised under the applicable accounting framework, but may offset between those cash receivables and cash payables (regardless of whether such offsetting is recognised under the applicable accounting framework) if the following conditions are met:

                    a) The financial assets bought and sold that are associated with cash payables and receivables are fair valued through income and included in the bank's regulatory trading book (See CA-8.1.5); and
                    b) The transactions of the financial assets are settled on a delivery-versus-payment (DVP) basis.

                    Bahraini conventional bank licensees using settlement date accounting will be subject to the treatment set out in Paragraphs CA-15.3.43 to CA-15.3.45 and Paragraphs CA-15.5.7 to CA-15.5.16.

                    Added: October 2018

                  • CA-15.3.12

                    For purposes of the leverage ratio exposure measure, where a cash pooling arrangement entails a transfer at least on a daily basis of the credit and/or debit balances of the individual participating customer accounts into a single account balance, the individual participating customer accounts are deemed to be extinguished and transformed into a single account balance upon the transfer provided the bank is not liable for the balances on an individual basis upon the transfer. Thus, the basis of the leverage ratio exposure measure for such a cash pooling arrangement is the single account balance and not the individual participating customer accounts. When the transfer of credit and/or debit balances of the individual participating customer accounts does not occur daily, for purposes of the leverage ratio exposure measure, extinguishment and transformation into a single account balance is deemed to occur and this single account balance may serve as the basis of the leverage ratio exposure measure provided all of the following conditions are met:

                    a) in addition to providing for the several individual participating customer accounts, the cash pooling arrangement provides for a single account, into which the balances of all individual participating customer accounts can be transferred and thus extinguished;
                    b) the Bahraini conventional bank licensees: (i) has a legally enforceable right to transfer the balances of the individual participating customer accounts into a single account so that the bank is not liable for the balances on an individual basis, and (ii) at any point in time, the bank must have the discretion and be in a position to exercise this right;
                    c) the Bahraini conventional bank licensee's supervisor does not deem as inadequate the frequency by which the balances of individual participating customer accounts are transferred to a single account;
                    d) there are no maturity mismatches among the balances of the individual participating customer accounts included in the cash pooling arrangement or all balances are either overnight or on demand; and
                    e) the Bahraini conventional bank licensee charges or pays interest and/or fees based on the combined balance of the individual participating customer accounts included in the cash pooling arrangement.

                    In the event the abovementioned conditions are not met, the individual balances of the participating customer accounts must be reflected separately in the leverage ratio exposure measure.

                    Added: October 2018

                • Securities Financing Transaction Exposures (SFTs)

                  • CA-15.3.13

                    Traditional securitisations must be excluded by the originating bank if the securitisation meets the operational requirements for the recognition of risk transference set out in CA-6, Credit Risk Securitisation Framework. Banks meeting these conditions must include any retained securitisation exposure in the leverage ratio exposure.

                    Added: October 2018

                  • CA-15.3.14

                    SFTs included in the exposure measure must be according to the treatment described in CA-15.3.19 below.

                    Added: October 2018

                  • CA-15.3.15

                    For purpose of Paragraph CA-15.3.13, the treatment recognises that secured lending and borrowing in the form of SFTs is an important source of leverage, and ensures consistent international implementation by providing a common measure for dealing with the main differences in the operative accounting frameworks.

                    Added: October 2018

                  • CA-15.3.16

                    For SFT assets subject to novation and cleared through Qualifying Central Counterparties, "gross SFT assets recognised for accounting purposes" are replaced by the final contractual exposure, given that pre-existing contracts have been replaced by new legal obligations through the novation process.

                    Added: October 2018

                  • CA-15.3.17

                    Gross SFT assets must not recognise any accounting netting of cash payables against cash receivables.

                    Added: October 2018

                  • CA-15.3.18

                    Bahraini conventional bank licensees and supervisors should be particularly vigilant to transactions and structures that have the result of inadequately capturing banks' sources of leverage. Examples of concerns that might arise in such leverage ratio exposure measure minimising transactions and structures may include: securities financing transactions where exposure to the counterparty increases as the counterparty's credit quality decreases or securities financing transactions in which the credit quality of the counterparty is positively correlated with the value of the securities received in the transaction (i.e. the credit quality of the counterparty falls when the value of the securities falls); banks that normally act as principal but adopt an agency model to transact in derivatives and SFTs in order to benefit from the more favourable treatment permitted for agency transactions under the leverage ratio framework; collateral swap trades structured to mitigate inclusion in the leverage ratio exposure measure; or use of structures to move assets off the balance sheet. This list of examples is by no means exhaustive. Where supervisors are concerned that such transactions are not adequately captured in the leverage ratio exposure measure or may lead to a potentially destabilising deleveraging process, they should carefully scrutinise these transactions and consider a range of actions to address such concerns. Supervisory actions may include requiring enhancements in banks' management of leverage, imposing operational requirements (e.g. additional reporting to supervisors) and/or requiring that the relevant exposure is adequately capitalised through a Pillar 2 capital charge. These examples of supervisory actions are merely indicative and by no means exhaustive.

                    Added: October 2018

                • General Treatment (Bank Acting as Principal)

                  • CA-15.3.19

                    The sum of the amounts in subparagraphs (a) and (b) are to be included in the leverage ratio exposure measure:

                    (a) Gross SFT assets recognized for accounting purposes (i.e. with no recognition of accounting netting), adjusted as follows:
                    (i) Excluding from the exposure measure the value of any securities received under an SFT, where the Bahraini conventional bank licensee has recognised the securities as an asset on its balance sheet; and
                    (ii) Cash payables and cash receivables in SFTs with the same counterparty may be measured net if the following criteria are met:
                    (A) Transactions have the same explicit final settlement date but which can be unwound at any time by either party to the transaction are not eligible;
                    (B) The right to set off the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable both currently in the normal course of business and in the event of: (i) default; (ii) insolvency; and (iii) bankruptcy; and
                    (C) The counterparties intend to settle net, settle simultaneously, or the transactions are subject to a settlement mechanism that results in the functional equivalent of net settlement, that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date. To achieve such equivalence, both transactions are settled through the same settlement system and the settlement arrangements are supported by cash and/or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day any issues arising from securities legs of the SFTs do not result in the unwinding of net cash settlement24; and
                    (b) A measure of Counterparty Credit Risk calculated as the current exposure without an add-on for Potential Future Exposure (PFE), calculated as follows:
                    (i) Where a qualifying Master Netting Agreement25(MNA) is in place, the current exposure (E*) is the greater of zero and the total fair value of securities and cash lent to a counterparty for all transactions included in the qualifying MNA (SEi), less the total fair value of cash and securities received from the counterparty for those transactions (SCi). This is illustrated in the following formula:
                    E* = max {0, [SEi – SCi]}; and
                    (ii) Where no qualifying MNA is in place, the current exposure for transactions with a counterparty must be calculated on a transaction by transaction basis; that is, each transaction is treated as its own netting set, as shown in the following formula:
                    Ei* = max {0, [Ei – Ci]}
                    (ii) Ei* may be set to zero if (i) Ei is the cash lent to a counterparty, (ii) this transaction is treated as its own netting set and (iii) the associated cash receivable is not eligible for the netting treatment in Paragraph CA-15.3.20.
                    (iii) For the purposes of the above, the term "counterparty" includes not only the counterparty of the bilateral repo transactions but also triparty repo agents that receive collateral in deposit and manage the collateral in the case of triparty repo transactions. Therefore, securities deposited at triparty repo agents are included in "total value of securities and cash lent to a counterparty" (E) up to the amount effectively lent to the counterparty in a repo transaction. However, excess collateral that has been deposited at triparty agents but that has not been lent out may be excluded.
                    Added: October 2018

                    24 This latter condition ensures that any issues arising from the securities leg of the SFTs do not interfere with the completion of the net settlement of the cash receivables and payables. If there is a failure of the securities leg of a transaction in such a mechanism at the end of the settlement window for settlement in the settlement mechanism, then this transaction and its matching cash leg must be split out from the netting set and treated gross.

                    25 A "qualifying" MNA is one that meets the requirements under Paragraphs CA-15.6.14 and 15.

                • Sale Accounting Transactions

                  • CA-15.3.20

                    Leverage may remain with the lender of the security in a SFT whether or not sale accounting is achieved under IFRS. As such, where sale accounting is achieved for a SFT under IFRS, the Bahraini conventional bank licensee must reverse all sales-related accounting entries, and then calculate its exposure as if the SFT had been treated as a financing transaction (i.e. the Bahraini conventional bank licensee must include the sum of amounts in Subparagraphs CA-15.3.19 (a) and (b) for such a SFT) for the purposes of determining its exposure measure.

                    Added: October 2018

                • Bank Acting as Agent

                  • CA-15.3.21

                    A Bahraini conventional bank licensee acting as agent in a SFT generally provides an indemnity or guarantee to only one of the two parties involved, and only for the difference between the value of the security or cash its customer has lent and the value of collateral the borrower has provided. In this situation, the bank is exposed to the counterparty of its customer for the difference in values rather than to the full exposure to the underlying security or cash of the transaction (as is the case where the bank is one of the principals in the transaction).

                    Added: October 2018

                  • CA-15.3.22

                    Where a Bahraini conventional bank licensee acting as agent in a SFT provides an indemnity or guarantee to a customer or counterparty for any difference between the value of the security or cash the customer has lent and the value of collateral the borrower has provided, then the Bahraini conventional bank licensee will be required to calculate its exposure measure by applying only Subparagraph 15.3.19(b).26

                    Added: October 2018

                    26 Where, in addition to the conditions in Paragraphs CA-15.3.21 to 15.3.23, a bank acting as an agent in a SFT does not provide an indemnity or guarantee to any of the involved parties, the bank is not exposed to the SFT and therefore need not recognise those SFTs in its exposure measure.

                  • CA-15.3.23

                    A Bahraini conventional bank licensee acting as agent in a SFT and providing an indemnity or guarantee to a customer or counterparty will be considered eligible for the exceptional treatment set out in paragraph CA-15.3.22 only if the Bahraini conventional bank licensee's exposure to the transaction is limited to the guaranteed difference between the value of the security or cash its customer has lent and the value of the collateral the borrower has provided. In situations where the Bahraini conventional bank licensees is further economically exposed (i.e. beyond the guarantee for the difference) to the underlying security or cash in the transaction,27 a further exposure equal to the full amount of the security or cash must be included in the exposure measure.

                    Added: October 2018

                    27 For example, due to the bank managing collateral received in the bank's name or on its own account rather than on the customer's or borrower's account (e.g. by on-lending or managing unsegregated collateral, cash or securities).

                • Derivative Exposures

                  • CA-15.3.24

                    Exposures to derivatives are included in the leverage ratio exposure by means of two components:

                    (a) Replacement cost (RC); and
                    (b) Potential Future Exposure (PFE).
                    Added: October 2018

                  • CA-15.3.25

                    Bahraini conventional bank licensees must calculate their exposures associated with all derivative transactions including where a Bahraini conventional bank licensee sells protection using a credit derivative, as the replacement cost (RC)28 for the current exposure plus an add-on for PFE, as described in Paragraph CA-15.3.26. If the derivative exposure is covered by an eligible bilateral netting contract as specified in this Section 15.4, the treatment in Chapter CA-4 may be applied29. Written credit derivatives are subject to an additional treatment, as set out in Paragraphs CA-15.3.37 to CA-15.3.39.

                    Added: October 2018

                    28 If there is no accounting measure of exposure for certain derivative instruments because they are held (completely) off-balance sheet, the bank must use the sum of positive fair values of these derivatives as the replacement cost.

                    29 Cross-product netting is not permitted in determining the leverage ratio exposure.

                  • CA-15.3.26

                    For derivative transactions not covered by an eligible bilateral netting contract as specified in Paragraphs CA-15.4.1 to CA-15.4.3, the amount to be included in the exposure measure is determined as follows:

                    Exposure measure = alpha * (RC+PFE)
                    where
                    alpha = 1.4
                    RC = the replacement cost of the contract (obtained by marking to market), where the contract has a positive value. RC is determined in accordance with CA-15.3.27
                    PFE = an amount for PFE calculated in accordance with CA-15.3.28.
                    Added: October 2018

                  • CA-15.3.27

                    The replacement cost of a transaction or netting set is measured as follows:

                    RC = max {V - CVMr, + CVMp, 0}

                    where (i) V is the market value of the individual derivative transaction or of the derivative transactions in a netting set; (ii) CVMr is the cash variation margin received that meets the conditions set out in Paragraph CA-15.3.33 and for which the amount has not already reduced the market value of the derivative transaction V under the bank's operative accounting standard; and (iii) CVMp is the cash variation margin provided by the bank and that meets the same conditions.

                    Added: October 2018

                  • CA-15.3.28

                    The potential future exposure (PFE) for derivative exposures must be calculated mathematically as follows:

                    PFE = multiplier*AddOn aggregate

                    For the purposes of the leverage ratio framework, the multiplier is fixed at one. Moreover, when calculating the add-on component, for all margined transactions the maturity factor set out in CA-15.3.29 below may be used. Further, as written options create an exposure to the underlying, they must be included in the leverage ratio exposure measure by applying the treatment described herein, even if certain written options are permitted the zero exposure at default (EAD) treatment allowed in the risk-based framework.

                    Added: October 2018

                  • CA-15.3.29

                    The minimum time risk horizons include:

                    a) The lesser of one year and remaining maturity of the derivative contract for unmargined transactions, floored at ten business days. Therefore, the adjusted notional at the trade level of an unmargined transaction must be multiplied by:



                    where Mi is the transaction i remaining maturity floored by 10 business days
                    b) For margined transactions, the minimum margin period of risk is determined as follows:
                    — At least ten business days for non-centrally-cleared derivative transactions subject to daily margin agreements.
                    — Five business days for centrally cleared derivative transactions subject to daily margin agreements that clearing members have with their clients.
                    — 20 business days for netting sets consisting of 5,000 transactions that are not with a central counterparty.
                    — Doubling the margin period of risk for netting sets with outstanding disputes. Therefore, the adjusted notional at the trade level of a margined transaction should be multiplied by:



                    where i MPOR is the margin period of risk appropriate for the margin agreement containing the transaction i.
                    Added: October 2018

                • Bilateral Netting

                  • CA-15.3.30

                    When an eligible bilateral netting contract is in place (see Paragraphs CA-15.4.1 to CA-15.4.3), the RC for the set of derivative exposures covered by the contract will be the net replacement cost and the add-on will be ANet as calculated in Paragraphs CA-15.3.27 and CA-15.3.28.

                    Added: October 2018

                • Treatment of Related Collateral

                  • CA-15.3.31

                    Collateral received in connection with derivative contracts has two countervailing effects on leverage:

                    (a) It reduces counterparty exposure; but
                    (b) It can also increase the economic resources at the disposal of the Bahraini conventional bank licensees, as the bank can use the collateral to leverage itself.
                    Added: October 2018

                  • CA-15.3.32

                    Collateral received in connection with derivative contracts does not necessarily reduce the leverage inherent in a Bahraini conventional bank licensee's derivatives position, which is generally the case if the settlement exposure arising from the underlying derivative contract is not reduced. As a general rule, collateral received may not be netted against derivative exposures whether or not netting is permitted under IFRS or in Chapter CA-4. Hence, when calculating the exposure amount by applying Paragraphs CA-15.3.25 to CA-15.3.27, a Bahraini conventional bank licensee must not reduce the exposure amount by any collateral received from the counterparty.

                    Added: October 2018

                  • CA-15.3.33

                    With regard to collateral provided, Bahraini conventional bank licensees must gross up their exposure measure by the amount of any derivatives collateral provided where the provision of that collateral has reduced the value of their balance sheet assets under IFRS.

                    Added: October 2018

                • Treatment of Cash Variation Margin

                  • CA-15.3.34

                    In the treatment of derivative exposures for the purpose of the leverage ratio, the cash portion of variation margin exchanged between counterparties may be viewed as a form of pre-settlement payment, if the following conditions are met:

                    (a) For trades not cleared through a qualifying central counterparty (QCCP) the cash received by the recipient counterparty is not segregated;
                    (b) Variation margin is calculated and exchanged on a daily basis based on mark-to-market valuation of derivatives positions;
                    (c) The cash variation margin is received in the same currency as the currency of settlement of the derivative contract;
                    (d) Variation margin exchanged is the full amount that would be necessary to fully extinguish the mark-to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty; and
                    (e) Derivatives transactions and variation margins are covered by a single master netting agreement (MNA)30, 31 between the legal entities that are the counterparties in the derivatives transaction. The MNA must explicitly stipulate that the counterparties agree to settle net any payment obligations covered by such a netting agreement, taking into account any variation margin received or provided if a credit event occurs involving either counterparty. The MNA must be legally enforceable and effective in all relevant jurisdictions, including in the event of default and bankruptcy or insolvency.
                    Added: October 2018

                    30 A Master MNA may be deemed to be a single MNA for this purpose.

                    31 To the extent that the criteria in this paragraph include the term "master netting agreement", this term should be read as including any "netting agreement" that provides legally enforceable rights of offsets. This is to take account of the fact that for netting agreements employed by CCPs, no standardisation has currently emerged that would be comparable with respect to OTC netting agreements for bilateral trading.

                  • CA-15.3.35

                    If the conditions in Paragraph CA-15.3.34 are met, the cash portion of variation margin received may be used to reduce the replacement cost portion of the leverage ratio exposure measure, and the receivables assets from cash variation margin provided may be deducted from the leverage ratio exposure measure as follows:

                    (a) In the case of cash variation margin received, the receiving bank may reduce the replacement cost (but not the PFE component) of the exposure amount of the derivative asset by the amount of cash received if the positive mark-to-market value of the derivative contract(s) has not already been reduced by the same amount of cash variation margin received under the Bahraini conventional bank licensee's operative accounting standard; and
                    (b) In the case of cash variation margin provided to a counterparty, the posting Bahraini conventional bank licensee may deduct the resulting receivable from its leverage ratio exposure measure, where the cash variation margin has been recognised as an asset under the Bahraini conventional bank licensee's operative accounting framework and instead include the cash variation margin in the calculation of derivative replacement cost.
                    Added: October 2018

                • Add-on Factors for Determining PFE

                  • CA-15.3.36

                    The following add-on factors apply to financial derivatives, based on residual maturity:

                    Added: October 2018

                  • CA-15.3.37

                    Add-ons must be based on effective rather than apparent notional amounts. In the event that the stated notional amount is leveraged or enhanced by the structure of the transaction, Bahraini conventional bank licensees must use the effective notional amount when determining PFE.

                    Added: October 2018

                • Treatment of Clearing Services

                  • CA-15.3.38

                    Where a Bahraini conventional bank licensee acting as clearing member (CM)32 offers clearing services to clients, the clearing member's trade exposures33 to the central counterparty (CCP) that arise when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults, must be captured by applying the same treatment that applies to any other type of derivatives transactions. However, if the clearing member, based on the contractual arrangements with the client, is not obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that a QCCP defaults, the clearing member need not recognise the resulting trade exposures to the QCCP in the leverage ratio exposure measure.

                    Added: October 2018

                    32 For the purposes of this Paragraph, a clearing member (CM) is defined as a member of, or a direct participant in, a CCP that is entitled to enter into a transaction with the CCP, regardless of whether it enters into trades with a CCP for its own hedging, investment or speculative purposes or whether it also enters into trades as a financial intermediary between the CCP and other market participants.

                    33 "Trade exposure" includes initial margin irrespective of whether or not it is posted in a manner that makes it remote from the insolvency of the CCP.

                  • CA-15.3.39

                    Where a client enters directly into a derivatives transaction with the CCP and the CM guarantees the performance of its clients' derivative trade exposures to the CCP, the Bahraini conventional bank licensee acting as the clearing member for the client to the CCP must calculate its related leverage ratio exposure resulting from the guarantee as a derivative exposure as set out in Paragraphs CA-15.3.24 to CA-15.3.36, as if it had entered directly into the transaction with the client, including with regard to the receipt or provision of cash variation margin.

                    Added: October 2018

                • Additional Treatment for Written Credit Derivatives

                  • CA-15.3.40

                    In addition to the CCR exposure arising from the fair value of the contracts, written credit derivatives create a notional credit exposure arising from the creditworthiness of the reference entity. Written credit derivatives must be treated consistently with cash instruments (e.g. loans, bonds) for the purposes of the exposure measure.

                    Added: October 2018

                  • CA-15.3.41

                    In order to capture the credit exposure to the underlying reference entity, in addition to the above CCR treatment for derivatives and related collateral, the effective notional amount referenced by a written credit derivative is to be included in the exposure measure. The effective notional amount of a written credit derivative may be reduced by any negative change in fair value amount that has been incorporated into the calculation of Tier 1 capital with respect to the written credit derivative. The resulting amount may be further reduced by the effective notional amount of a purchased credit derivative on the same reference name,34, 35provided:

                    (a) The credit protection purchased is on a reference obligation which ranks pari passu with or is junior to the underlying reference obligation of the written credit derivative in the case of single name credit derivatives;36
                    (c) The remaining maturity of the credit protection purchased is equal to or greater than the remaining maturity of the written credit derivative;
                    (d) the credit protection purchased through credit derivatives is not from a counterparty whose credit quality is highly correlated with the value of the reference obligation; in the event that the effective notional amount of a written credit derivative is reduced by any negative change in fair value reflected in the bank's Tier 1 capital, the effective notional amount of the offsetting credit protection purchased through credit derivatives must also be reduced by any resulting positive change in fair value reflected in Tier 1 capital; and
                    (e) the credit protection purchased through credit derivatives is not included in a transaction that has been cleared on behalf of a client (or that has been cleared by the bank in its role as a clearing services provider in a multi-level client services structure as referenced in CA-15.3.38 and for which the effective notional amount referenced by the corresponding written credit derivative is excluded from the leverage ratio exposure measure according to this paragraph.
                    Added: October 2018

                    34 Two reference names are considered identical only if they refer to the same legal entity. For single-name credit derivatives, protection purchased that references a subordinated position may offset protection sold on a more senior position of the same reference entity as long as a credit event on the senior reference asset would result in a credit event on the subordinated reference asset. Protection purchased on a pool of reference entities may offset protection sold on individual reference names if the protection purchased is economically equivalent to buying protection separately on each of the individual names in the pool (this would, for example, be the case if a bank were to purchase protection on an entire securitisation structure). If a bank purchases protection on a pool of reference names, but the credit protection does not cover the entire pool (i.e. the protection covers only a subset of the pool, as in the case of an nth-to-default credit derivative or a securitisation tranche), then offsetting is not permitted for the protection sold on individual reference names. However, such purchased protections may offset sold protections on a pool provided the purchased protection covers the entirety of the subset of the pool on which protection has been sold. In other words, offsetting may only be recognised when the pool of reference entities and the level of subordination in both transactions are identical.

                    35 The effective notional amount of a written credit derivative may be reduced by any negative change in fair value reflected in the bank's Tier 1 capital provided the effective notional amount of the offsetting purchased credit protection is also reduced by any resulting positive change in fair value reflected in Tier 1 capital. Where a bank buys credit protection through a total return swap (TRS) and records the net payments received as net income, but does not record offsetting deterioration in the value of the written credit derivative (either through reductions in fair value or by an addition to reserves) reflected in Tier 1 capital, the credit protection will not be recognised for the purpose of offsetting the effective notional amounts related to written credit derivatives.

                    36 For tranched products, the purchased protection must be on a reference obligation with the same level of seniority.

                  • CA-15.3.42

                    For the purposes of CA-15.3.40, the term "written credit derivative" refers to a broad range of credit derivatives through which a bank effectively provides credit protection and is not limited solely to credit default swaps and total return swaps. For example, all options where the bank has the obligation to provide credit protection under certain conditions qualify as "written credit derivatives". The effective notional amount of such options sold by the bank may be offset by the effective notional amount of options by which the bank has the right to purchase credit protection which fulfils the conditions of CA-15.3.41. For example, the condition of same or more conservative material terms as those in the corresponding written credit derivatives can be considered met only when the strike price of the underlying purchased credit protection is equal to or lower than the strike price of the underlying sold credit protection.

                    Added: October 2018

                  • CA-15.3.43

                    Since written credit derivatives are included in the exposure measure at their effective notional amounts, and are also subject to add-on amounts for PFE, the exposure measure for written credit derivatives may be overstated. Bahraini conventional bank licensees must deduct the individual PFE add-on amount relating to a written credit derivative (which is not offset according to Paragraph CA-15.3.41 and whose effective notional amount is included in the exposure measure) from their gross add-on in Paragraphs CA-15.3.25 to CA-15.3.27.

                    Added: October 2018

                  • CA-15.3.44

                    Where a bank buys credit protection through a total return swap (TRS) and records the net payments received as net income, but does not record offsetting deterioration in the value of the written credit derivative (either through reductions in fair value or by an addition to reserves) reflected in Tier 1 capital, the credit protection will not be recognised for the purpose of offsetting the effective notional amounts related to written credit derivatives.

                    Added: October 2018

                • Off-balance Sheet Items (OBS)

                  • CA-15.3.45

                    OBS items include commitments (including liquidity facilities), whether or not unconditionally cancellable, direct credit substitutes, acceptances, standby letters of credit and trade letters of credit. If the OBS item is treated as a derivative exposure for the purpose of the accounting, then the item must be measured as a derivative exposure for the purpose of leverage ratio exposure.

                    Added: October 2018

                  • CA-15.3.46

                    In the risk-based capital framework, OBS items are converted under the standardised approach into credit exposure equivalents through the use of credit conversion factors (CCFs). For the purpose of determining the exposure amount of OBS items for the leverage ratio, the CCFs set out in CA-15.4 must be applied to the notional amount.

                    Added: October 2018

                  • CA-15.3.47

                    In addition, specific and general provisions set aside against OBS exposures that have decreased Tier 1 capital may be deducted from the credit exposure equivalent amount of those exposures (i.e. the exposure amount after the application of the relevant CCF). However, the resulting total off-balance sheet equivalent amount for OBS exposures cannot be less than zero.

                    Added: October 2018

              • CA-15.4 CA-15.4 Additional Detail for Computation Purposes

                • Bilateral Netting

                  • CA-15.4.1

                    For the purpose of the leverage ratio measure, bilateral netting is allowed subject to the following conditions:

                    (a) Bahraini conventional bank licensees may net transactions subject to novation under which any obligation between a bank and its counterparty to deliver a given currency on a given value date is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations; or
                    (b) Bahraini conventional bank licensees may also net transactions subject to any legally valid form of bilateral netting not covered in (a), including other forms of novation.
                    Added: October 2018

                  • CA-15.4.2

                    In both cases in CA-15.5.1 (a) and (b), a Bahraini conventional bank licensee will need to satisfy the CBB that it has:

                    (a) A netting contract or agreement with the counterparty that creates a single legal obligation, covering all included transactions, such that the Bahraini conventional bank licensee would have either a claim to receive or obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions in the event a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstances;
                    (b) Written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and administrative authorities would find the Bahraini conventional bank licensee's exposure to be such a net amount under:
                    (i) The law of the home jurisdiction in which the counterparty is incorporated and, if the foreign branch of a counterparty is involved, then also under the law of jurisdiction in which the branch is located;
                    (ii) The law that governs the individual transactions; and
                    (iii) The law that governs any contract or agreement necessary to effect the netting.
                    The CBB must be satisfied that the netting is enforceable under the laws of each of the relevant jurisdictions; and
                    (c) Procedures in place to ensure that the legal characteristics of netting arrangements are kept under review in the light of possible changes in relevant law.
                    Added: October 2018

                  • CA-15.4.3

                    Contracts containing walkaway clauses are not eligible for netting for the purpose of calculating the leverage ratio requirements. A walkaway clause is a provision that permits a non-defaulting counterparty to make only limited payments, or no payment at all, to the estate of a defaulter, even if the defaulter is a net creditor.

                    Added: October 2018

                • Securities Financing Transaction Exposures 37

                  • CA-15.4.4

                    Where a qualifying master netting agreement is in place, the effects of bilateral netting agreements for SFTs are recognised on a counterparty by counterparty basis if the agreements are legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of whether the counterparty is insolvent or bankrupt. In addition, netting agreements must:

                    (a) Provide the non-defaulting party with the right to terminate and close out in a timely manner all transactions under the agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;
                    (b) Provide for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it so that a single net amount is owed by one party to the other;
                    (c) Allow for the prompt liquidation or setoff of collateral upon the event of default; and
                    (d) Be, together with the rights arising from provisions required in (a) and (c) above, legally enforceable in each relevant jurisdiction upon the occurrence of an event of default regardless of the counterparty's insolvency or bankruptcy.
                    Added: October 2018

                    37 The provisions related to qualifying master netting agreements (MNAs) for SFTs are intended for the calculation of the counterparty add-on of the exposure measure of SFTs.

                  • CA-15.4.5

                    Netting across positions held in the banking book and trading book can only be recognised when the netted transactions fulfil the following conditions:

                    (a) All transactions are marked to market daily; and
                    (b) The collateral instruments used in the transactions are recognised as eligible financial collateral in the banking book.
                    Added: October 2018

                • Off-balance Sheet Items

                  • CA-15.4.6

                    For the purpose of the leverage ratio, OBS items must be converted into credit exposure equivalents through the use of credit conversion factors (CCFs).

                    Added: October 2018

                  • CA-15.4.7

                    For the purpose of Paragraph CA-15.4.6, commitments include any contractual arrangement that has been offered by the bank and accepted by the client to extend credit, purchase assets or issue credit substitutes.

                    Added: October 2018

                  • CA-15.4.8

                    Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances) receive a CCF of 100%.

                    Added: October 2018

                  • CA-15.4.9

                    The exposure amount associated with unsettled financial asset purchases where regular-way unsettled trades are accounted for at settlement date, a 100% CCF applies.

                    Added: October 2018

                  • CA-15.4.10

                    Forward asset purchases, forward deposits and partly paid shares and securities, which represent commitments with certain drawdown, will receive a CCF of 100%.

                    Added: October 2018

                  • CA-15.4.11

                    The following transaction-related contingent items — performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions, receive a CCF of 50%.

                    Added: October 2018

                  • CA-15.4.12

                    Note issuance facilities (NIFs), and revolving underwriting facilities (RUFs) receive a CCF of 50%.

                    Added: October 2018

                  • CA-15.4.13

                    A 40% CCF will be applied to commitments, regardless of the maturity of the underlying facility, unless they qualify for a lower CCF.

                    Added: October 2018

                  • CA-15.4.14

                    A 20% CCF will be applied to both the issuing and confirming banks of short-term38 self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralised by the underlying shipment).

                    Added: October 2018

                    38 That is, with a maturity below one year. For further details see Basel Committee on Banking Supervision, Treatment of trade finance under the Basel capital framework, October 2011, www.bis.org/publ/bcbs205.pdf.

                  • CA-15.4.15

                    A 10% CCF will be applied to commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness.

                    Added: October 2018

                  • CA-15.4.16

                    The CBB shall evaluate various factors in the jurisdiction, which may constrain banks' ability to cancel the commitment in practice, and consider applying a higher CCF to certain commitments as appropriate.

                    Added: October 2018

                  • CA-15.4.17

                    Where there is an undertaking to provide a commitment on an off-balance sheet item, banks are to apply the lower of the two applicable CCFs.39

                    Added: October 2018

                    39 For example, if a bank has a commitment to open short-term self-liquidating trade letters of credit arising from the movement of goods, a 20% CCF will be applied (instead of a 40% CCF); and if a bank has an unconditionally cancellable commitment to issue direct credit substitutes, a 10% CCF will be applied (instead of a 100% CCF).

                  • CA-15.4.18

                    All off-balance sheet securitisation exposures, except an eligible liquidity facility or an eligible servicer cash advance facility as set out in Paragraphs CA-6.4.18 and CA-6.4.20 of this Module, receive a CCF of 100% conversion factor. All eligible liquidity facilities receive a CCF of 50%. Undrawn servicer cash advances or facilities that are unconditionally cancellable without prior notice are eligible for a 10% CCF.

                    Added: October 2018

              • CA-15.5 CA-15.5 Effective Date and Transitional Arrangements

                • CA-15.5.1

                  Bahraini Conventional Bank Licensees shall implement the requirements of this Module with effect from 30th June 2019. Quarterly reporting of leverage ratio to the CBB and in public disclosures shall commence with reference to the quarter ending on 30th June 2019.

                  Added: October 2018

              • CA-15.6 CA-15.6 Additional Requirements

                • CA-15.6.1

                  A higher ratio may be required for any Bahraini conventional bank licensee if warranted by its risk profile or circumstances. The CBB may use stress testing as a complementing tool to adjust the leverage ratio requirement at the macro- and/or individual Bahraini conventional bank licensee-level.

                  Added: October 2018

                • CA-15.6.2

                  The leverage ratio can be used for both micro- and macro prudential surveillance; for example, as a macro prudential tool, a consistent leverage ratio can be applied for all Bahraini conventional bank licensees as an indicator for monitoring vulnerability. As a micro prudential tool, it can be used as a trigger for increased surveillance or capital requirements for specific licensees under the supervisory review process.

                  Added: October 2018

              • CA-15.7 CA-15.7 Gearing

                • CA-15.7.1

                  The content of this Section is applicable to all retail branches of foreign banks.

                  Amended: October 2022
                  Added: October 2018

                • Measurement

                  • CA-15.7.2

                    The gearing ratio is measured as the ratio of deposit liabilities against the bank's capital and reserves. Deposit liabilities includes ‘deposits from banks’ (excluding deposits from head office) and ‘deposits from non-banks’ as reported in Section A Balance Sheet of the PIR. Capital and reserves refers to the aggregate amount of the capital items reported in Section A Balance Sheet of the PIR i.e. ‘total capital items’.

                    Amended: October 2022
                    Added: October 2018

                  • CA-15.7.3

                    [This Paragraph was deleted in October 2022].

                    Deleted: October 2022
                    Added: October 2018

                  • CA-15.7.4

                    [This Paragraph was deleted in October 2022]

                    Deleted: October 2022
                    Added: October 2018

                  • CA-15.7.5

                    [This Paragraph was deleted in October 2022]

                    Deleted: October 2022
                    Added: October 2018

                • Gearing Limit

                  • CA-15.7.6

                    Deposit liabilities must not exceed 20 times the respective bank's capital and reserves at all times (i.e. capital and reserves must be 5% or above of the deposit liabilities).

                    Amended: October 2022
                    Added: October 2018

            • CA-16 CA-16 Prudent Valuation Guidance

              • CA-16.1 CA-16.1 Prudent Valuation Guidance

                • CA-16.1.1

                  This Section provides conventional bank licensees with guidance on prudent valuation for positions that are accounted for at fair value, whether they are in the trading book or in the banking book. This guidance is especially important for positions without actual market prices or observable inputs to valuation, as well as less liquid positions which, although they will not be excluded from the trading book solely on grounds of lesser liquidity, raise supervisory concerns about prudent valuation. The valuation guidance set forth below is not intended to require conventional bank licensees to change valuation procedures for financial reporting purposes. The CBB will assess a conventional bank licensee's valuation procedures for consistency with this guidance. One factor in the CBB's assessment of whether a conventional bank licensee must take a valuation adjustment for regulatory purposes under Paragraphs CA-16.1.11A to CA-16.1.13 is the degree of consistency between the conventional bank licensee's valuation procedures and these guidelines.

                  January 2015

                • CA-16.1.2

                  A framework for prudent valuation practices must at a minimum include the following:

                  January 2015

                • Systems and Controls

                  • CA-16.1.3

                    Conventional bank licensees must establish and maintain adequate systems and controls sufficient to give management and CBB the confidence that their valuation estimates are prudent and reliable. These systems must be integrated with other risk management systems within the organisation (such as credit analysis). Such systems must include:

                    (a) Documented policies and procedures for the process of valuation. This includes clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, guidelines for the use of unobservable inputs reflecting the conventional bank licensee's assumptions of what market participants would use in pricing position, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, end of the month and ad-hoc verification procedures; and
                    (b) Clear and independent (i.e. independent of front office) reporting lines for the department accountable for the valuation process. The reporting line must ultimately be to a main board executive director.
                    January 2015

                • Valuation Methodologies

                  • Marking to Market

                    • CA-16.1.4

                      Marking-to-market is at least the daily valuation of positions at readily available close out prices that are sourced independently. Examples of readily available close out prices include exchange prices, screen prices, or quotes from several independent reputable brokers.

                      January 2015

                    • CA-16.1.5

                      Conventional bank licensees must mark-to-market as much as possible. The more prudent side of bid/offer must be used unless the institution is a significant market maker in a particular position type and it can close out at mid-market. Conventional bank licensees must maximise the use of relevant observable inputs and minimise the use of unobservable inputs when estimating fair value using a valuation technique. However, observable inputs or transactions may not be relevant, such as in a forced liquidation or distressed sale, or transactions may not be observable, such as when markets are inactive. In such cases, the observable data must be considered, but may not be determinative.

                      January 2015

                  • Marking to Model

                    • CA-16.1.6

                      Only where marking-to-market is not possible must conventional bank licensees mark-to-model, but this must be demonstrated to be prudent. Marking-to-model is defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input.

                      January 2015

                    • CA-16.1.7

                      When marking to model, an extra degree of conservatism is appropriate. The CBB will consider the following in assessing whether a mark-to-model valuation is prudent:

                      (a) Senior management should be aware of the elements of the trading book or of other fair-valued positions which are subject to mark to model and should understand the materiality of the uncertainty this creates in the reporting of the risk/performance of the business;
                      (b) Market inputs should be sourced, to the extent possible, in line with market prices (as discussed above). The appropriateness of the market inputs for the particular position being valued should be reviewed regularly;
                      (c) Where available, generally accepted valuation methodologies for particular products should be used as far as possible;
                      (d) Where the model is developed by the institution itself, it should be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process. The model should be developed or approved independently of the front office. It should be independently tested. This includes validating the mathematics, the assumptions and the software implementation;
                      (e) There should be formal change control procedures in place and a secure copy of the model should be held and periodically used to check valuations;
                      (f) Risk management should be aware of the weaknesses of the models used and how best to reflect those in the valuation output;
                      (g) The model should be subject to periodic review to determine the accuracy of its performance (e.g. assessing continued appropriateness of the assumptions, analysis of P&L versus risk factors, comparison of actual close out values to model outputs); and
                      (h) Valuation adjustments should be made as appropriate, for example, to cover the uncertainty of the model valuation (see also valuation adjustments in Paragraphs CA-16.1.10 to CA-16.1.13).
                      January 2015

                  • Independent Price Verification

                    • CA-16.1.8

                      Independent price verification is distinct from daily mark-to-market. It is the process by which market prices or model inputs are regularly verified for accuracy. While daily marking-to-market may be performed by dealers, verification of market prices or model inputs must be performed by a unit independent of the dealing room, at least monthly (or, depending on the nature of the market/trading activity, more frequently). It need not be performed as frequently as daily mark-to-market, since the objective, i.e. independent, marking of positions, should reveal any error or bias in pricing, which should result in the elimination of inaccurate daily marks.

                      January 2015

                    • CA-16.1.9

                      Independent price verification entails a higher standard of accuracy in that the market prices or model inputs are used to determine profit and loss figures, whereas daily marks are used primarily for management reporting in between reporting dates. For independent price verification, where pricing sources are more subjective, e.g. only one available broker quote, prudent measures such as valuation adjustments may be appropriate.

                      January 2015

                  • Valuation Adjustments

                    • CA-16.1.10

                      As part of their procedures for marking to market, conventional bank licensees must establish and maintain procedures for considering valuation adjustments. Conventional bank licensees using third-party valuations must consider whether valuation adjustments are necessary. Such considerations are also necessary when marking to model.

                      January 2015

                    • CA-16.1.11

                      The CBB requires the following valuation adjustments/reserves to be formally considered at a minimum: unearned credit spreads, close-out costs, operational risks, early termination, investing and funding costs, and future administrative costs and, where appropriate, model risk.

                      January 2015

                  • Adjustment to the Current Valuation of Less Liquid Positions for Regulatory Capital Purposes

                    • CA-16.1.11A

                      Conventional bank licensees must establish and maintain procedures for judging the necessity of and calculating an adjustment to the current valuation of less liquid positions for regulatory capital purposes. This adjustment may be in addition to any changes to the value of the position required for financial reporting purposes and must be designed to reflect the illiquidity of the position. The CBB requires conventional bank licensees to consider the need for an adjustment to a position's valuation to reflect current illiquidity whether the position is marked to market using market prices or observable inputs, third-party valuations or marked to model.

                      January 2015

                    • CA-16.1.11B

                      'Less liquid positions' would generally involve positions in OTC financial instruments or commodities which are not listed or which are not traded through a central counterparties (such as NYSE Euronext or Chicago Mercantile Exchange) or which do not have readily available secondary market prices or observable inputs to valuation.

                      January 2015

                • CA-16.1.12

                  Bearing in mind that the assumptions made about liquidity in the market risk capital charge may not be consistent with the conventional bank licensee's ability to sell or hedge out less liquid positions, where appropriate, conventional bank licensees must take an adjustment to the current valuation of these positions, and review their continued appropriateness on an on-going basis. Reduced liquidity may have arisen from market events. Additionally, close-out prices for concentrated positions and/or stale positions must be considered in establishing the adjustment. Conventional bank licensees must consider all relevant factors when determining the appropriateness of the adjustment for less liquid positions. These factors may include, but are not limited to, the amount of time it would take to hedge out the position/risks within the position, the average volatility of bid/offer spreads, the availability of independent market quotes (number and identity of market makers), the average and volatility of trading volumes (including trading volumes during periods of market stress), market concentrations, the aging of positions, the extent to which valuation relies on marking-to-model, and the impact of other model risks not included in Paragraph CA-16.1.11A.

                  January 2015

                • CA-16.1.12A

                  For complex products including, but not limited to, securitisation exposures and n-th-to-default credit derivatives, conventional bank licensees must explicitly assess the need for valuation adjustments to reflect two forms of model risk: the model risk associated with using a possibly incorrect valuation methodology; and the risk associated with using unobservable (and possibly incorrect) calibration parameters in the valuation model.

                  January 2015

                • CA-16.1.13

                  The adjustment to the current valuation of less liquid positions made under Paragraph CA-16.1.12 must impact Tier 1 regulatory capital and may exceed those valuation adjustments made under financial reporting standards and Paragraphs CA-16.1.10 and CA-16.1.11.

                  January 2015

        • CM Credit Risk Management (Effective June 2022)

          • CM-A CM-A Introduction

            • CM-A.1 CM-A.1 Purpose

              • Executive Summary

                • CM-A.1.1

                  The purpose of this Module is to provide the Central Bank of Bahrain’s (CBB’s) Directive concerning requirements relevant to the key elements of a sound credit risk management system which it expects conventional bank licensees to observe.

                  Added: June 2022

                • CM-A.1.2

                  This Module must be read in conjunction with other parts of the Rulebook, mainly:

                  (a) High-level Controls;
                  (b) Capital Adequacy;
                  (c) Liquidity Risk;
                  (d) Operational Risk;
                  (e) Interest Rate Risk in the Banking Book;
                  (f) Reputational Risk;
                  (g) Credit Risk;
                  (h) Stress Testing; and
                  (i) Internal Capital Adequacy Assessment Process (‘ICAAP’).
                  Added: June 2022

              • Legal Basis

                • CM-A.1.3

                  This Module contains the CBB’s Directive (as amended from time-to-time) relating to credit risk management in conventional bank licensees and is issued under powers available to the CBB under Article 38 of the of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006) (“CBB Law”). This Module is applicable to all conventional bank licensees. Branches of foreign bank licensees shall comply with the requirements in this Module unless stated otherwise under relevant paragraphs of the Module.

                  Added: June 2022

                • CM-A.1.4

                  For an explanation of the CBB’s rule-making powers and different regulatory instruments, see Section UG-1.1.

                  Added: June 2022

            • CM-A.2 CM-A.2 Module History

              • CM-A.2.1

                This Module was first issued in July 2004. Changes made subsequently to this Module are annotated with the calendar quarter date in which the change was made as detailed in the table below. Chapter UG 3 provides further details on Rulebook maintenance and version control.

                Added: June 2022

              • CM-A.2.2

                Summary of Changes

                Module Ref. Change Date Description of Changes
                CM 8 1/1/2005 Revised Consumer Finance Limits.
                CMA-2 1/1/2005 Revised Key Requirements to reflect CM 8 above.
                CM 8.3 1/7/2005 Revised definition of 'consumer loan'.
                CM 3.2 1/10/2005 Role of internal audit becomes a rule.
                CM 8.4 1/10/2005 Clarifications re non-compliant facilities.
                CM-A.1 10/2007 New Rule CM-A.1.3 introduced, categorising this Module as a Directive.
                CM-5 10/2007 New Requirement to follow the ‘Code of Best practice on Consumer Credit and Charging’.
                CM-1.2 10/2007 Membership of CRB.
                CM-3.1 04/2008 Guidance concerning material interest as shareholder for write-offs.
                CM-5.6 04/2008 New Refund and prepayment requirements.
                CM-2.7 10/2009 New reporting arrangements for exposures of connected counterparties.
                CM-2.7 01/2010 Revised reference for LE reporting.
                CM-A.1.3 01/2011 Clarified legal basis.
                CM-5 01/2011 Changes made to incorporate Basel Core Principle 5 and new large exposure requirements along with a consistency alignment of Volume One and Volume Two.
                CM-A.1.1, CM-A.2.4 04/2011 Corrected typo.
                CM-2.3.1(c), CM-2.6.1 04/2011 Corrected cross reference.
                CM 07/2011 Various minor amendments to clarify Rules and have consistent language.
                CM-2.5.9 07/2011 Amended the definition of connected counterparties.
                CM-5.5.9 and CM-5.5.10 10/2011 Corrected elements of APR formula.
                CM-5.5.12 10/2011 Paragraph deleted as it does not reflect current practice on residual interest.
                CM-2.5.1.E 01/2012 Amended definition of qualifying holdings.
                CM-2.6 01/2012 Clarified and amended the Rules on temporary exposures.
                CM-2.10.3 01/2012 Clarified the Rule on future increases in qualifying holdings.
                CM-5.4.9 01/2012 Changed Rule to Guidance.
                CM-2.6.2 04/2012 Clarified Rules on temporary exposures.
                CM-A.2.8 07/2012 Updated reference to Bahrain Association of Banks.
                CM-2.5.6 07/2012 Clarified the definition of 'controlling interest'.
                CM-2.5.7A 07/2012 CBB prior approval required for excess over limits to connected counterparties.
                CM-2.5.9 07/2012 Minor correction.
                CM-2.10.3 07/2012 Amendment made to be in line with updated definition of qualifying holdings.
                CM-5.5.4 07/2012 Minor typo corrected.
                CM-5.5 10/2012 This Section was deleted and requirements are now included in Section BC-4.3.
                CM-A.2.10 01/2013 Clarified Rule related to the write-off of a credit facility.
                CM-2.5.11 07/2013 Clarified Rule on the amount that must be deducted from the capital base where exposure exceeds the limit stipulated.
                CM-5.6.2 07/2013 Clarified the type of mortgages on which the CBB imposes a ceiling on early repayment fees and/or charges.
                CM-1.2.4 10/2013 Amended to reflect the expanded scope of activities of the Credit Reference Bureau and the membership requirements.
                CM-5.4.4 10/2013 Updated reference to Eskan Bank to reflect new name.
                CM-1.2.4 01/2014 Clarified Rule to apply to credit facilities to residents in Bahrain.
                CM-A.2, CM-4.3 and CM-5 04/2014 Added cross references and corrected terminology to link to Glossary terms.
                CM-6.1 04/2014 Clarified Rules on staff loans.
                CM-5.2.4 04/2014 Reference updated for the code of best practice on consumer credit and charging.
                CM-2.10.2A 07/2014 Added a guidance Paragraph to clarify the treatment of investments in commercial entities which are otherwise not connected to the bank.
                CM-A.2 and CM-5 01/2015 Corrected to be aligned with updated requirements under Module CA.
                CM-2.3.2 01/2015 Added reference to transactions subject to the Regulation on close-out netting under a market contract.
                CM-2.5.1B 01/2015 Corrected cross reference.
                CM-2.5.1E 04/2015 Deleted cross reference as not applicable.
                CM-2.6.2B and CM-2.10.10 04/2015 Corrected reference to consolidated Total Capital to be in line with Module CA.
                CM-2.7.1 04/2015 Added reference to Appendix BR-19 for reporting the financial details of each large exposure.
                CM-2.10.3 04/2015 Clarified language on the treatment of significant investments over the thresholds outlined in Paragraph CA-2.4.25.
                CM-2.7.1, CM-2.7.1A and CM-2.7.1B 07/2015 Clarified the reporting requirements of exposures.
                CM-2.5.11 10/2015 Clarified limits on large exposures.
                CM-3.1 10/2015 Amended Rules on write-offs.
                CM-2.5.1E 10/2016 Amended definition of major investment.
                CM-2.5.3 10/2016 Added “Limits to Significant Investments” new Section reference.
                CM-2.10.2 10/2016 Major investments defined.
                CM-2.10.2A 10/2016 Paragraph moved to CM-5.11.4.
                CM-2.10.3 10/2016 Amended and split into CM-5.10.3 A, B, C & D.
                CM-2.10.3D 10/2016 Amended Rule.
                CM-2.10.6 10/2016 Moved to new section 5.11.
                CM-2.10.7 10/2016 Moved to new section 5.11.
                CM-2.10.8 10/2016 Moved to new section 5.11.
                CM-2.10.10 10/2016 Amended 'Acquisitions' to be 'Investments'.
                CM-2.11 10/2016 New Section 'Limits on Significant Investments'.
                CM-3.1.1 10/2016 Amended the Write-offs Section.
                CM-5.4.5 10/2016 Amendments to clarify the Rule.
                CM-A2.2A
                CM-2.5.3A
                01/2017 Added a new requirement on Large Exposures.
                CM-2.5.5A
                CM-2.5.9B
                01/2017 Added Paragraphs on closely related counterparties and connected counterparties.
                CM-4.5 07/2017 Added new Section on 'Country and Transfer Risks'.
                CM-8.6.2 04/2018 Deleted Paragraph on "Early Repayment Fees/Charges".
                CM-8.4.10 10/2019 Amended Paragraph on non-compliant facilities.
                CM-5.6.2D 01/2020 Amended Paragraph on approval of the banks policies and procedures.
                CM-1.2.6 07/2020 Added a new Paragraph on CRB members requirements.
                CM-1.2.7 07/2020 Added a new Paragraph on compliance with CBB Law.
                Full Module CM 07/2021 Revised CM Module to incorporate various changes in qualitative requirements in line with Basel Committee on Banking Supervision standards and best practices
                CM-5.4.9 01/2022 Amended Paragraph on submission of technically non-compliant facilities report.
                CM-6.1.1 01/2022 Deleted Paragraph.
                CM-6.1.2 01/2022 Amended Paragraph.
                CM-6.1.3 01/2022 Deleted Paragraph.
                CM-6.1.4 01/2022 Deleted Paragraph.
                CM-1.2.29 10/2022 Amended Paragraph on CBB’s prior approval of country and transfer risks policy.
                CM-1.8.5 10/2022 Amended Paragraph on submission and CBB review of ECL recognition policy statement.
                CM-2.5.9 10/2022 Amended Paragraph on large exposure policy statement.
                CM-2.6.2 10/2022 Amended Paragraph on exempt exposures to parties not connected to the Bank.
                CM-2.8.1 10/2022 Amended Paragraph on submission of large exposure policy statement to CBB for approval.
                CM-1.8.22A 01/2023 Added a new Paragraph on the recognition of credit default guarantees provided by Tamkeen.
                CM-1.10 01/2023 Deleted Section on Provisions against Sovereign Debt.
                CM-4.1.3(d) 01/2023 Amended reference.
                CM-5.3.1 01/2023 Added a new Sub-paragraph on the excluded credit facilities from consumer finance requirements.
                CM-1.8.10 04/2023 Amended Paragraph on the identification of Non-performing Exposures.
                CM-1.8.15 04/2023 Amended Paragraph on re-categorisation of non-performing exposures as performing.
                CM-1.8.15A 04/2023 Added a new Paragraph on re-categorisation.
                CM-1.8.18A 04/2023 Added a new Paragraph on Re-categorisation of Non-performing Exposures as Performing requirements.
                CM-1.8.27 04/2023 Amended Paragraph on restructured accounts.
                CM-6 04/2023 Added a new Appendix CM-6 on re-categorisation of exposures.

              • Effective Date

                • CM-A.2.3

                  The requirements in this amended Module are effective from 30th June 2022 on which date the existing Module CM will become redundant and any exemptions allowed under the existing Module will be subject to grandfathering requirements with the approval of CBB.

                  Added: June 2022

          • CM-1 CM-1 Credit Risk Management Requirements

            • CM-1.1 CM-1.1 Overview

              • CM-1.1.1

                Credit risk is the likelihood that a counterparty of the licensee will not meet its obligations in accordance with the agreed terms. The magnitude of the credit risk depends on the likelihood of default by the counterparty, and on the potential value of the licensee's contracts with the customer at the time of default. Credit risk largely arises in assets shown on the balance sheet, but it can also show-up off the balance sheet in a variety of contingent obligations.

                Added: June 2022

              • CM-1.1.2

                The effective management of credit risk is a critical component of a comprehensive approach to risk management and is essential to the long-term success of any banking organisation.

                Added: June 2022

              • CM-1.1.3

                The lack of continuous loan supervision and effective internal controls, or the failure to identify abuse and fraud are also sources of risk. The overall lending policy of the licensee should be monitored by a Credit Committee, composed of officers with adequate seniority and experience.

                Added: June 2022

              • CM-1.1.4

                Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities, a comprehensive credit risk management program shall specifically address the following areas (i) establishing an appropriate credit risk environment; (ii) operating under a sound credit granting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (iv) ensuring adequate controls over credit risk. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality, the adequacy of provisions and reserves, and the disclosure of credit risk.

                Added: June 2022

            • CM-1.2 CM-1.2 Credit Risk Management Framework

              • CM-1.2.1

                Conventional bank licensees must establish a credit risk management unit (CRMU) within their organisational structure which will be responsible for identification, assessment, measurement, monitoring and controlling of credit risk inherent in the entire credit portfolios, as well as credit risk in individual credit exposures. The credit risk management framework must consider the relationship between credit risk and other risks.

                Added: June 2022

              • CM-1.2.2

                The CRMU must be independent and must ensure that it undertakes the credit risk management activities with no influence from business functions responsible for credit underwriting.

                Added: June 2022

              • CM-1.2.3

                The CRMU should not have management or financial responsibility related to credit operational business line or revenue generating functions.

                Added: June 2022

              • The Role of the Board of Directors

                • CM-1.2.4

                  The Board of Directors of the conventional bank licensee is responsible for ensuring that the licensee has an effective CRMU and for approving and regularly reviewing, at least every two years, its credit risk policies, credit risk appetite and limits framework. Amendments made to such documents must also be approved by the Board. The Board may delegate some of its functions, such as approval of policies, amendments to policies and periodic reviews to a designated Board committee.

                  Added: June 2022

                • CM-1.2.5

                  Effective credit risk management is imperative to optimise the licensee’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. A risk appetite statement is a written articulation of the aggregated level and types of risk exposures that the licensee will accept, or avoid, in order to achieve its business objectives.

                  Added: June 2022

                • CM-1.2.6

                  The Board must ensure that the credit risk policies cover all activities of the conventional bank licensee in which it incurs credit risk. The Board must also determine that the licensee’s capital level is adequate for the risks assumed throughout the entire organisation or group.

                  Added: June 2022

                • CM-1.2.7

                  The credit risk policy must document the licensee’s willingness to grant credit based on exposure type (commercial, consumer, real estate etc.), economic sector, geographical location, product, currency, maturity and anticipated profitability. This might also include the identification of target markets and the overall characteristics that the conventional bank licensee would want to achieve in its credit portfolio (including levels of diversification and concentration tolerances).

                  Added: June 2022

                • CM-1.2.8

                  The Board must ensure that the credit risk appetite framework delineates the delegated powers, lines of responsibility and accountability over credit risk management decisions, and must clearly define authorised instruments, hedging strategies and risk-taking opportunities.

                  Added: June 2022

                • CM-1.2.9

                  The Board must assess whether the conventional bank licensee is operating within the boundaries of the credit risk appetite and limits framework approved by the Board.

                  Added: June 2022

                • CM-1.2.10

                  The Board must ensure that it receives adequate management information reports and exception reports to meet its oversight requirements to monitor adherence to the licensee’s risk tolerance/appetite/limits. The Board must regularly evaluate whether it is receiving the right balance of detail and quantitative versus qualitative information.

                  Added: June 2022

                • CM-1.2.11

                  The Board must approve the structure in which the conventional bank licensee will organise its credit-granting functions, including independent review of the credit granting process and the overall portfolio.

                  Added: June 2022

                • CM-1.2.12

                  For branches of foreign bank licensees where no Board/Audit Committee exists, all references to the Board/Audit Committee should be interpreted as the Group Chief Risk Officer or equivalent person who has direct access or reports to the Board or Audit Committee of the parent bank, unless alternative structures that satisfy the primary objectives of such oversight are in place.

                  Added: June 2022

              • The Role of the Senior Management

                • CM-1.2.13

                  Senior management of the conventional bank licensee is responsible for developing, implementing and approving sound credit risk procedures in accordance with credit risk policies approved by the Board.

                  Added: June 2022

                • CM-1.2.14

                  Senior management must determine that the staff involved in any credit relationship, whether established or new, basic or complex, have the necessary knowledge, skill sets, experience and are fully capable of ensuring the relationship meets the highest standards and in compliance with the licensee’s policies and procedures.

                  Added: June 2022

                • CM-1.2.15

                  Senior management must ensure that risk monitoring systems are in place for effectively undertaking the activities of credit risk management.

                  Added: June 2022

              • Credit Risk Policy and Procedures

                • CM-1.2.16

                  A properly documented credit risk policy is an essential element of, and a prerequisite for, the credit risk management process. Consistent with the Board's objectives, it assists licensee’s management in the maintenance of proper credit standards and the avoidance of unnecessary risks. Additionally, periodic internal assessment should be undertaken by the internal audit. In the case of branches of foreign banks, the credit policy, limits and the procedures are normally those that are approved by the Head Office/Regional Office.

                  Added: June 2022

                • CM-1.2.17

                  Senior management, based on the approved credit risk policy, must develop credit risk procedures for identifying, measuring, monitoring and controlling credit risk. The procedures must address credit risk in all of the conventional bank licensee’s activities, and at both the individual credit and portfolio levels.

                  Added: June 2022

                • CM-1.2.18

                  Explicit guidelines in the credit risk policy provide the basis for effective credit risk management. A sound credit risk policy should consider which types of credit products and borrowers the licensee is looking for, and the underwriting standards the licensee will utilize.

                  Added: June 2022

                • CM-1.2.19

                  Conventional bank licensee’s credit risk framework must address all credit and credit risk related activities throughout the credit lifecycle covering matters of significance including, but not limited to:

                  (a) Organisation and reporting structure of the credit risk function/activities;
                  (b) Delegation of authority;
                  (c) Role of credit committee and Board risk committee;
                  (d) Designated markets and products;
                  (e) Credit limit framework;
                  (f) Desirable pricing levels and criteria;
                  (g) Policy on country and transfer risks;
                  (h) Credit granting criteria and authorisation procedures for the advancement of credit, including exceptions to set criteria and limits;
                  (i) Credit risk analysis, reviews and credit risk ratings;
                  (j) Assessment of concentration;
                  (k) Large exposure policy;
                  (l) Lending to connected counterparties;
                  (m) Problem credit identification, remediation and administration;
                  (n) Policies and procedures on write-offs and recoveries;
                  (o) Monitoring and reporting.
                  Added: June 2022

                • CM-1.2.20

                  Conventional bank licensees must operate within sound, well-defined credit-granting criteria. These criteria must include a clear indication of the licensee’s target market and a thorough understanding of the borrower or counterparty, as well as the purpose and structure of the credit and its source of repayment. In addition, the criteria must set out who is eligible for credit and for how much, what types of credit are available, and under what terms and conditions the credit may be granted.

                  Added: June 2022

                • CM-1.2.21

                  In the case of branches of foreign bank licensees, the credit policies, credit limits and the procedures are those that are approved by the Head Office/Regional office.

                  Added: June 2022

              • Effectiveness of Internal Control System

                • CM-1.2.22

                  An effective internal control system for credit risk assessment and measurement is essential to enable senior management to carry out its duties. An effective internal control system must include:

                  (a) Measures to comply with applicable laws, regulations and internal policies and procedures;
                  (b) Measures to provide oversight of the integrity of information used and to reasonably ensure that the allowances reflected in the licensee’s financial statements and its supervisory reports are prepared in accordance with the applicable accounting framework and relevant supervisory guidance;
                  (c) Well-defined credit risk assessment and measurement processes that are independent from (while taking appropriate account of) the lending function and include:
                  (i) An effective credit risk rating/ scoring system that is consistently applied, accurately grades differing credit risk characteristics, identifies changes in credit risk on a timely basis, and prompts appropriate action;
                  (ii) An effective process which ensures that all relevant/reasonable and supportable information, including forward-looking information, is appropriately considered in assessing and measuring expected credit loss (‘ECL’). This includes maintaining appropriate reports, details of reviews performed and identification and descriptions of the roles and responsibilities of the personnel involved;
                  (iii) An assessment policy that ensures ECL measurement occurs not just at the individual lending exposure level, but also when necessary to appropriately measure ECL at the collective portfolio level by grouping exposures based on identified shared credit risk characteristics;
                  (iv) An effective model validation process to ensure that the credit risk assessment and measurement models, including ECL models, are able to generate accurate, consistent and unbiased predictive estimates on an ongoing basis. This includes establishing policies and procedures which set out the accountability and reporting structure of the model validation process, internal standards for assessing and approving changes to the models and reporting of the outcome of the model validation (see also Paragraph CM-1.4.10);
                  (v) Clear formal communication and coordination among the licensee’s credit risk staff, financial reporting staff, senior management, the Board and others who are involved in the credit risk assessment and measurement process for an ECL accounting framework, as applicable (e.g. evidenced by written policies and procedures, management reports and committee minutes); and
                  (d) An internal audit function that independently evaluates the effectiveness of the licensee’s credit risk management framework, and in particular, assessment and measurement systems, models and processes, including the credit risk rating system. Refer to HC-6.5.
                  Added: June 2022

                • CM-1.2.23

                  Conventional bank licensees must ensure that the credit risk policy establishes the objectives that guide the licensee’s credit-granting activities.

                  Added: June 2022

                • CM-1.2.24

                  The credit risk policy must give recognition to the goals of credit quality, earnings quality and sustainability and growth. Conventional bank licensees, regardless of their size, must determine the acceptable risk/reward trade-off for their activities, factoring in the cost of capital.

                  Added: June 2022

                • CM-1.2.25

                  The credit risk appetite/limits framework of conventional bank licensees must take into consideration the cyclical aspects of the economy and the resulting shifts in the composition and quality of the overall credit portfolio. The credit granting criteria must be periodically assessed and amended and it must be viable in the long-run and through various economic cycles. The credit risk procedures must be reviewed at least once every three years or more frequently as may be necessary if there are changes in internal or regulatory requirements.

                  Added: June 2022

                • CM-1.2.26

                  The credit granting criteria must be designed and implemented within the context of internal and external factors, such as the licensee’s market position, trade area, staff capabilities and technology.

                  Added: June 2022

                • CM-1.2.27

                  Conventional bank licensees must have a clearly defined credit risk appetite statement which is implemented through comprehensive policies and procedures for limiting and controlling credit risk. Conventional bank licensees must also establish credit limits in a meaningful manner for different types of exposures, both on and off-balance sheet.

                  Added: June 2022

                • CM-1.2.28

                  Bahraini conventional bank licensees must consider the results of stress testing in the overall limit setting and monitoring process. Such stress testing must take into consideration economic cycles, interest rates and other market movements and liquidity conditions.

                  Added: June 2022

              • Country and Transfer Risks

                • CM-1.2.29

                  Conventional bank licensees must set out their policy on country and transfer risks within their Board approved credit risk policy. Such policy must include:

                  (a) the risk appetite/tolerance levels for country and transfer risks;
                  (b) country exposure limits;
                  (c) basis and frequency for periodic reviews and assessments;
                  (d) the criteria for downgrading a country exposure from Stage 1 to Stages 2 or 3, and related provisioning policy; and
                  (e) the policy for recategorization of exposure to a higher grade.
                  Amended: October 2022
                  Added: June 2022

                • CM-1.2.30

                  Country risk is the exposure to a loss in cross-border lending, caused by events in the country to which the licensee has exposure and includes all forms of lending whether to the government, a bank, a private enterprise or an individual. Country risk is therefore a broader concept than sovereign risk, which is restricted to the risk of lending to the government of a sovereign nation. Transfer risk, on the other hand, represents the risk of loss due to repatriation or remittance restrictions imposed by a foreign government that make it impossible to remit, fully or partially, the proceeds of debt owed to the licensee.

                  Added: June 2022

                • CM-1.2.31

                  In the case of exposure to borrowers, conventional bank licensees must examine any associated country and transfer risks keeping in view factors such as domicile of the counterparty, the legal structure of the counterparty, the existence of special purpose vehicles, conduits and/ or other related factors that may affect the transferability of proceeds of repayment.

                  Added: June 2022

                • CM-1.2.32

                  Branches of foreign bank licensees must satisfy the CBB that equivalent arrangements are in place at the parent entity level, otherwise a policy is required in line with Paragraph CM-1.2.28.

                  Added: June 2022

                • CM-1.2.33

                  Branches of foreign bank licensees are normally subject to country limits that are set at a global level by the head office or by the regional office. The branch should be able to demonstrate that it is subject to limits imposed on it by the head office or regional office as appropriate.

                  Added: June 2022

            • CM-1.3 CM-1.3 Credit Granting

              • CM-1.3.1

                The limits framework must ensure that the granting of credit exceeding certain predetermined levels receives prompt management attention. An appropriate limit system must assist the management in initiating discussion about opportunities and risks, in controlling credit risk exposures and monitoring actual risk taking against predetermined credit risk tolerances.

                Added: June 2022

              • CM-1.3.2

                Conventional bank licensees must receive sufficient information to enable a comprehensive assessment of the true risk profile of the borrower or counterparty. Depending on the type of credit exposure and the nature of the credit relationship to date, the factors to be considered and documented in approving credits must include:

                (a) The purpose of the credit and sources of repayment;
                (b) The current risk profile (including the nature and aggregate amounts of risks) of the borrower or counterparty and collateral and its sensitivity to economic and market developments;
                (c) The borrower’s repayment history and current capacity to repay, based on historical financial trends and future cash flow projections, under various scenarios;
                (d) For commercial credits, the borrower’s business expertise and the status of the borrower’s economic sector and its position within that sector;
                (e) The proposed terms and conditions of the credit, including covenants designed to limit changes in the future risk profile of the borrower;
                (f) The legal structure of the entity to which credit is granted and any associated implications; and
                (g) Where applicable, the adequacy and enforceability of collateral or guarantees, including under various scenarios.
                Added: June 2022

              • CM-1.3.3

                Conventional bank licensees need to understand to whom they are granting credit. As such, prior to entering into any new credit relationship, the licensee must become familiar with the borrower or counterparty and be confident that they are dealing with an individual or organisation of sound repute and creditworthiness. In particular, strict policies must be in place to avoid association with individuals involved in fraudulent activities and other crimes.

                Added: June 2022

              • CM-1.3.4

                Conventional bank licensees must perform their due diligence at the solo entity level to which there is a credit exposure. In evaluating the repayment capacity of the solo entity, licensees can take into account the support of the group and also the potential for the solo entity to be adversely impacted by problems in the group.

                Added: June 2022

              • CM-1.3.5

                In considering potential credit, conventional bank licensees must recognise the necessity of establishing provisions for identified and expected losses and hold adequate capital to absorb unexpected losses. The licensee must factor these considerations into credit-granting decisions, as well as into the overall portfolio risk management process.

                Added: June 2022

              • CM-1.3.6

                Where actual or potential conflicts of interest exist within the conventional bank licensee, internal confidentiality arrangements (e.g. ‘Chinese walls’) must be established and maintained to ensure that there is no hindrance to the licensee in obtaining all relevant information from the borrower.

                Added: June 2022

              • CM-1.3.7

                In order to maintain a sound credit portfolio, conventional bank licensee must have an established formal transaction evaluation and approval process for the granting of credit. Approvals must be made in accordance with the licensee’s written guidelines and granted by the appropriate level of management. There must be a clear audit trail documenting that the approval process was complied with and identifying the individual(s) and/or committee(s) providing input, as well as making the credit decision. Conventional bank licensees must invest in appropriate credit decision making tools and resources so that they are able to make sound credit decisions consistent with their credit risk strategy and meet competitive time, pricing and structuring pressures.

                Added: June 2022

              • CM-1.3.8

                Each credit proposal must be subject to careful analysis by an experienced credit analyst with expertise commensurate with the size and complexity of the transaction. An effective evaluation process establishes minimum requirements for the information on which the analysis is to be based.

                Added: June 2022

              • CM-1.3.9

                Conventional bank licensees must have in place a Board approved policy regarding the information and documentation needed to approve new credits, renew existing credits and/or change the terms and conditions of previously approved credits. The information received will be the basis for any internal evaluation or rating assigned to the credit, and its accuracy and adequacy is critical to the management making appropriate judgments about the acceptability of the credit.

                Added: June 2022

              • CM-1.3.10

                Credit risk officers must have the experience, knowledge and background to exercise prudent judgment in assessing, approving and managing credit risks. The licensee’s credit-granting approval process must establish accountability for decisions taken and designate who has the final or ultimate authority to approve credits or changes in credit terms.

                Added: June 2022

              • CM-1.3.11

                All extensions of credit must be made on an arm’s-length basis. In particular, credits to connected counterparties must be authorised only under exceptional circumstances. Such credits must be monitored with particular care and other appropriate steps taken to control or mitigate the risks of non-arm’s length lending.

                Added: June 2022

              • CM-1.3.12

                Transactions with connected counterparties must be subject to the approval of the Board of Directors (excluding Board members with conflict of interest).

                Added: June 2022

              • Credit Reference Requirements

                • CM-1.3.13

                  Conventional bank licensees which provide credit facilities to natural and legal persons in Bahrain must become members of the Bahrain Credit Reference Bureau (‘BCRB’). All enquiries for new or additional credit facilities in Bahrain must be submitted to the BCRB. BCRB members must meet the following requirements and incorporate them into their policies and procedures:

                  (a) Establish an electronic monitoring system to detect, monitor and maintain records and a log of all access to BCRB data by the BCRB member’s employees;
                  (b) Conduct a monthly internal audit on the access logs to identify unauthorised access to BCRB data by any employee without securing customer consent and report to the CBB any observed violation of Article 68 (bis (2)) of CBB Law;
                  (c) Require the sign off of a BCRB member’s designated employee on their legal obligations concerning the confidentiality of BCRB data and that any violation of Article 68 (bis (2)) of CBB Law would subject them to an enforcement action in accordance with CBB Law; and
                  (d) Cover compliance with the above requirements in the performance appraisal of relevant employees.
                  Added: June 2022

                • CM-1.3.14

                  Failure to comply with Article 68 (bis (2)) of the CBB Law and Paragraph CM-1.3.13 may result in an enforcement action taken against the BCRB member, as well as the relevant employee in accordance with CBB Law. Additionally, all BCRB members must abide by the agreed Code of Practice of the BCRB (see Appendix CM-3). Any breaches to the code will be subject to enforcement action by the CBB.

                  Added: June 2022

              • Name-lending

                • CM-1.3.15

                  Conventional bank licensees must avoid providing finance to counterparties without collateral or without adequate credit risk analysis performed on the basis of reliable audited financial statements to properly analyse the obligor’s ability to repay.

                  Added: June 2022

                • CM-1.3.16

                  Some licensees indulge in ‘name-lending’ which refers to the practice of lending to businesses and individuals merely on the basis of their ‘name’ or ‘reputation’ in the market. In such instances, the licensee, typically, does not receive audited financial statements and other relevant information to conduct a proper credit risk analysis, nor does it receive collateral to support the credit granting decision. The CBB prohibits licensees from engaging in such activities in order to minimise their credit risk and reputational risk.

                  Added: June 2022

            • CM-1.4 CM-1.4 Credit Risk Measurement and Monitoring

              • CM-1.4.1

                Conventional bank licensees must have methodologies that enable them to quantify the risk involved in exposures to individual borrowers or counterparties. Conventional bank licensees must also be able to analyse credit risk at the product and portfolio level, in order to identify any particular sensitivities or concentrations. The measurement of credit risk must take account of the following:

                (a) The specific nature of the credit and its contractual and financial conditions (maturity, reference rate, etc.);
                (b) The exposure profile until maturity in relation to potential market movements;
                (c) The existence of collateral or guarantees; and
                (d) The potential for default based on the internal risk rating.

                The analysis of credit risk data must be undertaken at an appropriate frequency, with the results reviewed against relevant limits.

                Added: June 2022

              • CM-1.4.2

                Conventional bank licensees must use measurement techniques that are appropriate to the complexity and level of the risks involved in their activities, based on robust data and subject to periodic validation.

                Added: June 2022

              • CM-1.4.3

                Conventional bank licensees must monitor actual exposures against established limits. It is important that licensees have an MIS in place to ensure that exposures approaching risk limits are brought to the attention of senior management. All exposures must be included in a risk limit measurement system. Conventional bank licensee’s information system must be able to aggregate credit exposures to individual borrowers and counterparties and report on exceptions to credit risk limits in a meaningful way and on a timely basis.

                Added: June 2022

              • CM-1.4.4

                Conventional bank licensees must take into consideration potential future changes in economic conditions when assessing individual credits and their credit portfolios and must assess their credit risk exposures under stressful conditions.

                Added: June 2022

              • CM-1.4.5

                An important element of sound credit risk management involves discussing what could potentially go wrong with individual credits and within the various credit portfolios and factoring this information into the analysis of the adequacy of capital and provisions. The supervisory guidance on accounting for expected credit losses has been provided in Section CM-1.8.

                Added: June 2022

              • Credit Rating /Scoring

                • CM-1.4.6

                  Conventional bank licensees must have in place a Board approved policy to develop, review and implement an internal risk rating system. Such a system must be able to assign a credit risk rating or scoring to obligors that accurately reflects the obligors’ risk profile and likelihood of loss.

                  Added: June 2022

                • CM-1.4.7

                  Conventional bank licensees must assign risk ratings or scoring in a consistent manner to enable the licensee to classify obligors by risk ratings or scoring and have a clearer understanding of the overall risk profile of its portfolio. The licensee’s credit risk policy must define the various risk grades of its rating system. Criteria for assigning risk grades and the circumstances under which deviations from the criteria are permitted must be set. The credit risk policy must also define the roles of different parties involved in the rating process.

                  Added: June 2022

                • CM-1.4.8

                  The credit risk rating/scoring process must appropriately group credit exposures on the basis of shared credit risk characteristics.

                  Added: June 2022

                • CM-1.4.9

                  Conventional bank licensees’ credit exposures must be grouped according to shared credit risk characteristics, so that changes in the level of credit risk respond to the impact of changing conditions on a common range of credit risk drivers. This includes considering the effect on the group’s credit risk in response to changes in forward-looking information, including macroeconomic factors. The licensee must review the appropriateness of the grouping implemented upon initial recognition based on similar credit risk characteristics, at regular intervals, at least annually, to ensure that the relevant characteristics and their impact on the level of credit risk of the different groupings have not changed over time.

                  Added: June 2022

                • CM-1.4.10

                  Conventional bank licensees must validate their risk rating or scoring system and ascertain its applicability to their portfolio prior to implementation. An external independent party, other than the external auditor, with necessary expertise in model validation, must conduct the validation of the risk rating/scoring and ECL models every three years and upon development of the model, and also when there are material changes to the portfolio, rating/scoring model or model parameters (See also Paragraph CM-1.2.22 (c)).

                  Added: June 2022

                • CM-1.4.11

                  Conventional bank licensees that use a judgmental rating or scoring system must ensure that each rating is unique, well-defined and distinct from other ratings in the rating scale. The relevant risk factors and weights employed in the rating/scoring methodology must be appropriate for the risk profile of the obligors in different market segments, such as corporations, small and medium-sized enterprises (‘SMEs’), and financial institutions.

                  Added: June 2022

                • CM-1.4.12

                  Risk ratings must be assigned at the inception of lending and updated at least on an annual basis. Additionally, conventional bank licensee must review the ratings or scoring as and when adverse events occur. Risk ratings or risk scores assigned to various obligors must be reviewed by the licensee’s personnel that are independent of those involved in loan origination. As part of its portfolio monitoring, the licensee must generate reports on credit exposures by risk rating/scores. Trend and migration analysis between risk ratings /scores must also be conducted to detect changes in the credit quality of the portfolio.

                  Added: June 2022

                • CM-1.4.13

                  The licensee may establish target limits for risk grades to highlight concentration in particular rating bands. The analysis of the portfolio by risk ratings is meaningful only when the licensee’s rating or scoring system is able to consistently assign similar ratings or scores to obligors with similar risk profiles.

                  Added: June 2022

                • CM-1.4.14

                  After the credit facility has been granted, its performance must be monitored at regular intervals. This includes an appropriate periodic review of financial statements, a reassessment of collateral and update of appraisals, and attentive monitoring of conditions in the borrower's industry. Credit supervision constitutes the first line of detection of difficulties and provides the licensee with an opportunity to address problems before losses are sustained. The loan review must ensure that the credit files are complete and that all loan approvals and other necessary documents relating to the obligor are available.

                  Added: June 2022

                • CM-1.4.15

                  Conventional bank licensees must perform regular credit reviews. The purpose of a credit review is to verify that credits are granted in accordance with the licensee’s credit risk policy and to provide an independent judgment of asset quality. Conventional bank licensees must conduct credit reviews with updated information on the obligor’s financial and business conditions, as well as the conduct of the account. Exceptions noted must be evaluated for impact on the obligor’s creditworthiness.

                  Added: June 2022

                • CM-1.4.16

                  Credit reviews must also be conducted on a consolidated group basis to factor in the business connections among connected entities. The performance of the underlying assets in the case of securitisation exposures must also be included in the credit reviews.

                  Added: June 2022

                • CM-1.4.17

                  Credit reviews must be performed and documented at least once a year other than for facilities subject to collective assessments. For Stage 2 and 3 accounts (See Paragraph CM-1.8.23), however, more frequent reviews must be conducted. Procedures must also be instituted to ensure that reviews are conducted at the appropriate frequency. A process to approve deferment of credit reviews must also be put in place. For consumer loans, annual credit reviews of individual obligors are only needed if significant and a portfolio analysis does not identify credit risk related issues or problems. However, credit exceptions and deterioration must be monitored and reported.

                  Added: June 2022

              • Credit risk stress testing

                • CM-1.4.18

                  Stress testing must involve identifying possible events or future changes in economic and other conditions that could have unfavourable effects on the conventional bank licensee’s credit exposures and assessing its ability to withstand such changes. Three areas that the licensee could usefully examine are: (i) economic or industry downturns; (ii) market risk events; and (iii) liquidity conditions. Stress testing can range from relatively simple alterations in assumptions about one or more financial, structural or economic variables, to the use of highly sophisticated financial models.

                  Added: June 2022

                • CM-1.4.19

                  Stress tests are to be performed by adjusting the parameters and then recalculating credit losses, for example:

                  (a) Unfavourable changes (increases/decreases, depending on portfolio composition) in the underlying interest rate by a certain number of basis points; and
                  (b) Unfavourable changes (increases/decreases, depending on portfolio composition) in crucial exchange rates by a certain percentage.
                  Added: June 2022

                • CM-1.4.20

                  In undertaking credit risk stress tests, licensees should consider counterparty-based and credit facility-based risk factors and scenarios that help estimate credit losses after modelling a change in probability of default (‘PD’) and/or loss given default (‘LGD’) or exposure at default (‘EAD’). Stress testing programmes should consider:

                  (a) The inclusion of the licensee’s individual credit portfolio composition and compile a list of the credit products in use;
                  (b) Identify the decisive risk factors for each individual credit product and develop a basis for prioritising the factors by relevance and to group those risk factors which influence each other strongly under normal conditions or in crisis situations for the development of stress tests;
                  (c) Analyse the prevailing social, economic, and political conditions and filter as many potential crisis situations as possible and relevant;
                  (d) Use of in-house as well as external expertise, as appropriate, and ensure that the stress tests attain the necessary level acceptance.
                  Added: June 2022

                • CM-1.4.21

                  The approaches towards modelling stress tests include the following elements considered individually and on a combined basis as appropriate and with varying severity:

                  (a) Downgrading all borrowers by one rating class;
                  (b) Increasing default probabilities by a certain percentage;
                  (c) Increasing LGD by a certain percentage;
                  (d) Increasing EAD by a certain percentage for variable credit products (justification: customers are likely to utilize credit lines more heavily in crisis situations, for example);
                  (e) Assumption of negative credit spread developments (e.g. parallel shifts in term structures of interest rates) for bonds;
                  (f) Modelling of input factors (e.g. balance sheet indicators).
                  Added: June 2022

                • CM-1.4.22

                  Additionally, the impact of macroeconomic risk factors such as fluctuations in interest rates and/or exchange rates etc. on the following illustrative general conditions may be considered:

                  (a) Stress tests for specific industries or regions;
                  (b) Downgrading all borrowers in one or more crisis-affected industries; and
                  (c) Downgrading all borrowers in one or more crisis-affected regions.
                  Added: June 2022

                • CM-1.4.23

                  If the licensee uses risk models (such as credit portfolio models or credit pricing models), it is necessary to perform stress tests which show whether the assumptions underlying the risk models will also be fulfilled in crisis situations. Only then will the models be able to provide the appropriate guidance in crisis situations.

                  Added: June 2022

                • CM-1.4.24

                  Conventional bank licensees should also examine political risk factors when significant parts of the credit portfolio consist of borrowers from politically unstable countries. Due to the complex interrelationships involved, however, developing plausible stress tests for political risk factors involves far more effort than designing tests for macroeconomic risk factors. It is, therefore, advisable to call in specialists to develop stress tests for political risk factors in order to assess the relevant effects on financial and macroeconomic conditions.

                  Added: June 2022

                • CM-1.4.25

                  The output of the stress tests must be reviewed periodically by senior management and appropriate action taken in cases where the results exceed agreed tolerances. The output must also be incorporated into the process for assigning and updating policy and limits.

                  Added: June 2022

                • CM-1.4.26

                  Conventional bank licensees must attempt to identify the types of situations, such as economic downturns, both in the whole economy or in particular sectors, higher than expected levels of delinquencies and defaults, or the combinations of credit and market events that could produce substantial losses or liquidity problems.

                  Added: June 2022

            • CM-1.5 CM-1.5 Credit Administration and Collateral Management

              • CM-1.5.1

                Conventional bank licensees must have in place a system for the ongoing administration of their various credit risk exposures.

                Added: June 2022

              • CM-1.5.2

                In developing their credit administration areas, conventional bank licensees must ensure:

                (a) The efficiency and effectiveness of credit administration operations, including monitoring documentation, contractual requirements, legal covenants, collateral etc.;
                (b) The accuracy and timeliness of information provided in management information systems (‘MIS’);
                (c) Adequate segregation of duties;
                (d) The adequacy of controls over all ‘back office’ procedures; and
                (e) Compliance with prescribed policy and procedures, as well as applicable laws and regulations.
                Added: June 2022

              • CM-1.5.3

                For the various components of credit administration to function appropriately, senior management must understand and demonstrate that it recognises the importance of this element of monitoring and controlling credit risk.

                Added: June 2022

              • CM-1.5.4

                The credit files must include all information necessary to ascertain the current financial condition of the borrower or counterparty, as well as sufficient information to track the decisions made and the history of the credit. For example, the credit files must include current financial statements, financial analyses and internal rating documentation, internal memoranda, reference letters and appraisals.

                Added: June 2022

              • CM-1.5.5

                Conventional bank licensees must develop and implement comprehensive procedures and information systems to monitor the condition of individual credits and single obligors across the licensee’s various portfolios. These procedures need to define the criteria for identifying and reporting potential problem credits and other transactions to ensure that they are subject to more frequent monitoring, as well as possible corrective action, classification and/or provisioning.

                Added: June 2022

              • Collateral Requirements

                • CM-1.5.6

                  When the loan decision is primarily based on collateral value, independent and timely appraisals of the collateral by a third party valuation expert must be undertaken, and the licensee must ensure that the collateral value is sufficiently higher than the exposure amount.

                  Added: June 2022

                • CM-1.5.7

                  The requirement in Paragraph CM-1.5.6 shall not apply to publicly traded instruments that are provided as collateral for which daily fair value is available from independent sources.

                  Added: June 2022

                • CM-1.5.8

                  Conventional bank licensees can utilise the transaction structure, collateral and guarantees to help mitigate risks (both identified and inherent) in individual credits, but transactions must be entered into primarily on the strength of the borrower’s repayment capacity. Collateral cannot be a substitute for a comprehensive assessment of the borrower or counterparty, nor can it compensate for insufficient information. It must be recognised that any credit enforcement action (e.g. foreclosure proceedings) can eliminate the profit margin on the transaction. In addition, conventional bank licensees need to be mindful that the value of collateral may well be impaired by the factors that have led to the diminished recoverability of the credit. Conventional bank licensees must have a policy covering the acceptability of various forms of collateral, procedures for the ongoing valuation of such collateral, and a process to ensure that the collateral is, and continues to be, enforceable and realisable. With regard to guarantees, conventional bank licensees must evaluate the level of coverage being provided in relation to the credit-quality and legal capacity of the guarantor. Licensees must be careful when making assumptions about implied support from third parties, such as the government.

                  Added: June 2022

                • CM-1.5.9

                  The value of the collateral must be updated periodically. In adverse market conditions and in the case of collateral that support Stage 2 and 3 credit exposures, the valuations must be conducted at least annually. If the exposure is backed by inventory or goods located in the obligor’s premises, additional measures must be in place to physically inspect and verify the existence and valuation of the collateral.

                  Added: June 2022

                • CM-1.5.10

                  Since expected credit loss (ECL) provisions are dependent on the recoverable value of collateral held, conventional bank licensees must obtain appropriate valuations of the collateral. The licensee must have a reliable and timely collateral valuation system which must include factors such as the legal enforceability of claims on collateral, ease of realisation of collateral, effects of currency and maturity mismatches, and be based on current market conditions.

                  Added: June 2022

            • CM-1.6 CM-1.6 Non-Performing Loans Management

              • CM-1.6.1

                Conventional bank licensees must ensure that their credit policy contains policy on non-performing loans (‘NPLs’). Such policy must outline the approach they would take to deal with NPLs in line with the Board approved risk appetite framework including tolerance levels for NPLs for different portfolios. Responsibility for such credit must be assigned to a specialised workout section.

                Added: June 2022

              • CM-1.6.2

                To formulate and execute a fit-for-purpose policy on NPLs, conventional bank licensees must complete an assessment of the following elements as a minimum:

                (a) The internal capabilities to effectively manage, i.e. maximise recoveries and reduce NPLs over a defined time horizon;
                (b) The external conditions and operating environment; and
                (c) The capital implications of NPLs
                Added: June 2022

              • CM-1.6.3

                Conventional bank licensees must include, at a minimum, clearly defined quantitative targets for NPLs (where relevant, including targets for foreclosed assets), which must be approved by the senior management. The combination of these targets must lead to a concrete reduction, gross and net (of provisions), of NPL exposures, at least in the medium-term.

                Added: June 2022

              • CM-1.6.4

                While expectations about changes in macroeconomic conditions can play a role in determining target levels (if based on reliable external forecasts), they should not be the sole driver for the established NPL reduction targets. Targets should be established at least along the following dimensions:

                (a) By time horizons, i.e. short-term (indicative 1 year), medium-term (indicative 3 years) and possibly long-term;
                (b) By main portfolios (e.g. retail mortgage, retail consumer, retail small businesses and professionals, SMEs, large corporates and commercial real estate);
                (c) By implementation option chosen to drive the projected reduction, e.g. cash recoveries from hold strategy, collateral repossessions, recoveries from legal proceedings, revenues from sale of NPLs or write-offs.
                Added: June 2022

              • CM-1.6.5

                When the NPL levels exceed the thresholds under the Board approved Risk Appetite Framework, the conventional bank licensee must develop an NPL operational plan which clearly defines how the licensee will effectively reduce the level of NPLs over a time horizon of at least 1 to 3 years (depending on the type of operational measures required).

                Added: June 2022

              • CM-1.6.6

                Conventional bank licensees must fully understand and examine:

                (a) Scale and drivers of the NPL problem:
                (i) The size and evolution of NPL portfolio on an appropriate level of granularity, which requires appropriate portfolio classification as outlined in Section 1.8;
                (ii) The drivers of NPL in-flows and out-flows, by portfolio where relevant; and
                (iii) Other potential correlations and causations.
                (b) Outcomes of NPL actions taken in the past:
                (i) Types and nature of actions implemented, including forbearance measures; and
                (ii) The success of the implementation of those activities and related drivers, including the effectiveness of forbearance treatments.
                (c) Operational capacities (processes, tools, data quality, IT/automation, staff/expertise, decision-making, internal policies, and any other relevant areas for the implementation of the strategy) for the different process steps involved, including, but not limited to:
                (i) Early warning and detection/recognition of NPLs;
                (ii) Forbearance;
                (iii) Provisioning;
                (iv) Collateral valuations;
                (v) Recovery/legal process/foreclosure;
                (vi) Management of foreclosed assets (if relevant); and
                (vii) Reporting and monitoring of NPLs and effectiveness of NPL workout solutions.
                Added: June 2022

              • Capital Implications of NPLs

                • CM-1.6.7

                  Capital levels and their projected trends are important inputs towards determining the scope of NPL reduction actions available to licensees. Conventional bank licensees should dynamically model the capital implications of the different elements of their policy on NPLs, ideally under different economic scenarios. Those implications should also be considered in conjunction with the risk appetite framework as well as the internal capital adequacy assessment process (‘ICAAP’).

                  Added: June 2022

                • CM-1.6.8

                  Where capital buffers are slim and profitability low, conventional bank licensees must include suitable actions in their capital planning, ICAAP and recovery plans which will enable effective management and sustainable clean-up of NPLs.

                  Added: June 2022

                • CM-1.6.9

                  Conventional bank licensees should also identify medium and long-term options for NPL reductions.

                  Added: June 2022

                • CM-1.6.10

                  A strong level of monitoring and oversight by risk management function in respect of the formulation and implementation of the NPL strategy (including the NPL operational plan) must also be ensured.

                  Added: June 2022

                • CM-1.6.11

                  Conventional bank licensees must write-off loans which are deemed to be uncollectable in a timely manner.

                  Added: June 2022

            • CM-1.7 CM-1.7 Credit Risk Reporting

              • CM-1.7.1

                Conventional bank licensees must have an effective MIS that captures all on and off-balance sheet credit exposures.

                Added: June 2022

              • CM-1.7.2

                The MIS must enable the senior management to identify any concentrations of risk within the credit portfolio.

                Added: June 2022

              • CM-1.7.3

                The MIS must comprehensively cover reporting of NPLs, including but not limited to the following:

                (a) NPL related KPIs and performance against the KPIs;
                (b) Forbearance activity levels;
                (c) Early warning indicators;
                (d) Liquidation, foreclosure, provisions for impairment and write offs; and
                (e) Risk adjusted returns and capital implications.
                Added: June 2022

              • CM-1.7.4

                The MIS must be able to aggregate all such credit exposures to a single borrower and also aggregate exposures to groups of accounts under common ownership or control. This data must be aggregated in an accurate and timely manner and monitored as part of the licensee’s credit risk management process.

                Added: June 2022

              • CM-1.7.5

                The MIS must provide the Board and senior management with timely and forward-looking information on credit risk management to support them in identifying emerging concerns on credit risk as well as in managing credit stress events. The MIS must be fit for the purpose of supporting the licensee’s day-to-day monitoring of compliance with established policies, procedures and limits.

                Added: June 2022

              • CM-1.7.6

                Risk management reports must be accurate and precise to ensure that conventional bank licensees’ Board and senior management can rely, with confidence, on the aggregated information to make critical decisions about risk.

                Added: June 2022

              • CM-1.7.7

                To ensure the accuracy of the reports, conventional bank licensees must maintain, at a minimum, the following:

                (a) Defined requirements and processes to reconcile reports to risk data;
                (b) Automated and manual edit and reasonableness checks, including an inventory of the validation rules that are applied to quantitative information. The inventory must include explanations of the conventions used to describe any mathematical or logical relationships that must be verified through these validations or checks; and
                (c) Integrated procedures for identifying, reporting and explaining data errors or weaknesses in data integrity via exception reports.
                Added: June 2022

              • CM-1.7.8

                Risk management reports to the Board and senior management must provide a forward-looking assessment of risk and must not just rely on current and past data. The reports must contain forecasts or scenarios for key market variables and the effects on the licensee, so as to inform the Board and senior management of the likely trajectory of the licensee’s capital and risk profile in the future.

                Added: June 2022

              • CM-1.7.9

                Conventional bank licensees must develop an inventory and classification of risk data items which includes a reference to the concepts used to elaborate the reports.

                Added: June 2022

              • CM-1.7.10

                The credit risk reports must be clear and useful. Reports must reflect an appropriate balance between detailed data, qualitative discussion, explanation and recommended conclusions. Interpretation and explanations of the data, including observed trends, must be clear.

                Added: June 2022

              • CM-1.7.11

                Conventional bank licensees must confirm periodically with the recipients that the information aggregated and reported is relevant and appropriate, in terms of both quantity and quality, to the governance and decision-making process.

                Added: June 2022

              • CM-1.7.12

                Conventional bank licensees must assess, periodically, the purpose of each report, adequacy of the scope of the information in the reporting and MIS and set requirements for how quickly the reports need to be produced in both normal and stress/crisis situations. The licensee must routinely test its ability to produce accurate reports within established timeframes, particularly in stress/crisis situations.

                Added: June 2022

            • CM-1.8 CM-1.8 Classification and Provisioning

              • CM-1.8.1

                The objective of this section is to set out the requirements and supervisory guidance on the assessment and measurement of expected credit losses and allowances (together referred to as ‘ECL’). The supervisory guidance is intended to supplement the guidance under the applicable accounting framework and, where relevant, ensure consistency in application of definitions and other areas of estimates and judgment that are expected to be common across the banking sector. The term ‘allowances’ includes allowances/provisions on loans, loan commitments, financial guarantees and similar contracts.

                Added: June 2022

              • CM-1.8.2

                In applying these instructions, conventional bank licensees must make sure that consistent accounting policies are applied at group level including subsidiaries and branches outside Bahrain. If the supervisory and accounting standards applied at the licensee’s outside branches or subsidiaries (such as NPL norms) are in conflict with these instructions, the licensee must notify CBB accordingly.

                Added: June 2022

              • Governance

                • CM-1.8.3

                  Conventional bank licensees’ Board of Directors (or equivalent) and senior management are responsible for ensuring that the licensee has appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate ECL in accordance with the licensee’s stated policies and procedures, the applicable accounting framework and relevant supervisory guidance.

                  Added: June 2022

                • CM-1.8.4

                  Conventional bank licensees must adopt, document and adhere to sound policies, procedures and controls for assessing and measuring ECL on all lending exposures. The measurement of allowances must build upon those robust methodologies and result in the appropriate and timely recognition of ECL in accordance with the applicable accounting framework.

                  Added: June 2022

                • CM-1.8.5

                  Conventional bank licensees must have in place a detailed and clear policy statement pertaining to ECL recognition. The policy statement must be approved by the Board of Directors, including at the time of any periodic changes. The policy statement must be comprehensive and must include, but not be limited to, the following components:

                  (a) Definition of default (including consideration of cross defaults and restructured/renegotiated/rescheduled facilities in such assessment);
                  (b) Portfolio segmentation, detailing the level at which PD and LGD will be measured;
                  (c) For collectively evaluated exposures, a description of the basis for creating groups of portfolios with shared credit risk characteristics;
                  (d) Qualitative and quantitative staging criteria, including criteria for qualifying as low credit risk assets and triggers for both forward and backward transition between Stages 1 to 3 (CM-1.8.24);
                  (e) Source of internal data sets, minimum period of internal data repository and when external data sets will be used as reliable proxies in assessment of required impairment allowances;
                  (f) Identify and document the ECL assessment and measurement methods (such as a loss rate method, PD/LGD modelling methods, prepayment and cure rate models or any another method) to be applied to each exposure, segment or portfolio;
                  (g) Methodology for conversion from through-the-cycle (‘TTC’) to point-in-time (‘PIT’) PDs and variables considered for making forward-looking adjustments to PIT PDs, including use of macroeconomic factors;
                  (h) Determine the extent to which the value of collateral and other credit risk mitigants will be used for LGD calculations (including the use of liquidation haircuts and, where available, forecasting of collateral values);
                  (i) Policy for specific cash shortfall assessment for Stage 3 accounts (NPL provisions);
                  (j) Document the methods and frequency used to validate models for ECL measurement (e.g. back tests, quantitative and qualitative validation tests). Models, input data and systems used to develop PD, LGD and other components of ECL must be subject to internal and external validation as required under CM-1.4.10; and
                  (k) Include a process for evaluating the appropriateness of significant inputs and assumptions in the ECL assessment and measurement method chosen. It is expected that the basis for inputs and assumptions used in the estimation process will generally be consistent from period-to-period. Where the basis of use of inputs and assumptions changes, the rationale must be documented.
                  Amended: October 2022
                  Added: June 2022

              • Definition of Default / Impairment

                • CM-1.8.6

                  Default for the purpose of this Module and impairment in the context of credit risk exposure of an obligor as per IFRS 9 is considered to have occurred with regard to a particular obligor when either or both of the following events have taken place:

                  (a) The licensee considers that the obligor is unlikely to pay its credit obligations in full (i.e. principal, interest, fees or any other amount), without taking actions such as realising security (if held).
                  (b) The obligor is past due for 90 days or more on any credit obligation to the licensee. In case of overdrafts, the customer will be considered as being past due once an advised limit has been breached or the customer has been advised of a limit smaller than the current outstanding amount.
                  Added: June 2022

                • CM-1.8.7

                  The elements to be taken as indications of unlikeliness to pay must include, but not be limited to, the following:

                  (a) The licensee puts the interest on the credit obligation on non-accrual status;
                  (b) The licensee makes a charge-off or account-specific provision resulting from a significant perceived decline in credit quality subsequent to the licensee taking on the exposure;
                  (c) The licensee sells the credit obligation at a material credit-related economic loss;
                  (d) The licensee consents to a distressed restructuring of the credit obligation where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of repayment instalments;
                  (e) The licensee has filed for the obligor’s bankruptcy or a similar order in respect of the obligor’s credit obligation to the licensee; or
                  (f) The obligor has sought or has been placed in bankruptcy or similar protection where this would avoid, or delay, repayment of the credit obligation to the licensee.
                  Added: June 2022

                • CM-1.8.8

                  For the purpose of CM-1.8.7, distressed restructuring refers to situations when a licensee grants a concession that it would not otherwise consider, irrespective of whether the concession is at the discretion of the licensee or otherwise. Forgiveness means reduction in repayment amount or interest. Postponement could include grace periods or changes in instalments leading to delayed maturity.

                  Added: June 2022

              • Identification of Non-performing Exposures

                • CM-1.8.9

                  Non-performing exposures must always be categorised for the whole exposure, including when non-performance relates to only a part of the exposure, for instance, unpaid interest. For off-balance sheet exposures, such as loan commitments or financial guarantees, the whole exposure is the entire uncancellable nominal amount. All non-performing exposures will be classified as Stage 3 for the purpose of ECL calculations.

                  Added: June 2022

                • CM-1.8.10

                  The following exposures are considered as non-performing:

                  (a) All exposures, including purchased or originated credit impaired (POCI), that are in default or impaired under Paragraph CM-1.8.6, where applicable;
                  (b) All exposures that have experienced a downward adjustment to their valuation due to deterioration of their creditworthiness and classified as Stage 3 according to the applicable accounting framework;
                  (c) [This Subparagraph was deleted in April 2023]; and
                  (d) All other exposures that are not in default or impaired but nevertheless:
                  (i) Relate to a counterparty that has other exposures that are past due for 90 days or more; and
                  (ii) Where there is evidence that full repayment based on the contractual terms, original or, when applicable, modified (e.g. repayment of principal and interest) is unlikely without the licensee’s realisation of collateral, whether or not the exposure is current and regardless of the number of days the exposure is past due.
                  Amended: April 2023
                  Added: June 2022

                • CM-1.8.11

                  The existence of collateral or guarantees must have no direct influence on the categorisation of an exposure as non-performing or its past due status, including the counting of past-due days and the determination of the exposure as non-performing, once the overdue days threshold has been met. However, conventional bank licensees may consider the collateral when assessing a borrower’s economic incentive (both positive and negative) to repay under the unlikeliness to repay criteria. Any recourse by the licensee must not be considered in this judgment. When the relevant criteria are met, the exposure must be categorised as non-performing even if the collateral value exceeds the amount of the past-due exposure.

                  Added: June 2022

                • CM-1.8.12

                  The classification of an exposure as non-performing must be applied as follows:

                  (a) When any one of the material exposures to a non-retail counterparty is categorised as non-performing, all exposures to that counterparty must be categorised as non-performing (i.e. cross-default across obligor);
                  (b) In the case of exposures to a retail counterparty, the definition of default may be applied at the level of a particular facility rather than at the level of the obligor. This would be appropriate when the licensee considers the risk of each product and source of repayments having different characteristics for each transaction. In the case of a retail counterparty with more than one exposure from the licensee, it must consider the non-performing or performing status of the other exposures when deciding about the status of a given exposure; and
                  (c) In the case of exposures to a group, non-performing status can be applied at the counterparty level. This assumes that the licensee has a separate credit review and rating assigned for each counterparty within the group. At the same time, the licensee must consider the non-performing or performing status of the other group entities when deciding about the status of any of the group entities.
                  Added: June 2022

                • CM-1.8.13

                  For the purpose of CM-1.8.12 (a), where a single facility which represents 25% or more of the aggregate exposure to the obligor is non-performing a cross default is deemed to have occurred and, accordingly, all exposures to that obligor will be considered non-performing.

                  Added: June 2022

                • CM-1.8.14

                  With reference to Sub-Paragraph CM-1.8.12 (b), however, a default by a borrower on one retail obligation may not require the licensee to treat all other obligations to the licensee as defaulted and non-performing. In these cases, conventional bank licensees must carefully consider the categorisation and staging status of other exposures to the same counterparty (i.e. cross-product default). For example, if a customer has a retail personal loan and an auto loan with the licensee, a default on the personal loan must be considered when assessing the stage classification of the auto loan.

                  Added: June 2022

              • Re-categorisation of Non-performing Exposures as Performing

                • CM-1.8.15

                  A Stage 3 exposure can be moved to Stage 2 or Stage 1 when all the following criteria are met simultaneously:

                  (a) The counterparty does not have any exposures that are past due for 90 days or more (see also Paragraph CM-1.8.6);
                  (b) Repayments have been made when due in accordance with Appendix CM-6.
                  However, if the repayments are not clearly reflective of improvement in the counterparty’s financial position, a longer re-payment history or higher number of instalments must be assessed by the licensee before re-categorisation of the exposure to a ‘performing’ status;
                  (c) The counterparty’s financial situation has improved so that the full repayment of the exposure is likely, according to the original or, when applicable, modified conditions. This must usually require a credit review process that evaluates the borrower’s current capacity to repay, clarity on the source of cash flow available for debt repayments, improvements in the level of indebtedness and compliance with various debt covenants imposed by the licensee. Repayments through liquidation or enforcement of collateral is generally not considered as an improvement in the financial health of the borrower; and
                  (d) The exposure is not considered to be in ‘default’ or ‘impaired’ according to the applicable accounting and risk management frameworks.
                  Amended: April 2023
                  Added: June 2022

                • CM-1.8.15A

                  Stage 2 exposures can be moved to Stage 1 after the cooling-off period, specified in Appendix CM-6, has passed and the counterparty’s financial situation indicates it to be equivalent to that of a ‘very low credit risk’ exposure.

                  Added: April 2023

                • CM-1.8.16

                  Conventional bank licensee must clearly articulate and document policies in respect of the counting of days past due, in particular in respect of the re-ageing of the facilities and the granting of extensions, deferrals, renewals and rewrites to existing accounts. At a minimum, the re-ageing policy must include:

                  (a) Approval authorities and reporting requirements;
                  (b) Minimum age of a facility before it is eligible for re-ageing;
                  (c) Delinquency levels of facilities that are eligible for re-ageing;
                  (d) Maximum number of re-ageing allowed per facility; and
                  (e) A reassessment of the borrower’s capacity to repay.
                  Added: June 2022

                • CM-1.8.17

                  For the purpose of CM-1.8.16, re-aging occurs when the licensee changes the tenor or due dates of the credit when rescheduling or restructuring a facility.

                  Added: June 2022

                • CM-1.8.18

                  Non-performing exposures in the following situations must not be re-categorised as performing without meeting the conditions set forth in CM-1.8.15:

                  (a) Partial write-off of an existing non-performing exposure (i.e. when the licensee writes-off part of a non-performing exposure that it deems to be uncollectible);
                  (b) Repossession of collateral on a non-performing exposure; or
                  (c) Extension or granting of forbearance measures to an exposure that is already identified as non-performing.

                  The re-categorisation of a non-performing exposure as performing must be made on the same level (i.e. obligor or transaction approach) as when the exposure was originally categorised as non-performing.

                  Added: June 2022

                • CM-1.8.18A

                  Non-performing POCI exposures may be re-categorised as performing subject to meeting the conditions stipulated in Paragraphs CM-1.8.15 to CM-1.8.18.

                  Added: April 2023

                • CM-1.8.19

                  Conventional bank licensees must have the necessary tools to ensure a robust estimate and timely recognition of ECL. Information on historical loss experience or the impact of current conditions may not fully reflect the credit risk in lending exposures. In this context, the licensee must use its experienced credit judgment to thoroughly incorporate the expected impact of all reasonable and supportable forward-looking information, including macroeconomic factors, on its estimate of ECL. The licensee’s use of its experienced credit judgment must be documented in the licensee’s credit risk methodology and subject to appropriate oversight.

                  Added: June 2022

                • CM-1.8.20

                  Applying the concepts of ECL could vary for each licensee depending on its underwriting criteria, loss history, terms of collateral and a number of other variables, both entity-specific and external. Reasonable and supportable information will not present itself, but would rather require management to determine what is relevant and practical, without undue costs or efforts, to actively gather, analyse and process to make required credit risk assessments to support the ECL process. Licensees will need to adopt an appropriate risk assessment methodology which is commensurate with the size, complexity, structure, economic significance and risk profile of their portfolio. This means that, in general, the larger and more complex a portfolio or institution, the more its risk infrastructure should capture relevant and reliable information and trends that would support the development of a sophisticated approach to determine a risk based ECL. Conversely, for smaller and simpler portfolios or institutions, a less sophisticated approach may be adopted to align with the risk management infrastructure and processes within the licensee.

                  Added: June 2022

                • CM-1.8.21

                  Regardless of the size of the licensee or prominence of the portfolio, the approach adopted by the licensee should comply with the specific requirements of this section and applicable accounting standards. It is not necessary that every licensee or every portfolio within the bank would apply the same level of sophistication. However, licensees will need to periodically assess whether their approach continues to be appropriate and relevant in light of changing circumstances with the aim of improving its level of estimation over time.

                  Added: June 2022

              • Measurement Requirements

                • CM-1.8.22

                  The credit impairment assessment under IFRS 9 is based on an expected loss approach, i.e. it is not necessary for a loss event to occur before an ECL is recognised. As a result, all financial assets are generally expected to attract an ECL. For the purpose of Section CM 1.8, any direct credit exposures to the government of Bahrain (or exposures explicitly guaranteed by the government of Bahrain) are exempted from the application of the expected credit loss model.

                  Added: June 2022

                • CM-1.8.22A

                  For the purpose of Section CM-1.8, the portion of the exposure that is explicitly guaranteed by Tamkeen is exempted from the application of the expected credit loss model.

                  Added: January 2023

                • CM-1.8.23

                  IFRS 9 requires a three-stage approach to recognise and measure ECL at each reporting date, which is based on changes observed in credit quality of financial assets since origination. The standards prescribe two measures of ECL to be carried by licensees:

                  (a) Twelve-month ECL: The expected credit losses that result from default events that are possible within 12 months after the reporting date. It is not the expected cash shortfalls over the 12-month period, but the entire credit loss on an asset weighted by the probability that the loss will occur in the next 12 months; and
                  (b) Life-time ECL: The expected credit losses that result from all possible default events over the life of the financial instrument.
                  Added: June 2022

                • CM-1.8.24

                  The below staging classification must represent migration in credit quality and dictates the level of ECL to be recognised. The following must be followed:

                  Staging Description ECL measure
                  Stage 1 Performing assets with no significant deterioration in credit risk since origination or with very low credit risk. 12-month ECL
                  Stage 2 Performing assets that have exhibited significant increase in credit risk since origination. Life-time ECL
                  Stage 3 Non-performing assets that are considered credit impaired. Life-time ECL
                  Added: June 2022

                • CM-1.8.25

                  The staging classification should normally apply to the entire balance of an outstanding facility because if a problem exists with one credit, it normally applies to the whole facility and not just the payment or individual credit which may be overdue. This is a conservative approach, which will alert bank management and the Board to the full extent of a potential problem.

                  Added: June 2022

              • Regulatory Treatment of Accounting Provisions

                • CM-1.8.26

                  With reference to CM-1.8.24, the ECL provisions assessed on a collective basis (‘CP’) relating to Stage 1 and Stage 2 exposures are used for the purposes of regulatory adjustments under Paragraph CA-2.1.8.

                  Added: June 2022

              • Restructured Accounts, Forbearance and Modifications

                • CM-1.8.27

                  Conventional bank licensees must report restructured accounts to the CBB on a quarterly basis until the satisfactory performance of the account, under revised terms, and the counterparty has resolved its financial difficulty. All NPL accounts restructured must be classified as non-performing and must be subject to the requirements of the Paragraph CM-1.8.15 to CM-1.8.18. A Stage 3 or Stage 2 exposure that is restructured must be re-categorised in accordance with Appendix CM-6.

                  Amended: April 2023
                  Added: June 2022

                • CM-1.8.28

                  Forbearance, including synonyms such as ‘restructuring’ occurs when (a) a counterparty is experiencing financial difficulty in meeting its financial commitments; and (b) the licensee grants a concession that it would not otherwise consider, irrespective of whether the concession is at the discretion of the licensee and/or the counterparty. A concession is at the discretion of the counterparty (debtor) when the initial contract allows the counterparty (debtor) to change the terms of the contract in its own favour (embedded forbearance clauses) due to financial difficulty. When such concessions are granted, the facility is ‘restructured’.

                  Added: June 2022

                • CM-1.8.29

                  The following list provides examples of possible indicators of financial difficulty. In particular, financial difficulty can be identified even in the absence of arrears on an exposure:

                  (a) A counterparty is currently past due on any of its material exposures.
                  (b) A counterparty is not currently past due, but it is probable that the counterparty will be past due on any of its material exposures in the foreseeable future without the concession, for instance, when there has been a pattern of delinquency in payments on its material exposures.
                  (c) A counterparty’s outstanding securities have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange due to noncompliance with the listing requirements or for financial reasons.
                  (d) On the basis of actual performance, estimates and projections that encompass the counterparty’s current capabilities, the licensee forecasts that all the counterparty’s committed/available cash flows will be insufficient to service all of its loans or debt securities (both interest and principal) in accordance with the contractual terms of the existing agreement for the foreseeable future.
                  (e) A counterparty’s existing exposures are categorised as exposures that have already evidenced difficulty in the counterparty’s ability to repay in accordance with the supervisory categorisation scheme in force or the credit categorisation scheme within the licensee's internal credit rating system.
                  (f) A counterparty is in non-performing status or would be categorised as nonperforming without the concessions.
                  (g) The counterparty cannot obtain funds from sources other than the existing banks at an effective interest rate equal to the current market interest rate for similar loans or debt securities for a non-troubled counterparty.
                  Added: June 2022

                • CM-1.8.30

                  Concessions are special contractual terms and conditions that a lender would not extend or consider under normal market conditions.

                  Added: June 2022

                • CM-1.8.31

                  Licensees should distinguish between restructured loans and rescheduled loans where no concessions have been granted to a performing customer in response to changes in market conditions provided that at the time of rescheduling the loans have been serviced normally, the ability of the borrower to service is not in doubt and where there is reasonable assurance that the borrower will be able to service all future principal and interest payments on the loans in accordance with the revised repayment terms.

                  Added: June 2022

                • CM-1.8.32

                  Conventional bank licensees must disclose in their public disclosures their policies and definitions that are integral to the estimation of ECL. Quantitative and qualitative disclosures, taken together, must communicate to users the main assumptions/inputs used to develop ECL estimates.

                  Added: June 2022

            • CM-1.9 CM-1.9 Provisioning Policies of Branches of Foreign Bank Licensees

              • CM-1.9.1

                Specific provisions for impaired assets (i.e. Stage 3 accounts) and, where applicable, collective provisions (i.e. Stage 1 and Stage 2) representing ECL on performing exposures of branches of foreign bank licensees must be maintained in the books of the Bahrain branch.

                Added: June 2022

              • CM-1.9.2

                If a branch of foreign bank licensee which is a wholesale bank licensee is not able to meet the requirement in Paragraph CM-1.9.1, the branch's head office must advise the CBB, on an annual basis and in writing, whether an equivalent or higher amount of specific and collective provisions related to the exposures of its Bahrain branch are being maintained by the head office. In all cases, the branch must maintain and make available all underlying details of such provision calculations at the request of its external auditors and the CBB. The provisions maintained at the head office in relation to exposures of the branch must be disclosed in the financial statements of the branch submitted to the CBB.

                Added: June 2022

              • CM-1.9.3

                In addition, the CBB may contact the licensee’s home supervisor, on a regular or ad hoc basis, in order to obtain information about the adequacy of the provisioning for such assets or may require the licensee to provide additional comfort or assurance, e.g. through external auditors, that such provisions are indeed set aside properly.

                Added: June 2022

            • CM-1.10 CM-1.10 [This Section was deleted in January 2023]

              • CM-1.10.1

                [This Paragraph was deleted in January 2023].

                Deleted: January 2023
                Added: June 2022

              • CM-1.10.2

                [This Paragraph was deleted in January 2023].

                Deleted: January 2023
                Added: June 2022

              • CM-1.10.3

                [This Paragraph was deleted in January 2023].

                Deleted: January 2023
                Added: June 2022

              • CM-1.10.4

                [This Paragraph was deleted in January 2023].

                Deleted: January 2023
                Added: June 2022

          • CM-2 CM-2 The Monitoring and Control of Large Exposures

            • CM-2.1 CM-2.1 Overview

              • CM-2.1.1

                The CBB’s directives on large exposures for licensees in Bahrain are issued as part of the CBB’s measures to encourage licensees to mitigate risk concentrations and to design the licensees’ large exposure framework so that the maximum possible loss the licensee could incur, if a single counterparty or group of connected counterparties were to suddenly fail, would not endanger the licensee’s survival as a going concern.

                Added: June 2022

              • CM-2.1.2

                The contents of this Chapter apply in full to all Bahraini conventional bank licensees on a consolidated basis.

                Added: June 2022

              • CM-2.1.3

                The application of the large exposures framework at the consolidated level implies that the licensee must consider all exposures to third parties across the relevant regulatory consolidation group and compare the aggregate of those exposures with the group’s consolidated total capital.

                Added: June 2022

              • CM-2.1.4

                Bahraini conventional bank licensees must report large exposures through the PIR forms (see Module CA).

                Added: June 2022

            • CM-2.2 CM-2.2 Exposures Undertaken by Overseas Conventional Bank Licensees

              • CM-2.2.1

                The CBB may, if circumstances so require and on a case-by-case basis, apply the full or part of the requirements of this Chapter to branches of foreign bank licensees.

                Added: June 2022

            • CM-2.3 CM-2.3 Measure of Exposure

              • CM-2.3.1

                For the purpose of the banking book and the trading book, the measure of exposure, net of specific provisions, reflects the maximum loss that will arise should a counterparty fail, or the loss that may arise due to exposures relating to concentration per product, asset classes, collateral, segments, country, region, currencies, market, etc. In certain cases (particularly derivatives), the measure of an exposure may be larger than that used in published financial statements. Consistent with this, an exposure encompasses the amount at risk arising from the licensee’s:

                (a) Claims on a counterparty, including actual and potential claims which would arise from the drawing down in full of undrawn advised facilities (whether revocable/irrevocable, conditional or unconditional) which the licensee has committed itself to provide, and claims which the licensee has committed itself to purchase or guarantee/underwrite. In the case of undrawn facilities (including overdrafts), the advised limit must be included in the measure of exposure (after deduction of any provisions). In the case of loans, the net outstanding balance to be repaid, as shown in the books of the licensee, must be included in the measure of exposure after deduction of any provisions. These claims would include, but are not limited to:
                (i) Loans and other credit facilities (including overdrafts) whether or not drawn;
                (ii) Exposures arising through lease agreements;
                (iii) Margin held with exchanges or counterparties;
                (iv) Claims under derivative contracts such as futures, forwards, options, swaps and similar contracts on interest rates, foreign currencies, equities, securities, commodities or indexes;
                (v) Claims arising in the course of settlement of securities transactions;
                (vi) Receivables, such as fees or commissions;
                (vii) Claims arising in the case of forward sales and purchases of financial instruments in the trading or banking books;
                (viii) Amounts outstanding under sale and repurchase agreements, forward asset purchase agreements, buyback agreements, stock borrowing/lending or similar transactions;
                (ix) Bonds, bills or other non-equity financial instruments; and
                (x) Underwriting exposures for bonds, bills, or other non-equity financial instruments.
                (b) Contingent liabilities arising in the normal course of business, and those contingent liabilities which would arise from the drawing-down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the licensee has committed itself to provide. In the case of an undrawn overdraft, letter of credit (‘L/C’) or similar facility, the advised limit must be included in the measure of exposure. Such liabilities may include:
                (i) Direct credit substitutes (including guarantees, standby letters of credit, bills accepted but not held by the reporting bank, and endorsements creating payable obligations);
                (ii) Claims sold with recourse (i.e. where the credit risk remains with the reporting bank);
                (iii) Transaction-related contingents not having the character of direct credit substitutes (e.g. performance bonds, bid bonds, transaction-related L/Cs etc.);
                (iv) Undrawn documentary letters of credit issued or confirmed;
                (v) Credit derivatives sold (where the licensee is providing credit protection); and
                (vi) Asset value guarantees (where the licensee provides protection on exit price or realisable value of a non-financial asset).
                (c) Any other assets or transactions whose value depends wholly or mainly on a counterparty performing its obligations, or whose value depends upon that counterparty’s financial soundness, but which do not represent a claim on the counterparty. Such assets or transactions include:
                (i) Equities and other capital instruments;
                (ii) Equity warrants, options, or equity derivatives where the reporting bank is obtaining credit protection; and
                (iii) Underwriting or purchase commitments for equities.
                (d) Investments transactions in trading book (e.g. index positions, securitisations, investments in hedge funds or investment funds) must be calculated by applying the same rules as for similar instruments in the banking book (see Paragraph CM-2.3.27 to CM-2.3.41). The amount invested in a particular structure may be assigned to the structure itself, defined as a distinct counterparty to the counterparties corresponding to the underlying assets, or to the unknown client.
                Added: June 2022

              • CM-2.3.2

                Where the licensee has a legally enforceable netting arrangement in place for loans and deposits, it may calculate the exposure values for large exposures in accordance with Section CA-4.4.

                Added: June 2022

              • Eligible Credit Risk Mitigation (‘CRM’) Techniques

                • CM-2.3.3

                  Bahraini conventional bank licensee must recognise an eligible CRM technique in the calculation of an exposure whenever it has used this technique to calculate the risk-based capital requirements under Chapter CA-4. Eligible credit risk mitigation techniques for large exposures are those that meet the minimum requirements and eligibility criteria for the recognition of unfunded credit protection and financial collateral that qualify under Chapter CA-4. Other forms of collaterals, e.g. receivables, commercial and residential real estate are not eligible to reduce exposure values for large exposure purposes unless the title deeds, in the case of real estate, are held in the name of the licensee and it is able to demonstrate that it has the ability to realise the value of the collateral.

                  Added: June 2022

                • CM-2.3.4

                  In accordance with Paragraph CA-4.6.3, hedges with maturity mismatches are recognised only when their original maturities are equal to or greater than 1 year and the residual maturity of a hedge is not less than 3 months.

                  Added: June 2022

                • CM-2.3.5

                  If there is a maturity mismatch in respect of credit risk mitigants (collateral, on balance sheet netting, guarantees and credit derivatives) recognised under Paragraph CA-4.6.3, the adjustment of the credit protection for the purpose of calculating large exposures must be calculated according to CA-4.6.4.

                  Added: June 2022

                • CM-2.3.6

                  Bahraini conventional bank licensee must reduce the value of the exposure to the original counterparty by the amount of eligible CRM technique recognised under Chapter CA-4. The recognised amount is:

                  (a) The value of the protected portion in the case of unfunded credit protection;
                  (b) The value of the portion of the claim collateralised by the market value of the recognised financial collateral when the licensee uses the simple approach under Section CA-4.2; and
                  (c) The value of the collateral adjusted after applying the required haircuts, in the case of financial collateral when the licensee applies the comprehensive approach (see Section CA-4.3).
                  Added: June 2022

                • CM-2.3.7

                  The exposure value for instruments that give rise to counterparty credit risk and are not securities financing transactions, must be the exposure at default according to the standardised approach for the purpose of computing capital adequacy (See Module CA).

                  Added: June 2022

                • CM-2.3.8

                  Off-balance sheet items must be converted into credit exposure equivalents through the use of credit conversion factors (‘CCFs’) by applying the CCFs set-out in Section CA-3.3, with a floor of 10 percent.

                  Added: June 2022

                • CM-2.3.9

                  Instruments such as swaps, futures, forwards and credit derivatives must be converted into positions following Section CA-3.3. These instruments are decomposed into their individual legs.

                  Added: June 2022

                • CM-2.3.10

                  For credit derivatives that represent sold protection, the exposure to the referenced name must be the amount due in cases where the referenced name triggers the instrument, minus the absolute value of the credit protection. For credit-linked notes, the protection seller needs to consider positions both in the bond of the note issuer and in the underlying referenced by the note.

                  Added: June 2022

                • CM-2.3.11

                  The measures of exposure values of options for this Chapter differ from the exposure value used for purposes of Chapter CA-4. The exposure value must be based on the change(s) in option prices that would result from a default of the respective underlying instrument. The exposure value for a simple long call option is its market value and for a short put option is the strike price of the option minus its market value. In cases involving short-call or long-put options, a default of the underlying would lead to a profit (i.e. a negative exposure) instead of a loss, resulting in an exposure of the option’s market value in the former case and equal the strike price of the option minus its market value in the latter case. The resulting positions will, in all cases, be aggregated with those from other exposures. After aggregation, negative net exposures must be set to zero.

                  Added: June 2022

                • CM-2.3.12

                  In case of syndicated facilities initially underwritten by the licensee, the nominal amount would include only the licensee’s share of the syndication and any amounts for which binding commitments from other financial institutions are not available or have not been sold down. Where a binding commitment is available, that amount would be excluded in calculation of the large exposures. See Section CM-2.6 for exemptions.

                  Added: June 2022

              • Offsetting Long and Short Positions in the Trading Book

                • CM-2.3.13

                  Bahraini conventional bank licensee’s exposure arising from securities’ trading operations is calculated as its net long position in a particular security (a short position in one security issue may not be offset against a long position in another issue made by the same issuer). The licensee’s ‘net long position’ in a security refers to its commitment to buy that security together with its current holdings of the same security, less its commitment to sell these securities.

                  Added: June 2022

                • CM-2.3.14

                  Positions in the same issue (two issues are defined as the same if the issuer, coupon, currency and maturity are identical) may only be offset for the purpose of calculating large exposure.

                  Added: June 2022

                • CM-2.3.15

                  Positions in different issues from the same counterparty may be offset only when the short position is junior to the long position, or if the positions are of the same seniority.

                  Added: June 2022

                • CM-2.3.16

                  For positions hedged by credit derivatives, the hedge may be recognised provided the underlying of the hedge and the position hedged fulfil the provision of Paragraph CM-2.3.15.

                  Added: June 2022

                • CM-2.3.17

                  When the result of the offsetting is a net short position with a single counterparty, this net exposure need not be considered as an exposure for the purpose of this Chapter.

                  Added: June 2022

                • CM-2.3.18

                  In order to determine the relative seniority of positions, securities may be allocated into broad buckets of degrees of seniority (for example, ‘equity’, ‘subordinated debt’ and ‘senior debt’).

                  Added: June 2022

                • CM-2.3.19

                  When the credit protection takes the form of a Credit Default Swap (‘CDS’) and either the CDS provider or the referenced entity is not a financial entity, the amount to be assigned to the credit protection provider is not the amount by which the exposure to the original counterparty is reduced but, instead, the counterparty credit risk exposure calculated in accordance with Module CA .

                  Added: June 2022

                • CM-2.3.20

                  Bahraini conventional bank licensee must add any exposure to any single counterparty arising in the trading book to any other exposures to that counterparty that lie in the banking book to calculate its total exposure to that counterparty.

                  Added: June 2022

                • CM-2.3.21

                  Netting across the banking and the trading books is not permitted.

                  Added: June 2022

              • Covered Bonds

                • CM-2.3.22

                  Covered bonds are bonds issued by a bank or mortgage institutions and are subject by law to special public supervision designed to protect bond-holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.

                  Added: June 2022

                • CM-2.3.23

                  A covered bond satisfying the conditions set out in Paragraph CM-2.3.24, may be assigned an exposure value of no less than 20 percent of the nominal value of the licensee’s covered bond holding. Other covered bonds must be assigned an exposure equal to 100 percent of the nominal value of the licensee’s covered bond holding. The counterparty to which the exposure value is assigned is the issuing bank.

                  Added: June 2022

                • CM-2.3.24

                  To be eligible to be assigned an exposure value of less than 100 percent, a covered bond must satisfy all the following conditions:

                  (a) It must meet the general definition set out in CM-2.3.22.
                  (b) The pool of underlying assets must exclusively consist of one or more of the following:
                  (i) Claims on, or guaranteed by, sovereigns, their central banks, public sector entities or multilateral development banks;
                  (ii) Claims secured by mortgages on residential real estate that would qualify for a 35 percent or lower risk-weight under Section CA-3.2 and have a loan-to-value ratio of 80 percent or lower;
                  (iii) Claims secured by commercial real estate that would qualify for the 100 percent or lower risk-weight under Section CA-3.2 and with a loan-to-value ratio of 60 percent or lower; and/or
                  (iv) Claims on, or guaranteed by banks that qualify for a 30 percent or lower risk weight. However, such assets cannot exceed 15 percent of covered bond issuances; and
                  (c) The nominal value of the pool of assets assigned to the covered bond instrument(s) by its issuer must exceed its nominal outstanding value by at least 10 percent. The value of the pool of assets for this purpose does not need to be that outlined by the legislative framework. However, if the legislative framework does not stipulate a requirement of at least 10 percent, the issuing bank needs to publicly disclose on a regular basis that their cover pool meets the 10 percent requirement in practice. In addition to the primary assets listed under this Sub-paragraph, the additional collateral may include substitution assets (cash or short-term liquid and secure assets held in substitution of the primary assets to top up the cover pool for management purposes) and derivatives entered into for the purposes of hedging the risks arising in the covered bond program.
                  Added: June 2022

                • CM-2.3.25

                  In order to calculate the required maximum loan-to-value for residential real estate and commercial real estate referred to in Paragraph CM-2.3.24, the following requirements must be met:

                  (a) Legal Enforceability: Any claim on a collateral taken must be legally enforceable in all relevant jurisdictions, and any claim on collateral must be properly filed on a timely basis. Collateral interests must reflect a perfected lien (i.e. all legal requirements for establishing the claim have been fulfilled). In addition to this, the collateral agreement and the legal process underpinning it must be such that they allow the licensee to realise the value of the collateral within a reasonable timeframe; and
                  (b) Frequent Revaluation: The licensee must monitor the value of the collateral on a frequent basis and, at a minimum, once a year. More frequent monitoring is suggested where the market is subject to significant changes in conditions. Statistical methods of evaluation (e.g. reference to house price indices, sampling) may be used to update estimates or to identify collateral that may have declined in value and that may need reappraisal. A qualified professional must evaluate the property when information indicates that the value of the collateral may have declined materially relative to general market prices, or when a credit event, such as a default, occurs.
                  Added: June 2022

                • CM-2.3.26

                  The conditions set out in Paragraph CM-2.3.24 must be satisfied at the inception of the covered bond and throughout its remaining maturity.

                  Added: June 2022

              • Collective Investment Undertakings, Securitisation Vehicles and Other Structures

                • CM-2.3.27

                  Bahraini conventional bank licensees must consider exposures even when a structure lies between the licensee and the exposures, that is, even when the licensee invests in structures through an entity which itself has exposures to assets (‘underlying assets’). Bahraini conventional bank licensees must assign the exposure amount, i.e. the amount invested in a particular structure, to specific counterparties following the approach described in Paragraphs CM-2.3.28 to CM-2.3.35. The structures include funds, securitisations and other structures with underlying assets.

                  Added: June 2022

                • CM-2.3.28

                  Bahraini conventional bank licensee may assign the exposure amount to the structure itself, defined as a distinct counterparty, if it can demonstrate that the licensee’s exposure amount to each underlying asset of the structure is smaller than 1 percent of total consolidated capital, considering only those exposures to underlying assets that result from the investment in the structure itself, and using the exposure value calculated according to Paragraphs CM-2.3.34 and CM-2.3.35. In this case, the licensee is not required to look through the structure to identify the underlying assets.

                  Added: June 2022

                • CM-2.3.29

                  Bahraini conventional bank licensees must look through the structure to identify those underlying assets for which the underlying exposure value is equal to or above 1 percent of total consolidated capital. In this case, the counterparty corresponding to each of the underlying assets must be identified so that these underlying exposures can be added to any other direct or indirect exposure to the same counterparty. The licensee’s exposure amount to the underlying assets that are below 1 percent of the licensee’s total consolidated capital may be assigned to the structure itself (i.e. partial Look-Through-Approach (‘LTA’) is permitted).

                  Added: June 2022

                • CM-2.3.30

                  If a Bahraini conventional bank licensee is unable to identify the underlying assets of a structure where the total amount of its exposure does not exceed 1 percent of its Total consolidated capital, the licensee must:

                  (a) Assign the total exposure amount of its investment to the structure; or
                  (b) Assign this total exposure amount to the unknown client.
                  Added: June 2022

                • CM-2.3.31

                  Bahraini conventional bank licensees must aggregate all ‘unknown exposures’ as if they are related to a single counterparty (the unknown client), to which the large exposure limit would apply.

                  Added: June 2022

                • CM-2.3.32

                  When a LTA is not required, according to Paragraph CM-2.3.28, a Bahraini conventional bank licensee must, nevertheless, be able to demonstrate that regulatory arbitrage considerations have not influenced the decision whether to look through or not – e.g. that the licensee has not circumvented the large exposure limit by investing in several individually immaterial transactions with identical underlying assets.

                  Added: June 2022

                • CM-2.3.33

                  If the LTA need not be applied, Bahraini conventional bank licensee’s exposure to the structure must be the nominal amount it invests in the structure.

                  Added: June 2022

                • CM-2.3.34

                  When the LTA is required, the exposure value assigned to a counterparty is equal to the pro rata share that the licensee holds in the structure multiplied by the value of the underlying asset in the structure. Thus, the licensee holding a 1 percent share of a structure that invests in 20 assets each with a value of 5, must assign an exposure of 0.05 to each of the counterparties. An exposure to a counterparty must be added to any other direct or indirect exposures the licensee has to that counterparty.

                  Added: June 2022

                • CM-2.3.35

                  When the LTA is required, the exposure value to a counterparty is measured for each tranche within the structure, assuming a pro rata distribution of losses amongst investors in a single tranche. To compute the exposure value to the underlying asset, the licensee must:

                  (a) Consider the lower of the value of the tranche in which the licensee invests and the nominal value of each underlying asset included in the underlying portfolio of assets; and
                  (b) Apply the pro rata share of the licensee’s investment in the tranche to the value determined in the first step above.
                  Added: June 2022

              • Identification of Additional Risks

                • CM-2.3.36

                  Bahraini conventional bank licensees must identify third parties that may constitute an additional risk factor inherent in a structure itself rather than in the underlying assets. This third party could be a risk factor for more than one structure that the licensee invests in. Examples of roles played by third parties include originator, fund manager, liquidity provider and credit protection provider.

                  Added: June 2022

                • CM-2.3.37

                  Bahraini conventional bank licensees should connect their investments in those structures with a common risk factor, to form a group of connected counterparties. In such cases, the manager would be regarded as a distinct counterparty so that the sum of the licensee’s investments in all of the funds managed by this manager would be subject to the large exposure limit, with the exposure value being the total value of the different investments. In other cases, the identity of the manager may not comprise of an additional risk factor – for example, if the legal framework governing the regulation of particular funds requires separation between the legal entity that manages the fund, and the legal entity that has custody of the fund’s assets.

                  Added: June 2022

                • CM-2.3.38

                  In the case of structured finance products, the liquidity provider or sponsor of short-term programmes (asset-backed commercial paper – ‘ABCP’, or conduits and structured investment vehicles – ‘SIVs’) may warrant consideration as an additional risk factor (with the exposure value being the amount invested). Similarly, in synthetic deals, the protection providers (sellers of protection by means of CDS/guarantees) may be an additional source of risk and a common factor for interconnecting different structures (in this case, the exposure value would correspond to the percentage value of the underlying portfolio).

                  Added: June 2022

                • CM-2.3.39

                  Bahraini conventional bank licensees may add their investments in a set of structures associated with a third party that constitutes a common risk factor to other exposures (such as a loan) it has to that third party. Whether the exposures to such structures must be added to any other exposures to the third party, would again depend on a case-by-case consideration of the specific features of the structure and on the role of the third party. In the example of the fund manager, adding together the exposures may not be necessary because potentially fraudulent behaviour may not necessarily affect the repayment of a loan.

                  Added: June 2022

              • Identification of Additional Risks

                • CM-2.3.40

                  It is conceivable that the licensee may consider multiple third parties to be potential drivers of additional risk. In this case, the licensee should assign the exposure resulting from the investment in the relevant structures to each of the third parties.

                  Added: June 2022

                • CM-2.3.41

                  The requirement set out in Paragraph CM-2.3.36 to recognise a structural risk inherent in the structure instead of the risk stemming from the underlying exposures is independent of whatever the general assessment of additional risks concludes.

                  Added: June 2022

              • Exposures to Central Counterparties

                • CM-2.3.42

                  Exposures to qualified central counterparties (‘QCCPs’) related to clearing activities are exempted from the requirements of this Chapter.

                  Added: June 2022

                • CM-2.3.43

                  In the case of non-QCCPs, Bahraini conventional bank licensees must measure their exposure as a sum of both the clearing exposures described in Paragraph CM-2.3.45 and the non-clearing exposures described in Paragraph CM-2.3.48 and must respect the general large exposure limit of 15 percent of Total consolidated capital.

                  Added: June 2022

                • CM-2.3.44

                  The concept of closely related counterparties referred to in CM-2.5.4 does not apply in the context of exposures to centralised counterparties (‘CCPs’) that are specifically related to clearing activities.

                  Added: June 2022

              • Identification of Additional Risks

                • CM-2.3.45

                  Bahraini conventional bank licensees must identify exposures to a CCP related to clearing activities and sum together these exposures. Exposures related to clearing activities are listed in the table below, together with the exposure value to be used:

                  Trade Exposures The exposure value of trade exposures must be calculated using the exposure measures prescribed in this Chapter for the respective type of exposures.
                  Segregated Initial Margin The exposure value is 0.
                  Non-segregated Initial Margin The exposure value is the nominal amount of initial margin posted.
                  Pre-funded Default Fund Contributions Nominal amount of the funded contribution.
                  Unfunded Default Fund Contributions The exposure value is 0.
                  Equity Stakes The exposure value is the nominal amount.
                  Added: June 2022

                • CM-2.3.46

                  Regarding exposures subject to clearing services (the licensee acting as a clearing member or being a client of a clearing member), the licensee must determine the counterparty to which exposures must be assigned by applying the provisions of Module CA.

                  Added: June 2022

                • CM-2.3.47

                  Bahraini conventional bank licensees must apply a risk weight of 2 percent to their trade exposure to the CCP in respect of OTC derivatives, exchange-traded derivative transactions, securities financing transactions (SFTs) and long-settlement transactions, where the licensee acts as a clearing member of a CCP for its own purposes. Where the clearing member offers clearing services to clients, the 2 percent risk weight also applies to the clearing member’s trade exposure to the CCP that arises when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults.

                  Added: June 2022

                • CM-2.3.48

                  Other types of exposures that are not directly related to clearing services provided by the CCP, such as funding facilities, credit facilities, guarantees, etc. must be measured according to the rules set out in this Chapter as for any other type of counterparty. These exposures will be added together and be subjected to the large exposure limit.

                  Added: June 2022

            • CM-2.4 CM-2.4 Identity of Counterparty

              • CM-2.4.1

                For the purposes of measuring exposures, the counterparty will generally be the person from whom the concerned funds are receivable (in the case of fees and commissions etc.), the borrower (customer) in the case of credit facilities; the person guaranteed; the issuer of a security in the case of a security held; or the party with whom a contract was made in the case of a derivative contract.

                Added: June 2022

              • CM-2.4.2

                Where a third party has provided an eligible guarantee, and subject to the guaranteed licensee’s policy statement not stating otherwise, the guaranteed licensee must recognise an exposure to the third-party guarantor, rather than the person guaranteed (see Chapter CA-4 for full conditions relating to the recognition of guarantees for regulatory purposes).

                Added: June 2022

            • CM-2.5 CM-2.5 Limits for Large Exposures

              • Definitions and Aggregate Limit on Large Exposures

                • CM-2.5.1

                  A ‘large exposure’ is any exposure to a counterparty or a group of closely related counterparties which is greater than, or equal to, 10 percent of the reporting Bahraini conventional bank licensee’s Total Consolidated capital but excluding intragroup exposures.

                  Added: June 2022

                • CM-2.5.2

                  CBB requires that any large exposure, as defined in Paragraph CM-2.5.1, must have a prior approval by the Bahraini conventional bank licensee's Board of Directors unless the exposure was incurred within the specific borrower limits for which the licensee has prior Board approval.

                  Added: June 2022

              • Single Exposure Limit to a counterparty – 15 Percent

                • CM-2.5.3

                  A Bahraini conventional bank licensee may not incur an exposure to an individual counterparty or a group of closely related counterparties (not connected to the reporting licensee) which is 15 percent or more of the reporting licensee’s Total consolidated capital without the prior written approval of the CBB. Where this limit has been exceeded, the excess amount must be risk-weighted at 800 percent.

                  Added: June 2022

              • Closely related counterparties – Criteria

                • CM-2.5.4

                  In order for the licensee to establish the existence of a group of closely related counterparties, it must assess the relationship amongst counterparties by referring to one or more of the following criteria:

                  (a) Control relationship: One of the counterparties, directly or indirectly, has control over the other(s) based on the following:
                  (i) Where one entity owns 50% or more of the voting rights of another entity.
                  (ii) Where one entity is deemed to have control by virtue of voting agreements (e.g. control of a majority of voting rights pursuant to an agreement with other shareholders).
                  (iii) Where one entity exercises significant influence on the appointment or dismissal of an entity’s board and/or senior management, such as the right to appoint or remove a majority of such persons, or the fact that a majority of such persons have been appointed solely as a result of the exercise of an individual entity’s voting rights.
                  (iv) Where one entity has significant influence on the board or senior management, e.g. an entity has the power, pursuant to a contract or otherwise, to exercise a controlling influence over the management or policies of another entity (e.g. through consent rights over key decisions).
                  ; or
                  (b) Economic interdependence: If one of the counterparties were to experience financial problems, in particular funding or repayment difficulties, the other(s), as a result, would also be likely to encounter funding or repayment difficulties.
                  Added: June 2022

                • CM-2.5.5

                  Bahraini conventional bank licensees are also expected to refer to criteria specified in IFRS for further qualitative guidance when determining control.

                  Added: June 2022

                • CM-2.5.6

                  Bahraini conventional bank licensees must assess the control relationship using the following criteria:

                  (a) Voting agreements (e.g. control of a majority of voting rights pursuant to an agreement with other shareholders);
                  (b) Significant influence on the appointment or dismissal of an entity’s administrative, management or supervisory body, such as the right to appoint or remove a majority of members in those bodies, or the fact that a majority of members have been appointed solely as a result of the exercise of an individual entity’s voting rights;
                  (c) Significant influence on senior management, e.g. an entity has the power, pursuant to a contract or otherwise, to exercise a controlling influence over the management or policies of another entity (e.g. through consent rights over key decisions).
                  Added: June 2022

                • CM-2.5.7

                  The CBB will exercise its discretion in applying the definition of closely related counterparties on a case-by-case basis if it finds, during its onsite or offsite supervisory review, any linkage of such counterparties.

                  Added: June 2022

                • CM-2.5.8

                  In establishing closely related counterparty relationships based on economic interdependence (CM-2.5.4 (b)), licensees must consider, at a minimum, the following qualitative criteria:

                  (a) Where 50 percent or more of one counterparty’s gross receipts or gross expenditures (on an annual basis) are derived from transactions with the other counterparty (e.g. the owner of a residential/commercial property and the tenant who pays a significant part of the rent);
                  (b) Where one counterparty has fully or partly guaranteed the exposure of the other counterparty, or is liable by other means, and the exposure is so significant that the guarantor is likely to default if a claim occurs;
                  (c) Where a significant part of one counterparty’s production/output is sold to another counterparty, which cannot easily be replaced by other customers;
                  (d) When the expected source of funds to repay each loan one counterparty makes to another is the same and the counterparty does not have another source of income from which the loan may be fully repaid;
                  (e) Where it is likely that the financial problems of one counterparty would cause difficulties for the other counterparties in terms of full and timely repayment of liabilities;
                  (f) Where the insolvency or default of one counterparty is likely to be associated with the insolvency or default of the other(s); and
                  (g) When two or more counterparties rely on the same source for the majority of their funding and, in the event of the common provider’s default, an alternative provider cannot be found. In this case, the funding problems of one counterparty are likely to spread to another due to a one-way or two-way dependence on the same main funding source.
                  Added: June 2022

              • Limit on Exposures to connected counterparties – 25 Percent Aggregate

                • CM-2.5.9

                  Exposures to connected counterparties of Bahraini conventional bank licensees may be justified only when undertaken for the clear commercial advantage of the licensee, when negotiated and agreed on an arm’s-length basis, and when included in the Large Exposures Policy statement.

                  Amended: October 2022
                  Added: June 2022

                • CM-2.5.10

                  A Bahraini conventional bank licensee may not exceed the individual or aggregate limits for exposures to connected counterparties shown in Paragraph CM-2.5.15, without the prior written approval of the CBB.

                  Added: June 2022

                • CM-2.5.11

                  The licensee may not undertake exposures to its own external auditor. In this context, ‘external auditor’ refers to the firm/partnership, the partners, the directors and the managers of the audit firm.

                  Added: June 2022

                • CM-2.5.12

                  For the purpose of this Module, ‘connected counterparties’ include legal and natural persons connected with the Bahraini conventional bank licensee, including, in particular; controllers of the licensee (and Board members, senior management and key staff of the controller, the controller’s appointed Board representatives, subsidiaries and associated companies of controllers including their Board members, senior management and key staff), approved persons of the licensee, as defined by Module LR-1A, and their close family members (as defined by IFRS – IAS 24); associated companies not mentioned hereinabove, unconsolidated subsidiaries and members of the Shari’a Supervisory Board (‘SSB’), if any.

                  Added: June 2022

                • CM-2.5.13

                  Equity participations in, and credit exposures to, consolidated banking and financial subsidiaries (see CA-2.3.1(c)) need not be included in exposures to connected counterparties for the sake of the table in CM-2.5.15. Equity participations in, and credit or financing exposures to, unconsolidated subsidiaries are included in the definition of exposure in order to understand the degree of support the parent is supplying to its unconsolidated subsidiaries on a day-to-day basis.

                  Added: June 2022

                • CM-2.5.14

                  The CBB will exercise its discretion in applying the definition of connected counterparties of the licensee on a case-by-case basis, if it finds during its onsite or offsite supervisory review any linkage of such counterparties.

                  Added: June 2022

                • CM-2.5.15

                  Exposures (both on and off-balance sheet) to all connected counterparties of Bahraini conventional bank licensees listed below, when taken together, may not exceed 25 percent of the Total consolidated capital. Where any of these limits have been exceeded, the excess amount must be risk-weighted at 800 percent.

                  Connected Counterparties Individual Limit Aggregate Limit
                  Controllers and their close family members as defined in IFRS, and Board members, senior management and key staff of the controller, the controller’s appointed Board representatives, subsidiaries and associated companies of controllers including their Board members, senior management and key staff 0% 0%
                  Approved persons (and their close family members as defined in IFRS) and members of the SSB 10% 25%
                  Associated companies not mentioned hereinabove, other connected counterparties not mentioned above, and unconsolidated subsidiaries 15%
                  Total (including senior management and others) 25%
                  Added: June 2022

              • Deductions from Total Capital

                • CM-2.5.16

                  The CBB will closely examine all exposures to ‘connected counterparties’ and will deduct them from the licensee’s consolidated total capital if they are, in the CBB's opinion, of the nature of a capital investment, or provision of long-term working capital, or are made on particularly concessionary terms.

                  Added: June 2022

                • CM-2.5.17

                  Reciprocal cross-holdings of capital between the licensee and its controllers (see GR-5) which artificially inflate the capital of licensee concerned are not permitted. Any cross-holdings that occur, due to acquisitions or takeovers, must be deducted from the concerned licensee’s total capital (see also CA-2).

                  Added: June 2022

                • CM-2.5.18

                  Any other form of lending to connected counterparties outside the scope of the above will be dealt with by the CBB on a case-by-case basis.

                  Added: June 2022

                • CM-2.5.19

                  Bahraini conventional bank licensees must perform valuations of collaterals covering large exposures to ensure that collaterals are, and continue to be, enforceable and realisable at least on an annual basis when market conditions are adverse.

                  Added: June 2022

            • CM-2.6 CM-2.6 Exempt Exposures

              • Exempt Exposures to Parties not Connected to the Bank

                • CM-2.6.1

                  Certain types of exposure are exempt from the 15 percent exposure limit set out in CM-2.5.3, but commitment to such exposures must be reported to the CBB on a quarterly basis using the Form PIR provided in Appendix BR-5.

                  Added: June 2022

                • CM-2.6.2

                  These exemptions fall into the following categories and are subject, in each case, to the policy statement:

                  (a) Short term interbank exposures, with original maturities of 3 months or less to parties not connected to the reporting licensee;
                  (b) Exposures to GCC governments and their public sector entities that are not connected to the reporting licensee and do not operate on a commercial basis, as set out in the guidelines to the PIR (see Module CA).
                  (c) Exposures secured by cash or GCC government securities or guarantees;
                  (d) Exposures to central governments who are members of the Organisation for Economic Cooperation and Development (‘OECD’) or exposures secured by OECD central government securities/guarantees;
                  (e) Pre-notified exposures which are covered by a guarantee from the licensee’s parent (see Paragraphs CM-2.6.9 to CM-2.6.12); and
                  (f) Sukuk or other securities issued or exposure to / exposure guaranteed by the Islamic Development Bank or any of its subsidiaries and other multilateral development banks, such as IMF, World Bank, Arab Monetary Fund, Asian Development Bank, African Development Bank, European Bank of Reconstruction and Development.
                  Amended: October 2022
                  Added: June 2022

                • CM-2.6.3

                  Where two or more entities that are outside the scope of sovereign exemption are controlled by or are economically dependent on an entity that falls within the scope of the sovereign exemption referred to in paragraph CM-2.6.2, and are closely related, those entities need not be deemed to constitute a group of closely related counterparties pursuant to paragraph CM-2.5.4. Additionally, consistent with Module CA, where other supervisors also treat claims on named PSEs as claims on their sovereigns, claims to those PSEs are treated as claims on the respective sovereigns.

                  Added: June 2022

                • CM-2.6.4

                  If a Bahraini conventional bank licensee has an exposure to any entity noted in Paragraph CM-2.6.2 which is hedged by a credit derivative, the licensee will have to recognise an exposure to the counterparty providing the credit protection, as prescribed in Paragraphs CM-2.4.2 and CM-2.3.16, notwithstanding the fact that the original exposure is exempted.

                  Added: June 2022

              • Exempt Exposures to Connected Counterparties

                • CM-2.6.5

                  Exposures to subsidiaries which are always fully consolidated on a line-by-line basis for all supervisory purposes are exempt from the limits in this Module on a consolidated basis. However, licensees must observe the CBB's solo capital adequacy requirements in Module CA.

                  Added: June 2022

                • CM-2.6.6

                  Exposures to unconsolidated subsidiaries (normally non-financial and outside the scope of regulatory consolidation) are not exempt from the limits in this Module and are included under the limits for exposures to associates, related parties and unconsolidated subsidiaries (See Paragraph CM-2.5.14).

                  Added: June 2022

                • CM-2.6.7

                  Bahraini conventional bank licensees may apply to the CBB to take on a treasury role on behalf of the group as a whole (provided that the group is subject to consolidated supervision by its home supervisor). The CBB's policy regarding the taking on of a treasury role includes exposures arising from a central risk management function. Such exposures must be approved by the CBB before they may be exempted.

                  Added: June 2022

                • CM-2.6.8

                  In the above scenario (Paragraph CM-2.6.7), for example, exposures of more than 15% of Total Consolidated Capital to a parent bank from a subsidiary bank may be permitted where they constitute short term lending of excess liquid funds.

                  Added: June 2022

              • Exposures Undertaken by a Subsidiary Bank

                • CM-2.6.9

                  Where exposures undertaken by a Bahrain subsidiary of an overseas bank are guaranteed by its parent bank, the Bahrain subsidiary bank may be deemed to have an exposure to its parent bank.

                  Added: June 2022

                • CM-2.6.10

                  Under the terms of this Module (see Sub-Paragraph CM-2.6.2(f)), such indirect exposures to a parent bank may be exempted from the limits on large exposures if the CBB is satisfied that:

                  (a) Such exposures have been pre-notified to the CBB for the CBB's approval and are entered into within the terms of a policy agreed by the parent bank;
                  (b) There are guarantees in place from the parent bank to protect the subsidiary should the exposure become impaired or require to be written off; and
                  (c) In the case of licensees which are the Bahrain subsidiaries of overseas licensees, the supervisory authority of the parent bank has approved the exposures that can be undertaken by the Bahrain subsidiary.
                  Added: June 2022

                • CM-2.6.11

                  In the case of a Bahrain incorporated bank’s subsidiary in Bahrain, in order for an exposure exceeding 15% of Total Capital to be acceptable in the subsidiary, the Bahrain parent bank must at all times have the capacity to take on the exposure to the third party, without itself exceeding the limit of 15% of its own Total Capital. Also, the total exposure of the banking group to the customer must be within 15% of the parent bank’s consolidated Total Capital.

                  Added: June 2022

                • CM-2.6.12

                  The CBB will need to be satisfied that adequate control systems are in place to ensure that risks taken in the group as a whole are properly monitored and controlled.

                  Added: June 2022

            • CM-2.7 CM-2.7 Reporting of Exposures

              • CM-2.7.1

                Conventional bank licensees are required to report their 25 largest exposures to banks as well as their 25 largest exposures to non-banks to the CBB on a quarterly basis using the Form PIR provided in Appendix BR-5.

                Added: June 2022

              • CM-2.7.2

                Bahraini conventional bank licensees must report the financial details of each large exposure, as defined under Paragraph CM-2.5.1 in Appendix BR-19, as required under Paragraph BR-3.1.10.

                Added: June 2022

              • CM-2.7.3

                Bahraini conventional bank licensees must report all their exposures to connected counterparties on a monthly basis using the form provided in Appendix BR-11, as required under Paragraph BR-4.3.4.

                Added: June 2022

              • CM-2.7.4

                Bahraini conventional bank licensees are required to adopt policies and set internal limits, which will not lead to the exposure limit(s) referred to above being exceeded as a matter of course.

                Added: June 2022

              • CM-2.7.5

                For some licensees, the CBB may determine it prudent to set lower large exposure limits than the ones given in this Module.

                Added: June 2022

              • CM-2.7.6

                Should any licensee incur or plans to incur an exposure to an individual counterparty (other than an exempt exposure) which results in or may result in it exceeding any of the limits set out above, this must be reported immediately to the CBB for its consideration. Where the exposure or counterparty is not exempt, action must be taken to immediately bring the exposure back within applicable limits as soon as possible.

                Added: June 2022

            • CM-2.8 CM-2.8 Policy Statements

              • CM-2.8.1

                The CBB requires each Bahraini conventional bank licensee to set out its policy and internal limits on large exposures, including limits for differing types of exposures, to individual customers, banks, corporates, countries, regions, products, asset classes, collateral, currencies, markets, commodities, connected counterparties and economic sectors, in a policy statement which must be formally approved by the Board of Directors. Furthermore, licensees must not implement significant changes to this policy without the prior approval of the Board.

                Amended: October 2022
                Added: June 2022

              • CM-2.8.2

                The necessary control systems to give effect to the licensee’s policy on large exposures must be clearly specified and monitored by its Board.

                Added: June 2022

              • CM-2.8.3

                Bahraini conventional bank licensees are required to implement appropriate internal systems and controls to monitor the size of their total consolidated capital on a daily basis to ensure that the limits detailed in this Module are not exceeded.

                Added: June 2022

            • CM-2.9 CM-2.9 Concentrations in Geographic, Economic and Market Sectors

              • CM-2.9.1

                The extent to which a licensee may be prudently exposed to a particular geographic, economic and market sectors will vary considerably, depending upon the characteristics and strategy of the licensee, and the sector concerned.

                Added: June 2022

              • CM-2.9.2

                Concentrations should also be recognised in not just geographic and economic sectors but also in markets (e.g. individual stock exchanges). The CBB will not apply common maximum percentages to licensees’ sectoral or market exposures but, instead, will continue to monitor such exposures on an individual and general basis.

                Added: June 2022

              • CM-2.9.3

                Bahraini conventional bank licensees must specify in their policy statements how they define geographic, economic and market sectors, and what limits apply to different sectors.

                Added: June 2022

              • CM-2.9.4

                Exposures and limits for sectors must be reviewed at least quarterly by the Board of Directors.

                Added: June 2022

              • CM-2.9.5

                Bahraini conventional bank licensees which have over 10 percent of their risk-adjusted assets in market risk (i.e. the trading book) must also set market risk concentration limits.

                Added: June 2022

            • CM-2.10 CM-2.10 Major Investments

              • Prior approval for Major Investments

                • CM-2.10.1

                  Bahraini conventional bank licensees must obtain the CBB’s prior written approval before making an investment in another commercial or financial entity (whether incorporated inside or outside of Bahrain) which falls within the definition of a major investment. Additionally, the CBB’s prior approval must be obtained for any subsequent increases in the licensee’s ownership in excess of 5% of similar exposure. Where the increase is due to a revaluation or change in capital of the licensee, a written notification outlining the percentage increase and reasons for the increase must be provided to the CBB.

                  Added: June 2022

                • CM-2.10.2

                  In assessing a proposed major investment, the CBB will take into account the impact of such investment on the risk profile of the licensee. See Appendix CM-5 for criteria for assessment.

                  Added: June 2022

                • CM-2.10.3

                  A major investment is defined as either of the following:

                  (a) An investment in the capital instruments of another entity (whether financial or commercial) by a Bahraini conventional bank licensee which is equivalent to or more than 10% of the Bahraini conventional bank licensee’s consolidated Tier 1 capital; or
                  (b) An investment in the capital instruments of a non-financial entity (commercial entity) which is equivalent to or more than 10 percent of the issued common share capital of the commercial entity.
                  Added: June 2022

                • CM-2.10.4

                  Any major investments by a Bahraini conventional bank licensee in the capital instruments of another entity must be included in the measure of an ‘exposure’ for the purposes of this Chapter, i.e. such major investments must be aggregated with all other facilities to a client for the purpose of calculating the level of ‘large exposures’. Where a percentage ownership increase results in the licensee exceeding the single large exposure limit, the 800 percent risk-weight rule must be applied (see CM-2.5).

                  Added: June 2022

                • CM-2.10.5

                  The CBB reserves the right to require Bahraini conventional bank licensees to dispose of any major investments acquired without its prior approval. Where a ‘major investment’ is acquired without the approval of the CBB, the entire value of the holding must be deducted from the consolidated total capital of the concerned licensee. Approval will not be given for ‘major investments’ in entities incorporated in jurisdictions where secrecy constraints exist, or there are restrictions on the passage of information to the bank (other than customer confidentiality requirements imposed by financial regulators).

                  Added: June 2022

                • CM-2.10.6

                  If the licensee’s close links with another entity prevent effective supervision of the licensee (or bank group), the CBB may refuse or revoke a license, or require the licensee to sell or otherwise dispose of entities within its corporate group, or to restructure the licensee.

                  Added: June 2022

              • Limits of major investments

                • CM-2.10.7

                  The total amount of the licensee’s investments in commercial entities, other than associated companies considered under CM-2.5.14, may not exceed the limits set forth below:

                  Limits on major investments in commercial entities* Individual Limit** Aggregate Limit**
                  Major investments by retail conventional bank licensees 15% 30%
                  Major investments by wholesale conventional bank licensees undertaking commercial banking business 40%
                  Major investments by wholesale conventional bank licensees undertaking investment banking business 70%

                  *Exposure for this purpose includes investment in capital instruments and any other exposure to the subject entity
                  ** Limits expressed as a percentage of Total Tier 1 Capital.

                  Added: June 2022

          • CM-3 CM-3 Loans to Employees

            • CM-3.1 CM-3.1 Loans to Employees

              • CM-3.1.1

                The CBB’s prior written consent must be obtained for any loan to an employee where the amount of this loan, either singly or when added to an existing loan(s) outstanding to that employee at that date, would be equal to or in excess of BD 100,000, or its equivalent in foreign currency. Conventional bank licensees must notify the CBB in writing of any senior employee who fails to discharge his repayment obligations.

                Added: June 2022

              • CM-3.1.2

                Where a conventional bank licensee seeks the CBB’s prior approval, as required under Paragraph CM-3.1.1, in its request it must confirm that the employee loan is in line with the licensee’s Board-approved policy. The request must also confirm that the licensee has made an internal assessment and evaluation when reaching the decision to grant the employee loan and that all necessary internal approvals have been obtained. The licensee must also obtain the necessary credit reference information from the Bahrain Credit Reference Bureau.

                Added: June 2022

              • CM-3.1.3

                Conventional bank licensees must ensure that the provisions of relevant laws (including, specifically, the Bahrain Labour Law) are observed at all times in this regard.

                Added: June 2022

          • CM-4 CM-4 Write-off – Credit Facility

            • CM-4.1 CM-4.1 Write-offs

              • CM-4.1.1

                Bahraini conventional bank licensees must notify the CBB of any write-off of an exposure of an amount in excess of BD 100,000, or its equivalent in foreign currency.

                Added: June 2022

              • CM-4.1.2

                Such notification should be accompanied by documentary evidence showing, beyond reasonable doubt, that the customer does not possess the resources to fulfil the outstanding obligation.

                Added: June 2022

              • CM-4.1.3

                Bahraini conventional bank licensees must obtain the CBB’s written no-objection before writing-off any of the following:

                (a) Exposures to, or exposures guaranteed by, any approved person of the licensee or any other CBB licensee;
                (b) Exposures to controllers, subsidiaries, associates and SSB members of the licensee;
                (c) Exposures to any business entity for which the licensee, or any of its approved persons, is a related party, such as a Board member, a shareholder owning 5 percent or more, a person assuming a managerial role, a guarantor, a SSB member, etc.; and
                (d) Exposures to any controller of another CBB licensee (as defined in Resolution No. (16) of 2021 with respect to promulgating the Regulation Pertaining to Control in Banks).
                Amended: January 2023
                Added: June 2022

              • CM-4.1.4

                Branches of foreign bank licensees must obtain the CBB’s written no-objection before writing off the exposures listed in CM-4.1.3 from (a) to (d) except for (b).

                Added: June 2022

              • CM-4.1.5

                Bahraini conventional bank licensees must notify the CBB of any applicable exposures outlined in Paragraph CM-4.1.3 that are classified as NPLs.

                Added: June 2022

              • CM-4.1.6

                In order to comply with Sub-paragraphs CM-4.1.3 (a) and (d), conventional bank licensees should refer to the CBB register on the CBB website, which contains a list of approved persons and controllers of all CBB licensees.

                Added: June 2022

          • CM-5 CM-5 Consumer Finance

            • CM-5.1 CM-5.1 Overview

              • CM-5.1.1

                This Chapter sets out various requirements regarding the provision of consumer finance within the Kingdom of Bahrain by the CBB licensees. The aim of these requirements is to encourage:

                (a) Prudent lending by licensees providing consumer finance; and
                (b) The transparent disclosure of the full costs and terms on which licensees offer consumer finance.
                Added: June 2022

            • CM-5.2 CM-5.2 The CBB’s Approach to Consumer Finance

              • CM-5.2.1

                Conventional bank licensees are reminded of their obligation to implement a sound internal controls framework, including an effective credit culture (as outlined in Section CM-1.2).

                Added: June 2022

              • CM-5.2.2

                Conventional bank licensees which offer consumer finance facilities to residents of Bahrain must follow the Code of Best Practice on Consumer Credit attached as Appendix CM-2 in Part B of the Rulebook. Failure to adhere to the Code may result in enforcement action as outlined in Module EN.

                Added: June 2022

              • CM-5.2.3

                Conventional bank licensees are also reminded of their obligations to display and communicate charges and APRs clearly (as outlined in Section BC-4.3).

                Added: June 2022

              • CM-5.2.4

                The measures presented in this Chapter should be viewed as minimum standards, rather than best practice. They are aimed at encouraging prudent lending and full, frank and fair disclosures. These measures should be read in conjunction with the ‘Code of Best Practice on Consumer Credit and Charging’ which was agreed jointly between the CBB and the Bahrain Association of Banks (see Appendix CM-2).

                Added: June 2022

              • Ongoing Effort by the CBB

                • CM-5.2.5

                  The CBB supervisors and examiners will also focus on licensees’ implementation of the ‘Code of Best Practice on Consumer Credit and Charging’ in their ongoing supervision of licensees, to monitor and encourage sound lending practices and disclosure standards.

                  Added: June 2022

            • CM-5.3 CM-5.3 Definition of Consumer Finance

              • CM-5.3.1

                Consumer finance is the provision of any form of credit facility to an individual excluding:

                (a) Any loan secured by a first charge on residential property to an individual, where the borrower lives in, or intends to live in the property;
                (b) Any credit facility secured by cash or investments, where the security provided more than covers the principal of the credit facility;
                (c) The provision of any form of credit to an individual for business purposes where the facility is to be repaid from the business activities of the borrower; and
                (d) Any credit facility awarded based on eligibility as per the Social Insurance Organisation’s Pension Commutation Scheme.
                Amended: January 2023
                Added: June 2022

              • CM-5.3.2

                For the purposes of the Rulebook, ‘credit facility’ includes personal overdraft facilities, credit cards, consumer loans or other financing facilities. ‘Consumer loans’ are defined as loans for a fixed period to individuals for non-business purposes.

                Added: June 2022

            • CM-5.4 CM-5.4 Maximum Limits

              • Total Repayments Ratio

                • CM-5.4.1

                  Licensees may only provide a new consumer facility (or renew, extend or otherwise modify an existing consumer facility) for an amount so that the borrower’s total monthly repayments on all their consumer finance commitments do not exceed 50 percent of their monthly gross income. This limit may only be exceeded in the circumstances described in Paragraphs CM-5.4.6 and CM-5.4.9.

                  Added: June 2022

                • CM-5.4.2

                  When reviewing an applicant for a consumer facility, licensees may only take into consideration regular income. A spouse’s income may only be taken into consideration when the credit facility would be in joint names, so that the spouse would also be legally liable for the obligation incurred.

                  Added: June 2022

                • CM-5.4.3

                  Notwithstanding the above limit, licensees must review, in detail, an applicant’s personal financial standing and ability to service their obligations. Where a spouse’s income is being taken into consideration, their individual circumstances must also be similarly assessed. In many cases, these reviews may require consumer finance repayments to be kept significantly below 50 percent of monthly gross income.

                  Added: June 2022

                • CM-5.4.4

                  Licensees must enquire as to applicants’ sources of income, their credit history, their regular outgoings and other financial commitments, including potential liabilities such as guarantees. Particular attention must be paid to housing costs (such as payments for social housing schemes). A person’s regular income, net of consumer finance repayments and other financial obligations, must remain sufficient for that person to support himself and any dependents. Licensees must also take into account likely future trends in income and outgoings, and the impact this may have on the 50 percent ratio.

                  Added: June 2022

                • CM-5.4.5

                  When factoring in credit cards into the repayment limit in Paragraph CM-5.4.1 above, licensees must include 5 percent of the credit limits available on these facilities. If the amounts outstanding (including interest) under such facilities exceed their limit, then the full amount outstanding must be included in the repayments ratio calculation. Charge cards are not included under this definition.

                  Added: June 2022

                • CM-5.4.6

                  In the case of high earners – defined for these purposes as persons earning more than BHD 3,000 per month – the 50 percent limit may be relaxed, provided that the licensee has undertaken the review required in Paragraph CM-5.4.4 and is satisfied that the borrower can comfortably support a higher facility service ratio.

                  Added: June 2022

                • CM-5.4.7

                  The review undertaken to satisfy requirements, as outlined in Paragraph CM-5.4.4, must be documented and made available to the CBB’s examiners upon request. The documentation must include all relevant information used to support the decision to extend credit facilities. In the case of high earners who are granted a facility in excess of the 50 percent limit, the documentation must also include a written statement, signed by an appropriate member of management, explaining the justification for relaxing the limit.

                  Added: June 2022

              • Maximum Tenor Limit

                • CM-5.4.8

                  The maximum tenor for instalment consumer finance is 7 years. In the case of any restructuring of a consumer finance facility repayable in instalments, the stated final maturity must be within 7 years from the date of the original facility. The tenor may not be extended more than twice during the period of the agreement and in any case not extended beyond the 7-year duration.

                  Added: June 2022

              • Non-compliant Facilities

                • CM-5.4.9

                  Where a customer’s monthly gross income falls (e.g. due to redundancy, disability or a similar event outside the control of the customer), the licensee must identify such accounts as ‘technically non-compliant’. If a customer requests an extension to the tenor of the facility due to reduced income, then the licensee may increase the term to assist the customer. The licensee must take account of the 50 percent limit outlined in Paragraph CM-5.4.1. Such facilities must also be identified as ‘technically non-compliant’.

                  Added: June 2022

            • CM-5.5 CM-5.5 Refunds and Prepayments

              • Refund/Adjustment of Insurance Premium on Financing Prepayments and Top-Ups

                • CM-5.5.1

                  Conventional bank licensees must refund/adjust proportionately the insurance premium charged on individual credit facilities when the customer either requests for a top up or prepayment of the credit facility as per the prescribed formula below:

                  Added: June 2022

          • CM-6 CM-6 Independent Assessments

            • CM-6.1 CM-6.1 Independent assessments

              • CM-6.1.1

                [This Paragraph was deleted in January 2022].

                Added: June 2022

              • CM-6.1.2

                The independent reviews of the credit risk management framework and compliance with Module CM undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34 must cover the following:

                (a) The adequacy of internal systems and procedures for identifying, measuring, monitoring and mitigating credit risk;
                (b) The appropriateness of the procedures, processes, systems and tools for controlling credit risk;
                (c) The credit risk rating and scoring model governance;
                (d) The integrity and usefulness of management information reports on credit risk; and
                (e) The adherence to credit risk appetite and limits framework, credit risk policies and procedures and compliance with this Module.
                Added: June 2022

              • CM-6.1.3

                [This Paragraph was deleted in January 2022].

                Added: June 2022

              • CM-6.1.4

                [This Paragraph was deleted in January 2022].

                Added: June 2022

          • CM-5 CM-5 APPENDIX

            • Appendix CM-5 CBB Illustrative Criteria for Assessment of Major Investments by Bahraini Conventional Bank Licensees

              In assessing any proposed major investments mentioned above, the CBB will take into account the following points:

              (a) The amount of the proposed major investment relative to the existing consolidated total capital of the licensee;
              (b) Existing capital adequacy ratios on a consolidated basis and forecast ratios after the major investment has gone ahead;
              (c) The adequacy of information flows from the investee company to the concerned bank;
              (d) Experience, and fit and proper matters relating to the senior personnel associated with the proposed major investment;
              (e) Risks associated with the proposed major investment;
              (f) Disclosure and exchange of (supervisory) information (in the case of a foreign major investment);
              (g) Adequacy of host supervision (in the case of a foreign major investment);
              (h) Current investments and concentrations in exposures of the concerned bank.
              (i) The compliance of the concerned bank with the CBB’s rules and regulations (e.g. reporting issues), and the adequacy of internal systems and controls;
              (j) The extent of holdings by any other shareholders (holding 5 percent or more of the capital of the concerned entity) or controllers of the concerned entity;
              (k) Whether the proposed activities are in line with the memorandum and articles of association (‘MOA’ and ‘AOA’) of the licensee;
              (l) The accounting treatment of the proposed major investment;
              (m) Whether the major investment relates to a closely-linked party, connected party, or controller in any way;
              (n) The existence of secrecy laws or constraints over supervisory access to the premises, assets, books and records of the concerned entity in which a ‘major investment is being acquired;
              (o) The impact and extent of goodwill and intangibles upon the capital adequacy and balance sheet of the licensee on a consolidated basis; and
              (p) The licensee’s existing and forecast liquidity position (as a result of the major investment) and how the major investment is to be funded (e.g. by the issuance of new capital or sale of other investments).
              Added: June 2022

          • CM-6 CM-6 Appendix

            • Appendix CM-6 Re-categorisation of Exposures

              Retail Exposures (natural persons and micro, small and medium enterprises (MSMEs)

              Repayment frequency Performance terms No. of continuous repayments done (cooling-off period)
                  Stage 3 to Stage 2 Stage 3 to Stage 1 Stage 2 to Stage 1
              Monthly Original   3 instalments/months 3 instalments/months
              Restructured 3 instalments/months   3 instalments/months
              Quarterly Original   2 instalments/6 months 2 instalments/6 months
              Restructured 2 instalments/6 months   2 instalments/6 months
              Semi-annual Original   2 instalment/12 months 2 instalment/12 months
              Restructured 2 instalment/12 months   2 instalment/12 months
              Annual Original   1 instalment/12 months 1 instalment/12 months
              Restructured 1 instalment/12 months   1 instalment/12 months

              Corporate Exposures (legal persons excluding MSMEs)

              Repayment frequency Performance terms No. of continuous repayments done (cooling-off period)
                  Stage 3 to Stage 2 Stage 3 to Stage 1 Stage 2 to Stage 1
              Monthly Original   6 instalments/months 6 instalments/months
              Restructured 6 instalments/months   6 instalments/months
              Quarterly Original   2 instalments/6 months 2 instalments/6 months
              Restructured 2 instalments/6 months   2 instalments/6 months
              Semi-annual Original   2 instalment/12 months 2 instalment/12 months
              Restructured   2 instalment/12 months 2 instalment/12 months
              Annual Original   1 instalment/12 months 1 instalment/12 months
              Restructured   1 instalment/12 months 1 instalment/12 months

              Note: The above re-categorisation assumes that a corporate re-rating exercise prior to the upgrade also confirms a satisfactory credit rating and no other SICR triggers or conditions exist that prevent the upward transition.

              Added: April 2023

        • OM Operational Risk Management

          • OM-A OM-A Introduction

            • OM-A.1 OM-A.1 Purpose

              • Executive Summary

                • OM-A.1.1

                  The Operational Risk Management Module sets out the Central Bank of Bahrain's ('CBB's') rules and guidance to Conventional Bank licensees operating in Bahrain on establishing parameters and control procedures to monitor and mitigate operational risks. The contents of this Module apply to all Conventional banks, except where noted in individual Chapters.

                  Added: January 2020

                • OM-A.1.2

                  This Module provides support for certain other parts of the Rulebook, mainly:

                  (a) Principles of Business;
                  (b) High-level Controls;
                  (c) Reputational Risk;
                  (d) Internal Capital Adequacy Assessment Process ('ICAAP'); and
                  (e) Stress Testing.
                  Added: January 2020

              • Legal Basis

                • OM-A.1.3

                  This Module contains the CBB's Directive, as amended from time to time, relating to Operational Risk Management and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all Conventional bank licensees (including their approved persons).

                  Added: January 2020

                • OM-A.1.4

                  For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                  Added: January 2020

            • OM-A.2 OM-A.2 Module History

              • OM-A.2.1

                This Module was first issued in July 2004 as part of Volume one of the CBB Rulebook. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made; Chapter UG-3 provides further details on Rulebook maintenance and version control.

                Added: January 2020

              • OM-A.2.2

                The changes made to this Module are detailed in the table below:

                Summary of Changes

                Module Ref. Change Date Description of Changes
                OM-5.1 01/04/05 Physical security measures.
                OM-4.2 01/10/05 Succession planning for locally incorporated banks.
                OM-5.1 01/10/05 Clarification of security manager role for smaller banks and deletion of requirement for cash trays.
                OM-B & OM-1.2 01/04/06 Minor amendments concerning roles of Board and management and editing of OM B.
                OM-5.1.15-OM-5.1.24 01/04/06 New security requirements for ATM security arrangements and reporting of security related complaints.
                OM-A.2.1-OM-A.2.6 01/10/07 Purpose (expanded)
                OM-A.2.1-OM-A.2.6 01/10/07 Key Requirements (deleted)
                OM-5.1-OM-5.9 01/10/07 Business Continuity Planning (expanded)
                OM-7 01/10/07 New Books and Records Chapter transferred from Module GR
                OM-8 01/04/08 Basel II Qualitative Operational Risk Requirements
                OM 01/2011 Various minor amendments to ensure consistency in CBB Rulebook.
                OM-A.1.3 and OM-A.1.4 01/2011 Clarified legal basis.
                OM-7.1.4 04/2011 This paragraph was deleted as Ministerial Order 23 does not apply to CBB licensees.
                OM-7.3.4 04/2011 Clarified retention period of records for promotional schemes.
                OM 07/2011 Various minor amendments to clarify Rules and have consistent language.
                OM-2.4 07/2011 Amended CBB reporting requirements regarding succession planning.
                OM-3.1.7 07/2011 Paragraph deleted as no longer applicable since standard conditions and licensing criteria document has now been incorporated as part of Volume 1.
                OM-6.2 10/2011 Added new Section on internet security.
                OM-7.1.7 10/2011 Corrected typo.
                OM-A.1.3 01/2012 Updated legal basis.
                OM-2.1.4 01/2012 Corrected cross reference.
                OM-3.2.2 04/2012 Deleted last sentence of Paragraph as it repeats the requirement under Paragraph OM-3.3.1
                OM-6.2.2 04/2012 Clarified penetration testing interval for internet security.
                OM-1.1.4 10/2012 Amended to reflect updated version of Basel Committee document.
                OM-3.2.6, OM-5.2.1, OM-5.4.8, OM-8 10/2012 Amended to reflect the Basel June 2011 paper on Principles for the Sound Management of Operational Risk.
                OM-6.2 07/2013 Amended reporting requirements related to internet security measures.
                OM-6.2.1 10/2013 Amended Rule to apply to all banks.
                OM-3.7.2 10/2015 Clarified Rule on internal audit outsourcing.
                OM-6 04/2016 Updated ATM security measures for banks.
                OM-3.9 07/2016 Added new Section dealing with outsourcing of functions containing customer information.
                OM-5.10 10/2016 Added new Section on Cyber Security Risk Management
                OM-6.1.1 10/2016 Added implementation deadline date
                OM-6.4.3 10/2016 Corrected cross references
                OM-6.4.4 10/2016 Corrected cross references
                OM-6.4.5 10/2016 Corrected cross references
                OM-6.6 10/2016 Added new Section on Cyber Security Measures
                OM-3.9.2 01/2017 Amended Paragraph on customer information
                OM-3.9.6 01/2017 Added new guidance paragraph on customer information
                OM-6.4.22 04/2017 ATM requirement on Solid Wall deleted.
                OM-6.4.23 04/2017 ATM requirement on Solid Wall deleted.
                OM-6.3.1 07/2017 Clarified requirements on compliance date.
                OM-6.3.2A 07/2017 Added new paragraph on Prohibition of Double Swiping.
                OM-6.3.2B 07/2017 Added new paragraph on Prohibition of Double Swiping.
                OM-6.3.2C 07/2017 Added new paragraph on Prohibition of Double Swiping.
                OM-6.3.2D 07/2017 Added new paragraph on Prohibition of Double Swiping.
                OM-6.3.2E 07/2017 Added new paragraph on Prohibition of Double Swiping.
                OM-6.4.21 07/2017 Deleted paragraph.
                OM-7.2.1 07/2017 Amended paragraph according to the Legislative Decree No. (28) of 2002.
                OM-7.2.2 07/2017 Deleted paragraph.
                OM-3.1.2 10/2017 Amended paragraph to allow the utilization of cloud services.
                OM-3.1.5A 10/2017 Added a new paragraph on outsourcing requirements.
                OM-3.2.3 10/2017 Amended paragraph.
                OM-3.3.1 10/2017 Amended paragraph.
                OM-3.3.2 10/2017 Amended paragraph.
                OM-3.3.3 10/2017 Amended paragraph.
                OM-3.3.4 10/2017 Amended paragraph.
                OM-3.3.5 10/2017 Added a new paragraph on outsourcing.
                OM-3.4.1 10/2017 Amended paragraph.
                OM-3.4.2(b) 10/2017 Amended sub-paragraph.
                OM-3.4.3 10/2017 Deleted paragraph.
                OM-3.4.5 10/2017 Amended paragraph.
                OM-3.5.1(a) 10/2017 Amended sub-sub-paragraph no. (5).
                OM-3.5.1(c) 10/2017 Amended sub-sub-paragraphs no. (2) and (3).
                OM-3.5.1(e) 10/2017 Amended sub-sub-paragraph no. (3).
                OM-3.8.3 10/2017 Amended paragraph.
                OM-3.9.1 10/2017 Amended paragraph.
                OM-3.9.2 10/2017 Amended paragraph on third party outsourcing of functions.
                OM-3.9.3 10/2017 Amended paragraph.
                OM-3.9.4) 10/2017 Amended paragraph.
                OM-3.9.4(b) 10/2017 Amended sub-paragraph.
                OM-3.9.4(d) 10/2017 Deleted sub-paragraph.
                OM-3.9.5 10/2017 Deleted paragraph.
                OM-3.9.7 10/2017 Added a new paragraph for security measures related to cloud services.
                OM-6.4.6 10/2017 Amended paragraph to include ancillary service providers.
                OM-6.3.1A 04/2018 Added a new Paragraph on card (EMV) compliance.
                OM-6.3.1B 04/2018 Added a new Paragraph on "provision of cash withdrawal and payment services through various channels".
                OM-6.3.2 04/2018 Amended Paragraph to mention "Conventional bank licensees".
                OM-3.9.2 07/2018 Amended Paragraph to include call centres.
                OM-3.9.2A 07/2018 Added new Paragraph on customer notification.
                OM-6.4.15A 10/2018 Added a new Paragraph on drive-thru ATMs.
                OM-6.4.20A 10/2018 Added a new Paragraph on drive-thru ATMs.
                OM Module 01/2020 Entire Module revised for better alignment with the principles and guidance from Basel Committee on Banking Supervision.
                OM-5.2.1A 07/2020 Added a new Paragraph on contactless payments.
                OM-5.1.2A & OM-5.1.2B 10/2020 Added new Paragraphs on fraudulent phishing attempts measures.
                OM-2.8.5 01/2021 Deleted Subparagraph (a).
                OM-3.1.2(f) 01/2021 Amended Subparagraph on electronic fraud.
                OM-3.3.11 01/2021 Added a new Paragraph on electronic fraud awareness.
                OM-5.1.5 04/2021 Amended Paragraph.
                OM-5.5 07/2021 New enhanced Section.
                Appendix C 07/2021 Added a new Appendix - Cyber security Control Guidelines
                OM-1.6.1 01/2022 Deleted Paragraph.
                OM-1.6.2 01/2022 Deleted Paragraph.
                OM-1.6.3 01/2022 Amended Paragraph.
                OM-1.6.4 – OM-1.6.6 01/2022 Deleted Paragraphs.
                OM-5.3.2 01/2022 Amended Paragraph.
                OM-5.3.3 – OM-5.3.11 01/2022 Deleted Paragraphs.
                OM-1.3.17(g) 04/2022 Amended Subparagraph on vacation policy.
                OM-5.5.57 04/2022 Amended Paragraph on cyber security incident reporting.
                OM-5.5.58 04/2022 Amended Paragraph on submission period of the cyber security incident report.
                OM-5.5.61 04/2022 Deleted reference to BR.
                OM-2 07/2022 Replaced Chapter OM-2 with new Outsourcing Requirements.
                OM-5.3.25 10/2022 Added a new Paragraph on compliance with the physical security requirements for ATM installations.
                OM-5.5.21 10/2022 Amended Paragraph on email domains requirements.
                OM-5.5.21A 10/2022 Added a new Paragraph on additional domains requirements.
                OM-2.1.7(v) 04/2023 Amended Subparagraph on the outsourcing coordinator.
                OM-2.1.7(viii) 04/2023 Added a new Subparagraph on outsourcing the internal audit function.
                OM-5.2.1 – OM-5.2.1A 04/2023 Amended contactless payment amount permitted where no pin or authentication is required.

          • OM-B OM-B Scope of Application

            • OM-B.1 OM-B.1 Scope of Application

              • Bahraini Conventional Bank Licensees

                • OM-B.1.1

                  Bahraini conventional bank licensees must comply with all requirements included in this Module.

                  Added: January 2020

                • OM-B.1.2

                  The Framework for operational risk management and the structure of governance process for operational risk management chosen by an individual bank will depend on a range of factors, including its nature, size, complexity and risk profile.

                  Added: January 2020

              • Branches of foreign bank licensees

                • OM-B.1.3

                  In the case of branches of foreign bank licensees, while the requirements of this Module apply, it is recognised that certain activities and tasks relating to operational risk management function or unit might be conducted at the head office or a regional office. Additionally, in the case of branches, it is likely that oversight of the branch, from an operational risk perspective, is also exercised at the head office/regional office.

                  Added: January 2020

                • OM-B.1.4

                  Branches of foreign bank licensees must document the risk assessments which, at a minimum, include the identified risk events by risk type or category, the key risk indicators (KRIs) and key control indicators (KCIs). In addition, the branch must record losses arising from failures of people, processes, systems, internal and external frauds.

                  Added: January 2020

                • OM-B.1.5

                  Branches of foreign bank licensees must seek the CBB's approval for the operational risk management activities undertaken by their head/regional office and demonstrate to the CBB that there are effective high-level controls for management of operational risk for activities undertaken out of the Bahrain branch.

                  Added: January 2020

                • OM-B.1.6

                  For the purposes of such CBB approval, the branch must perform a mapping or a gap analysis of the requirements in this Module with practices undertaken at the head office or regional office, whichever applicable, and at the branch as appropriate.

                  Added: January 2020

          • OM-1 OM-1 General Requirements

            • OM-1.1 OM-1.1 Operational Risk Management Framework

              • Overview

                • OM-1.1.1

                  This chapter contains the requirements relating to operational risk management. It sets out the requirements for an appropriate risk management environment. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems including internal frauds, or from external events including external frauds. This definition includes legal and Shari'a non-compliance risks, but excludes strategic and reputational risk. Legal risk is the risk arising from the potential that unenforceable contracts, lawsuits or adverse judgments may disrupt or otherwise negatively affect the operations or financial condition of a bank. As legal risk is one type of operational risk, banks should ensure that all requirements included in this Module are also applied to the management of legal risks requirement.

                  Added: January 2020

                • OM-1.1.2

                  Operational risk is inherent in all types of bank activities, and can result in substantial losses. Sound operational risk governance, therefore, relies upon three lines of defence:

                  (a) Business line management;
                  (b) An independent operational risk management unit; and
                  (c) Internal Audit and functions that provide independent assurance.
                  Added: January 2020

                • OM-1.1.3

                  All new products and services must be reviewed for operational risks prior to their implementation. A bank's internal auditors play an important role in controlling operational risks and should include operational risk in the scope of internal audits.

                  Added: January 2020

                • OM-1.1.4

                  Shari'a non-compliance is a unique risk for Licensees offering shari'a-complaint products and services through Islamic windows resulting from non-compliance with the rules and principles of Shari'a. It is crucial to identify the Shari'a non-compliance risk inherent in different kinds of Shari'a-compliant contracts, and to outline a set of variables that help to estimate the likelihood and severity of Shari'a non-compliance risk. Refer to Appendix B for Shari'a requirements on financing contracts.

                  Added: January 2020

              • Establishing a Strong Risk Culture

                • OM-1.1.5

                  The Board of Directors must take the lead in establishing a strong operational risk management culture in the bank that supports and provides appropriate standards and incentives for effectively managing operational risk and for promoting professional and responsible behaviour.

                  Added: January 2020

                • OM-1.1.6

                  For branches of foreign bank licensees, all references in this Module to the board of directors should be interpreted as the Head Office/Regional Office unless such responsibility is formally delegated to a committee at the branch level.

                  Added: January 2020

              • Operational Risk Management Framework

                • OM-1.1.7

                  Conventional bank licensees must develop, implement and maintain an Operational Risk Management Framework (ORMF) that is fully integrated into the bank's overall risk management processes. The ORMF must consider a range of factors, including the nature, size, complexity and risk profile of the bank.

                  Added: January 2020

                • OM-1.1.8

                  The Board of Directors and senior management should understand the nature and complexity of the risks inherent in the portfolio of bank products, services and activities. This is particularly important for operational risk, given that operational risk is inherent in all business products, activities, processes and systems.

                  Added: January 2020

                • OM-1.1.9

                  A bank must ensure that its ORMF is appropriate at inception and that it keeps pace with the rate of growth of, or changes to, products, activities, processes and systems. The ORMF must be comprehensively and appropriately documented.

                  Added: January 2020

                • OM-1.1.10

                  At minimum, the ORMF documentation must:

                  (a) Identify the governance structures used to manage operational risk, including roles, responsibilities, reporting lines and accountabilities;
                  (b) Identify policy for approval of policies by the Board;
                  (c) Describe the risk assessment processes and tools and how they are used;
                  (d) Describe the bank's accepted operational risk appetite and tolerance (see Paragraphs OM-1.2.2 to OM-1.2.4), and the approach to setting thresholds or limits for inherent and residual risk, and approved risk mitigation strategies;
                  (e) Establish risk reporting and Management Information Systems ('MIS');
                  (f) Provide a common taxonomy of operational risk terms to ensure consistency of risk identification, exposure rating and risk management objectives; and
                  (g) Provide for appropriate independent review and assessment of operational risk.
                  Added: January 2020

            • OM-1.2 OM-1.2 Operational Risk Governance

              • OM-1.2.1

                The Board of Directors must:

                (a) Establish, approve and regularly review the operational risk management policy;
                (b) Ensure that senior management establish, approve and regularly review supporting policies, procedures, systems and processes in line with the nature and scope of the operational risks inherent in the bank's products, services and activities, and implement comprehensive, dynamic oversight and control environments that are fully integrated into, or coordinated with, the overall ORMF for managing all risks across the bank; and
                (c) Ensure that the bank's ORMF is subject to effective independent review (See Paragraph OM-1.6.1).
                Added: January 2020

              • Risk appetite

                • OM-1.2.2

                  The Board of Directors must approve and review the risk appetite and tolerance statement for operational risk that articulates the nature, the types and levels of operational risk that the bank is willing to assume.

                  Added: January 2020

                • OM-1.2.3

                  When approving and reviewing the risk appetite and tolerance statement, the Board of Directors should consider all relevant risks, the bank's level of risk aversion, its current financial condition and the bank's strategic direction. The Board of Directors should approve appropriate thresholds or limits for specific operational risks.

                  Added: January 2020

                • OM-1.2.4

                  In addition to the review of material operational risks and limits, the Board should also consider changes in the external environment, material increases in business or activity volumes, the quality of the control environment, the effectiveness of risk management and mitigation strategies, loss experience, and the frequency, volume and nature of limit breaches.

                  Added: January 2020

                • OM-1.2.5

                  The board must monitor management adherence to the risk appetite and tolerance statement and provide for timely detection and remediation of breaches.

                  Added: January 2020

                • OM-1.2.6

                  Senior management is responsible for consistently implementing and maintaining throughout the organisation, the policy, procedures, processes and systems for managing operational risk in all of the bank's products, activities, processes and systems.

                  Added: January 2020

                • OM-1.2.7

                  Banks must establish, commensurate with its nature, size and complexity, an Operational Risk Management Unit (ORMU), independent of the risk generating business lines, which is responsible for the design, maintenance and ongoing development of the ORMF within the bank. The ORMU must be adequately staffed with skilled resources.

                  Added: January 2020

                • OM-1.2.8

                  Senior management is responsible for establishing and maintaining effective channels for internal review of operational risk issues, as well as ensuring adequate resolution processes. These should include systems to report, track and, when necessary, escalate issues to ensure resolution. Banks should be able to demonstrate that the three lines of defence (as highlighted in Paragraph OM-1.1.2) approach is operating satisfactorily and to explain how the Board and senior management ensure that this approach is implemented and operating in an appropriate and acceptable manner.

                  Added: January 2020

                • OM-1.2.9

                  Senior management must translate the ORMF into specific processes and procedures that can be implemented and verified within the different business units. Senior management must clearly assign authority, responsibility and reporting relationships to encourage and maintain this accountability, and ensure that the necessary resources are available to manage operational risk in-line with the bank's risk appetite and tolerance statement. Furthermore, senior management must ensure that the management oversight process is appropriate for the risks inherent in a business unit's activity.

                  Added: January 2020

                • OM-1.2.10

                  Senior management should ensure that staff responsible for managing operational risk, coordinate and communicate effectively with staff responsible for managing credit, market, liquidity and other risks, as well as with those in the bank who are responsible for the procurement of external services, such as insurance risk transfer and outsourcing arrangements. Failure to do so could result in significant gaps or overlaps in a bank's overall risk management programme.

                  Added: January 2020

                • OM-1.2.11

                  The Head of the ORMU must be of sufficient stature within the bank to perform his duties effectively, ideally evidenced by a title commensurate with other risk management units, such as credit, market and liquidity risk.

                  Added: January 2020

                • OM-1.2.12

                  Senior management must ensure that bank activities are conducted by staff with the necessary experience, qualifications, technical capabilities and access to resources. Staff responsible for monitoring and enforcing compliance with the bank's risk policies must be independent from the units they oversee.

                  Added: January 2020

                • OM-1.2.13

                  Senior management must ensure that an appropriate level of operational risk training is available at all levels throughout the organisation. The training that is provided must reflect the seniority, role and responsibilities of the individuals for whom it is intended.

                  Added: January 2020

                • OM-1.2.14

                  A bank's risk governance structure should be commensurate with the nature, size, operational complexity and risk profile of its activities. When designing the operational risk governance structure, a bank should take the following into consideration:

                  (a) Committee structure;
                  (b) Committee composition; and
                  (c) Committee operation.
                  Added: January 2020

                • OM-1.2.15

                  Sound industry practice is for Operational Risk Committees (or the Risk Committee) to include a combination of members with expertise in business activities and financial, as well as risk managers.

                  Added: January 2020

                • OM-1.2.16

                  Committee meetings should be held at appropriate frequencies, with adequate time and resources to permit productive discussion and decision-making. Records of committee meetings should be adequate to permit review and evaluation of committee effectiveness.

                  Added: January 2020

            • OM-1.3 OM-1.3 Identification, Measurement, Monitoring and Control

              • OM-1.3.1

                As part of an effective ORMF, banks must have policies, procedures and system for the identification, measurement, monitoring, mitigating and controlling of the operational risk inherent in all products, services, activities, processes and systems.

                Added: January 2020

              • OM-1.3.2

                Risk identification and assessment are fundamental characteristics of an effective ORMF. Effective risk identification considers both internal factors (such as the bank's structure, the nature of the bank's activities, the quality of the bank's human resources, organisational changes and employee turnover) and external factors (such as changes in the broader environment and the industry and advances in technology). Sound risk assessment allows the bank to better understand its risk profile and allocate risk management resources and strategies most effectively. Banks may use the classification categories contained in Appendix A for determining and classifying operational risk events.

                Added: January 2020

              • OM-1.3.3

                Examples of tools that may be used for identifying and assessing operational risk include:

                (a) Audit Findings: While audit findings primarily focus on control weaknesses and vulnerabilities, they can also provide insight into inherent risk due to internal or external factors;
                (b) Internal Loss Data Collection and Analysis: Internal operational loss data provides meaningful information for assessing a bank's exposure to operational risk and the effectiveness of internal controls. Analysis of loss events can provide insight into the causes of large losses and information on whether control failures are isolated or systematic. Banks may also find it useful to capture and monitor operational risk contributions to credit and market risk related losses in order to obtain a more complete view of their operational risk exposure;
                (c) External Data Collection and Analysis: External data elements consist of gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at organisations other than the bank. External loss data can be compared with internal loss data, or used to explore possible weaknesses in the control environment or consider previously unidentified risk exposures;
                (d) Risk Assessments: In a risk assessment, often referred to as a Risk Self-Assessment ('RSA'), a bank assesses the processes underlying its operations against a library of potential threats and vulnerabilities and considers their potential impact. A similar approach, Risk Control Self-Assessments ('RCSA'), typically evaluates inherent risk (the risk before controls are considered), the effectiveness of the control environment, and residual risk (the risk exposure after controls are considered). Scorecards build on RCSAs by weighting residual risks to provide a means of translating the RCSA output into metrics that give a relative ranking of the control environment;
                (e) Business Process Mapping: Business process mappings identify the key steps in business processes, activities and organisational functions. They also identify the key risk points in the overall business process. Process maps can reveal individual risks, risk interdependencies, and areas of control or risk management weakness. They also can help prioritise subsequent management action;
                (f) Risk and Performance Indicators: Risk and performance indicators are risk metrics and/or statistics that provide insight into a bank's risk exposure. Risk indicators, often referred to as Key Risk Indicators ('KRIs'), are used to monitor the main drivers of exposure associated with key risks. Performance indicators, often referred to as Key Performance Indicators ('KPIs'), provide insight into the status of operational processes, which may in turn provide insight into operational weaknesses, failures, and potential loss. Risk and performance indicators are often paired with escalation triggers to warn when risk levels approach or exceed thresholds or limits and prompt mitigation plans;
                (g) Scenario Analysis: Scenario analysis is a process of obtaining expert opinion of business line and risk managers to identify potential operational risk events and assess their potential outcome. Scenario analysis is an effective tool to consider potential sources of significant operational risk and the need for additional risk management controls or mitigation solutions. Given the subjectivity of the scenario process, a robust governance ORMF is essential to ensure the integrity and consistency of the process;
                (h) Measurement: Banks may find it useful to quantify their exposure to operational risk by using the output of the risk assessment tools as inputs into a model that estimates operational risk exposure. The results of the model can be used in an economic capital process and can be allocated to business lines to link risk and return; and
                (i) Comparative Analysis: Comparative analysis consists of comparing the results of the various assessment tools to provide a more comprehensive view of the bank's operational risk profile. For example, comparison of the frequency and severity of internal data with RCSAs can help the bank determine whether self-assessment processes are functioning effectively. Scenario data can be compared to internal and external data to gain a better understanding of the severity of the bank's exposure to potential risk events.
                Added: January 2020

              • OM-1.3.4

                Banks should ensure that the internal pricing and performance measurement mechanisms appropriately take into account operational risk measures commensurate with the nature, size and complexity of its business operations.

                Added: January 2020

              • New Products, Process and Change Management

                • OM-1.3.5

                  In general, a bank's operational risk exposure is increased when a bank engages in new activities or develops new products; enters unfamiliar markets; implements new business processes or technology systems; and/or engages in businesses that are geographically distant from the head office. Moreover, the level of risk may escalate when new products, activities, procedures, processes, or systems transition from an introductory level to a level that represents material sources of revenue or business-critical operations.

                  Added: January 2020

                • OM-1.3.6

                  A bank must have a policy and procedures for review and approval of new products, services, activities, procedures, processes and systems. The review and approval process must consider, as appropriate, the following:

                  (a) Inherent and residual risks;
                  (b) Changes to the bank's operational risk profile and appetite and tolerance;
                  (c) The necessary controls, risk management processes and risk mitigation strategies;
                  (d) Changes to relevant risk thresholds or limits; and
                  (e) The procedures and metrics to measure, monitor, and manage the risk.
                  Added: January 2020

                • OM-1.3.7

                  The approval process must also ensure that adequate and well trained human resources and appropriate technology infrastructure are in place before new products, services, activities, procedures, processes or systems are introduced. The implementation of new products, activities, procedures, processes and systems must be monitored in order to identify any material differences to the expected operational risk profile, and to manage any unexpected risks.

                  Added: January 2020

                • OM-1.3.8

                  The use of technology-related products, services, activities, processes and delivery channels exposes a bank to strategic, operational and reputational risks, and the possibility of material financial loss. Consequently, a bank should have an integrated approach to identifying, measuring, monitoring and managing technology risks. Sound technology risk management uses the same precepts as operational risk management and includes:

                  (a) Governance and oversight controls that ensure technology, including outsourcing arrangements, is aligned with, and supportive of, the bank's business objectives;
                  (b) Policy and procedures that facilitate identification and assessment of risk;
                  (c) Establishment of a risk appetite and tolerance statement, as well as performance expectations to assist in controlling and managing risk;
                  (d) Implementation of an effective control environment and the use of risk transfer strategies that mitigate risk; and
                  (e) Monitoring processes that test for compliance with policy thresholds or limits
                  Added: January 2020

              • Monitoring and Reporting

                • OM-1.3.9

                  Senior management must implement a process to regularly monitor operational risk profiles and material exposures to losses. Appropriate reporting mechanisms must be in place at the board, senior management, and business line levels that support proactive management of operational risk.

                  Added: January 2020

                • OM-1.3.10

                  Banks must ensure that the operational risk reports are comprehensive, accurate, consistent and actionable across business lines and products.

                  Added: January 2020

                • OM-1.3.11

                  Reporting should be timely, and the bank must be able to produce reports in both normal and stressed market conditions. The frequency of reporting must reflect the risks involved and the pace and nature of changes in the operating environment. The results of these monitoring activities must be included in regular management and Board reports. Reports generated by (and/or for) supervisory authorities must also be reported internally to senior management and the Board, where appropriate.

                  Added: January 2020

                • OM-1.3.12

                  Operational risk reports may contain internal financial, operational, and compliance indicators, as well as external market or environmental information about events and conditions that are relevant to decision-making. Operational risk reports should include:

                  (a) Breaches of the bank's risk appetite and tolerance statement, as well as thresholds or limits;
                  (b) Details of recent significant internal operational risk events and losses; and
                  (c) Relevant external events and any potential impact on the bank and operational risk capital.
                  Added: January 2020

                • OM-1.3.13

                  Data capture and risk reporting processes should be analysed periodically with a view to continuously enhancing risk management performance, as well as advancing risk management policy, procedures and practices.

                  Added: January 2020

              • Controls and mitigation

                • OM-1.3.14

                  Banks must have a strong control environment that utilises policies, procedures, processes and systems; appropriate internal controls; and appropriate risk mitigation and/or transfer strategies.

                  Added: January 2020

                • OM-1.3.15

                  Strong internal controls are a critical aspect of operational risk management, and the banks should establish clear lines of management responsibility and accountability for implementing a strong control environment. The control environment should provide appropriate independence/separation of duties between the operational risk management unit, business lines and support functions.

                  Added: January 2020

                • OM-1.3.16

                  An effective internal control environment also requires appropriate segregation of duties. Assignments that establish conflicting duties for individuals, or a team without dual controls or other countermeasures may enable concealment of losses, errors or inappropriate actions. Therefore, areas of potential conflicts of interest must be identified, minimised, and subject to careful independent monitoring and review.

                  Added: January 2020

                • OM-1.3.17

                  In addition to segregation of duties and dual controls, banks should ensure that other traditional internal controls are in place, as appropriate, to address operational risk. Examples of these controls include:

                  (a) Clearly established authorities and/or processes for approval;
                  (b) Close monitoring of adherence to assigned risk limits or thresholds;
                  (c) Safeguards for access to, and use of, bank assets and records;
                  (d) Appropriate staffing level and training to maintain expertise;
                  (e) Ongoing processes to identify business lines or products where returns appear to be out of line with reasonable expectations;
                  (f) Regular verification and reconciliation of transactions and accounts; and
                  (g) A vacation policy in line with Bahrain Labour Law.
                  Amended: April 2022
                  Added: January 2020

                • OM-1.3.18

                  Internal control consists of five interrelated components:

                  (a) Control environment: The Board of Directors and senior management are responsible for promoting high ethical and integrity standards, and for establishing a culture within the organisation that emphasises and demonstrates to all levels of personnel the importance of internal controls. All personnel at a banking organisation need to understand their role in the internal controls process and be fully engaged in the process;
                  (b) Risk assessment: An effective internal control system requires that the material risks that could adversely affect the achievement of the bank's goals are being recognised and continually assessed. This assessment should cover all risks facing the bank and the consolidated banking organisation (that is, credit risk, country and transfer risk, market risk, profit rate risk, liquidity risk, operational risk, legal risk and reputational risk). Internal controls may need to be revised to appropriately address any new or previously uncontrolled risks;
                  (c) Control activities: Control activities should be an integral part of the daily activities of a bank. An effective internal control system requires that an appropriate control structure is set up, with control activities defined at every business level. These should include: Top level reviews; appropriate activity controls for different departments or divisions; physical controls; checking for compliance with exposure limits and follow-up on non-compliance; a system of approvals and authorisations; and a system of verification and reconciliation;
                  (d) Information and communication: An effective internal control system requires that there are adequate and comprehensive internal financial, operational and compliance data, as well as external market information about events and conditions that are relevant to decision-making. Information should be reliable, timely, accessible, and provided in a consistent format. It requires that there are reliable information systems in place that cover all significant activities of the bank. These systems, including those that hold and use data in an electronic form, must be secure, monitored independently and supported by adequate contingency arrangements. It also requires effective channels of communication to ensure that all staff fully understand and adhere to policy and procedures affecting their duties and responsibilities and that other relevant information is reaching the appropriate personnel; and
                  (e) Monitoring activities: The overall effectiveness of the bank's internal controls should be monitored on an ongoing basis. Monitoring of key risks should be part of the daily activities of the bank, as well as periodic evaluations by the business lines and internal audit. There should be an effective and comprehensive internal audit of the internal control system carried out by operationally independent, appropriately-trained and competent staff. The Internal Audit function, as part of the monitoring of the system of internal controls, should report directly to the Board of Directors or its Audit Committee, and to senior management. Internal control deficiencies, whether identified by business line, Internal Audit, or other control personnel, should be reported in a timely manner to the appropriate management level and addressed promptly. Material internal control deficiencies should be reported to senior management and the Board of Directors.
                  Added: January 2020

                • OM-1.3.19

                  Control processes and procedures should be established and banks should have a system in place for ensuring compliance with a documented set of internal policies concerning the risk management system. Principal elements of this could include, for example:

                  (a) Top-level reviews of the bank's progress towards the stated objectives;
                  (b) Verifying compliance with management controls;
                  (c) Review of the treatment and resolution of instances of non-compliance;
                  (d) Evaluation of required approvals and authorisations to ensure accountability to an appropriate level of management; and
                  (e) Tracking reports for approved exceptions to thresholds or limits, management overrides and other deviations from policy.
                  Added: January 2020

                • OM-1.3.20

                  Effective use and sound implementation of technology can contribute to the control environment. For example, automated processes are less prone to error than manual processes. However, automated processes introduce risks that should be addressed through sound technology governance and infrastructure risk management programmes.

                  Added: January 2020

                • OM-1.3.21

                  Management must ensure the bank has a sound technology infrastructure that:

                  (a) Meets current and long-term business requirements by providing sufficient capacity for normal activity levels, as well as peaks during periods of market stress;
                  (b) Ensures data and system integrity, security, and availability; and
                  (c) Supports integrated and comprehensive risk management.
                  Added: January 2020

                • OM-1.3.22

                  Mergers and acquisitions resulting in fragmented and disconnected infrastructure, cost-cutting measures or inadequate investment can undermine a bank's ability to aggregate and analyse information across risk dimensions or the consolidated enterprise, manage and report risk on a business line or legal entity basis, or oversee and manage risk in periods of high growth. Management should make appropriate capital investment or otherwise provide for a robust infrastructure at all times, particularly before mergers are consummated, high growth strategies are initiated, or new products are introduced.

                  Added: January 2020

                • OM-1.3.23

                  In those circumstances where internal controls do not adequately address risk and exiting the risk is not a reasonable option, management can complement controls by seeking to transfer the risk to another party such as through insurance. The Board of directors should determine the maximum loss exposure the bank is willing, and has the financial capacity to assume, and should perform a regular review of the bank's risk and insurance management programme.

                  Added: January 2020

                • OM-1.3.24

                  Because risk transfer is an imperfect substitute for sound controls and risk management programmes, banks should view risk transfer tools as complementary to, rather than a replacement for, thorough internal operational risk control. Having mechanisms in place to quickly identify, recognise and rectify distinct operational risk errors can greatly reduce exposures. Careful consideration also needs to be given to the extent to which risk mitigation tools such as insurance truly reduce risk, transfer the risk to another business sector or area, or create a new risk (e.g. counterparty risk).

                  Added: January 2020

            • OM-1.4 OM-1.4 Succession Planning

              • OM-1.4.1

                Succession planning is an essential precautionary measure for a bank if its leadership stability, and hence ultimately its financial stability, is to be protected. Succession planning is especially critical for smaller institutions, where management teams tend to be smaller and possibly reliant on a few key individuals.

                Added: January 2020

              • OM-1.4.2

                The CBB requires conventional bank licensees to document their Board-approved succession plans for their senior management team and have these ready at any time for onsite inspection by CBB.

                Added: January 2020

            • OM-1.5 OM-1.5 Public Disclosure

              • OM-1.5.1

                A bank must have a formal disclosure policy approved by the Board of Directors that addresses the bank's approach for determining what operational risks disclosures it will make and the internal controls over the disclosure process. In addition, banks must implement a process for assessing the appropriateness of their disclosures, including the verification and frequency of them.

                Added: January 2020

              • OM-1.5.2

                A bank's public disclosure of relevant operational risk management information can lead to transparency and the development of better industry practice through market discipline. The amount and type of disclosure should be commensurate with the size, risk profile and complexity of a bank's operations, and evolving industry practice. See also Chapter HC-8 and Chapter PD-1 on disclosure requirements.

                Added: January 2020

              • OM-1.5.3

                A bank must disclose its ORMF in a manner that will allow stakeholders to determine whether the bank identifies, assesses, monitors and controls/mitigates operational risk effectively.

                Added: January 2020

              • OM-1.5.4

                A bank's disclosures must be consistent with how senior management and the Board of Directors assess and manage the operational risks of the bank.

                Added: January 2020

            • OM-1.6 OM-1.6 Independent Review

              • OM-1.6.1

                [This Paragraph was deleted in January 2022].

                Deleted: January 2022
                Added: January 2020

              • OM-1.6.2

                [This Paragraph was deleted in January 2022].

                Deleted: January 2022
                Added: January 2020

              • OM-1.6.3

                The independent review of the operational risk management framework undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34 must cover the following:

                (i) Governance, the role of the board and senior management and ORMU in operational risk management;
                (ii) The existence of operational risk appetite/tolerances or thresholds and approved documented policies, procedures and processes including tools for risk identification and assessment;
                (iii) Register of risks covering risk events, KRIs, KRDs, KCIs and risk mitigation techniques;
                (iv) Policies to ensure the bank are in compliance with the requirements under this Module for outsourcing arrangements including cloud outsourcing, electronic banking, security arrangements and business continuity management.
                Amended: January 2022
                Added: January 2020

              • OM-1.6.4

                [This Paragraph was deleted in January 2022].

                Deleted: January 2022
                Added: January 2020

              • OM-1.6.5

                [This Paragraph was deleted in January 2022].

                Deleted: January 2022
                Added: January 2020

              • OM-1.6.6

                [This Paragraph was deleted in January 2022].

                Deleted: January 2022
                Added: January 2020

          • OM-2 OM-2 Outsourcing Requirements

            • OM-2.1 OM-2.1 Outsourcing Arrangements

              • OM-2.1.1

                This Chapter sets out the CBB’s approach to outsourcing by licensees. It also sets out various requirements that licensees must address when considering outsourcing an activity or function.

                Amended: July 2022
                Added: January 2020

              • OM-2.1.2

                In the context of this Chapter, ‘outsourcing’ means an arrangement whereby a third party performs on behalf of a licensee an activity which commonly would have been performed internally by the licensee. Examples of services that are typically outsourced include data processing, cloud services, customer call centres and back-office related activities.

                Amended: July 2022
                Added: January 2020

              • OM-2.1.3

                In the case of branches of foreign entities, the CBB may consider a third-party outsourcing arrangement entered into by the licensee’s head office/regional office or other offices of the foreign entity as an intragroup outsourcing, provided that the head office/regional office submits to the CBB a letter of comfort which includes, but is not limited to, the following conditions:

                i. The head office/regional office declares its ultimate responsibility of ensuring that adequate control measures are in place; and
                ii. The head office/regional office is responsible to take adequate rectification measures, including compensation to the affected customers, in cases where customers suffer any loss due to inadequate controls applied by the third-party service provider.
                Amended: July 2022
                Added: January 2020

              • OM-2.1.4

                The licensee must not outsource the following functions:

                (i) Compliance;
                (ii) AML/CFT;
                (iii) Financial control;
                (iv) Risk management; and
                (v) Business line functions offering regulated services directly to the customers (refer to Regulation No. (1) of 2007 and its amendments for the list of CBB regulated services).
                Amended: July 2022
                Added: January 2020

              • OM-2.1.5

                For the purposes of Paragraph OM-2.1.4, certain support activities, processes and systems under these functions may be outsourced (e.g. call centres, data processing, credit recoveries, cyber security, e-KYC solutions) subject to compliance with Paragraph OM-2.1.7. However, strategic decision-making and managing and bearing the principal risks related to these functions must remain with the licensee.

                Amended: July 2022
                Added: January 2020

              • OM-2.1.6

                Branches of foreign entities may be allowed to outsource to their head office, the risk management function stipulated in Subparagraph OM-2.1.4 (iv), subject to CBB’s prior approval.

                Amended: July 2022
                Added: January 2020

              • OM-2.1.7

                Licensees must comply with the following requirements:

                (i) Prior CBB approval is required on any outsourcing to a third-party outside Bahrain (excluding cloud data services). The request application must:
                a. include information on the legal and technical due diligence, risk assessment and detailed compliance assessment; and
                b. be made at least 30 calendar days before the licensee intends to commit to the arrangement.
                (ii) Post notification to the CBB, within 5 working days from the date of signing the outsourcing agreement, is required on any outsourcing to an intragroup entity within or outside Bahrain or to a third-party within Bahrain, provided that the outsourced service does not require a license, or to a third-party cloud data services provider inside or outside Bahrain.
                (iii) Licensees must have in place sufficient written requirements in their internal policies and procedures addressing all strategic, operational, logistical, business continuity and contingency planning, legal and risks issues in relation to outsourcing.
                (iv) Licensees must sign a service level agreement (SLA) or equivalent with every outsourcing service provider. The SLA must clearly address the scope, rights, confidentiality and encryption requirements, reporting and allocation of responsibilities. The SLA must also stipulate that the CBB, external auditors, internal audit function, compliance function and where relevant the Shari’a coordination and implementation and internal Shari’a audit functions of the licensee have unrestricted access to all relevant information and documents maintained by the outsourcing service provider in relation to the outsourced activity.
                (v) Licensees must designate an approved person to act as coordinator for monitoring and assessing the outsourced arrangement to ensure compliance with the licensee’s internal policies and applicable laws and regulations.
                (vi) Licensee must submit to the CBB any report by any other regulatory authority on the quality of controls of an outsourcing service provider immediately after its receipt or after coming to know about it.
                (vii) Licensee must inform its normal supervisory point of contact at the CBB of any material problems encountered with the outsourcing service provider if they remain unresolved for a period of three months from its identification date.
                (viii) Where the internal audit function is fully or partially outsourced, licensees must ensure that:
                i. The use of external experts does not compromise the independence and objectivity of the internal audit function;
                ii. The outsourcing service provider has not been previously engaged in a consulting or external audit engagement with the licensee unless a one year “cooling-off” period has elapsed;
                iii. The outsourcing service provider must not provide consulting services to the licensee during the engagement period; and
                iv. Adequate oversight is maintained over the outsourcing service provider to ensure that it complies with the licensee’s internal audit charter, policy and applicable laws and regulations.
                Amended: April 2023
                Amended: July 2022
                Added: January 2020

              • OM-2.1.8

                For the purpose of Subparagraph OM-2.1.7 (iv), licensees as part of their assessments may use the following:

                a) Independent third-party certifications on the outsourcing service provider’s security and other controls;
                b) Third-party or internal audit reports of the outsourcing service provider; and
                c) Pooled audits organized by the outsourcing service provider, jointly with its other clients.

                When conducting on-site examinations, licensees should ensure that the data of the outsourcing service provider’s other clients is not negatively impacted, including impact on service levels, availability of data and confidentiality.

                Added: July 2022

              • OM-2.1.9

                For the purpose of Subparagraph OM-2.1.7 (i), the CBB will provide a definitive response to any prior approval request for outsourcing within 10 working days of receiving the request complete with all the required information and documents.

                Added: July 2022

            • OM-2.2 [This Section was deleted in July 2022]

            • OM-2.3 [This Section was deleted in July 2022]

            • OM-2.4 [This Section was deleted in July 2022]

            • OM-2.5 [This Section was deleted in July 2022]

            • OM-2.6 [This Section was deleted in July 2022]

            • OM-2.7 [This Section was deleted in July 2022]

            • OM-2.8 [This Section was deleted in July 2022]

          • OM-3 OM-3 Electronic Money and Electronic Banking Activities

            • OM-3.1 OM-3.1 Board and Management Oversight

              • OM-3.1.1

                This section sets out the requirements related to systems risk management and controls relevant to services offered through electronic banking activities and electronic funds transfer. Such services are prone to technical complexity, operational and security issues.

                Added: January 2020

              • OM-3.1.2

                The Board of Directors, or a designated Board Committee and senior management must establish effective management oversight over the risks associated with activities involving e-banking and electronic funds transfer. The licensee must establish policies and procedures to manage these risks which include but are not be limited to the following:

                (a) The development and/or acquisition of the technology solutions;
                (b) Testing of application program interfaces;
                (c) Standards of communication and access and security of communication sessions, such as PCI-DSS compliance for cards;
                (d) Authentication of the users;
                (e) Processes and measures that protect customer data confidentiality consistent with Law No. 30 of 2018, Personal Data Protection Law (PDPL) issued on 12 July 2018;
                (f) The use of enhanced fraud monitoring of movements in customers’ accounts to guard against electronic frauds using various tools and measures, such as limits on value, volume and velocity; and
                (g) Security policy and risk management controls.
                Amended: January 2021
                Added: January 2020

              • OM-3.1.3

                The Board of Directors and senior management must ensure they possess the required competence, experience and skills to oversee, review and approve the key aspects of the licensee's security control process.

                Added: January 2020

              • OM-3.1.4

                The Board of Directors and senior management must establish a comprehensive and ongoing due diligence and oversight process for managing the licensee's outsourcing relationships and other third-party dependencies supporting e-banking.

                Added: January 2020

            • OM-3.2 OM-3.2 Secure Authentication

              • OM-3.2.1

                Licensees must take appropriate measures to authenticate the identity and authorisation of customers with whom it conducts business.

                Added: January 2020

              • OM-3.2.2

                Licensees must use predefined transaction authentication methods that promote non-repudiation and establish accountability for the transactions. Licensees must establish detailed procedures to effectively identify the person originating electronic funds transfer transactions and for 'call backs' when appropriate to avoid frauds in electronic fund transfers.

                Added: January 2020

              • OM-3.2.3

                The term 'authentication' as used in this Module refers to the techniques, procedures and processes used to verify the identity and authorisation of prospective and established customers.

                a) Identification refers to the procedures, techniques and processes used to establish the identity of a customer;
                b) Authorisation refers to the procedures, techniques and processes used to determine that a customer or an employee has legitimate access to the bank account or the authority to conduct associated transactions on that account.
                Added: January 2020

              • OM-3.2.4

                Licensees must have in place a strong customer authentication process for its e-banking activities which ensure the following:

                (a) no information on any of the elements of the strong customer authentication process can be derived from the disclosure of the authentication code;
                (b) it is not possible to generate a new authentication code based on the knowledge of any other code previously generated; and
                (c) the authentication code cannot be forged.
                Added: January 2020

              • OM-3.2.5

                The CBB will consider application of quantitative thresholds below which the strong customer authentication requirements may be simplified on a case-to-case basis.

                Added: January 2020

              • OM-3.2.6

                Licensees must establish adequate security features for customer authentication including the use of the following three elements:

                (a) an element categorised as knowledge (something only the user knows), such as length or complexity of the pin or password;
                (b) an element categorised as possession (something only the user possesses) such as algorithm specifications, key length and information entropy, and
                (c) for the devices and software that read, elements categorised as inherence (something the user is), i.e. algorithm specifications, biometric sensor and template protection features.
                Added: January 2020

            • OM-3.3 OM-3.3 Other Systems and Controls

              • OM-3.3.1

                Licensees must ensure that appropriate measures are in place to promote adequate segregation of duties within electronic funds transfer and e-banking systems, databases and applications.

                Added: January 2020

              • OM-3.3.2

                Licensees must ensure that proper authorisation controls and access privileges are in place for electronic funds transfer and e-banking systems, databases and applications.

                Added: January 2020

              • OM-3.3.3

                Licensees must ensure that appropriate measures are in place to protect the data integrity of all transactions, records and information.

                Added: January 2020

              • OM-3.3.4

                Licensees must ensure that clear audit trails exist for all electronic funds transfer and e-banking transactions.

                Added: January 2020

              • OM-3.3.5

                Licensees must establish and document the log retention requirements, including the identification of the source of each request, time synchronization of all related systems and all meta-data related to each request.

                Added: January 2020

              • OM-3.3.6

                Licensees must take appropriate measures to preserve the confidentiality of information. Measures taken to preserve confidentiality must be commensurate with the sensitivity of the information being transmitted and/or stored in databases.

                Added: January 2020

              • OM-3.3.7

                Licensees must ensure that adequate information is provided on their websites to allow potential customers to make an informed conclusion about the licensee's identity and regulatory status of the licensee prior to entering into e-banking transactions.

                Added: January 2020

              • OM-3.3.8

                Licensees must take appropriate measures to ensure adherence to customer privacy requirements applicable to the jurisdictions to which the licensee is providing e-banking products and services.

                Added: January 2020

              • OM-3.3.9

                Licensees must have effective capacity, business continuity and contingency planning processes to help ensure the availability of e-banking systems and services.

                Added: January 2020

              • OM-3.3.10

                Licensees must develop appropriate incident response plans to manage, contain and minimise problems arising from unexpected events, including internal and external attacks, that may hamper the provision of e-banking systems and services.

                Added: January 2020

              • OM-3.3.11

                Licensees must have in place customer awareness communications, pre and post onboarding process, using video calls, short videos or pop-up messages, to alert and warn natural persons applying to open current or saving accounts, credit, debit or prepaid cards or digital wallets about the risk of electronic frauds, and emphasise the need to secure their personal account details and not share them with anyone, online or offline.

                Added: January 2021

          • OM-4 OM-4 Business Continuity Management

            • OM-4.1 OM-4.1 Introduction

              • OM-4.1.1

                All businesses may experience serious disruptions to their business operations. These disruptions may be caused by external events such as flooding, power failure or terrorism, or by internal factors such as human error or a serious computer breakdown. The probability of some events may be small, but the potential consequences may be massive, whereas other events may be more frequent and with shorter time horizons.

                Added: January 2020

              • OM-4.1.2

                The purpose of a Business Continuity Plan ('BCP') is to minimize the operational, financial, legal, reputational, and other material consequences arising from a disruption. The objectives of a good BCP are:

                (a) To minimise financial loss to the licensee;
                (b) To continue to serve customers and counterparties in the financial markets; and
                (c) To mitigate the negative effects that disruptions can have on a licensee's reputation, operations, liquidity, credit quality, its market position, and its ability to remain in compliance with applicable laws and regulations.
                Added: January 2020

              • Scope and Key Elements of a Business Continuity Management (BCM)

                • OM-4.1.3

                  The requirements of this Chapter apply to all licensees.

                  Added: January 2020

                • OM-4.1.4

                  Branches of foreign banks may apply alternative arrangements to those specified in this module, where they are subject to comprehensive BCM arrangements implemented by their head office or other member of their group, provided that:

                  (a) They have notified the CBB in writing what alternative arrangements will apply;
                  (b) They have satisfied the CBB that these alternative arrangements are equivalent to the measures contained in this chapter, or are otherwise suitable; and
                  (c) The CBB has agreed in writing to these alternative arrangements being used.
                  Added: January 2020

            • OM-4.2 OM-4.2 General Requirements

              • OM-4.2.1

                To ensure an ability to operate on an ongoing basis and limit losses in the event of severe business disruption all Conventional bank licensees must establish a comprehensive framework for business continuity management (BCM) and must maintain a business continuity plan (BCP) appropriate to the scale and complexity of their operations. A BCP must address the following key areas:

                (a) Data back up and recovery (hard copy and electronic);
                (b) Continuation of all critical systems, activities, and counterparty impact;
                (c) Financial and operational assessments;
                (d) Alternate communication arrangements between the licensee and its customers and its employees;
                (e) Alternate physical location of employees;
                (f) Communications with and reporting to the CBB and any other relevant regulators; and
                (g) Ensuring customers' prompt access to their funds in the event of a disruption.
                Added: January 2020

              • OM-4.2.2

                Effective BCM framework must incorporate policy, procedures and tools required to manage the risk of major operational disruptions. The BCP must be comprehensive, limited not just to disruption of business premises and information technology facilities, but covering all other critical areas, which affect the continuity of critical business operations or services (e.g. liquidity, human resources and others).

                Added: January 2020

              • OM-4.2.3

                Licensees must notify the CBB promptly if there are events that lead to activating their BCP. They must also provide regular progress reports, as agreed with the CBB, until the BCP is deactivated.

                Added: January 2020

              • OM-4.2.4

                The CBB expects licensees to plan for how they may cope with the complete destruction of buildings and surrounding infrastructure in which their key offices, installations, counterparties or service providers are located. The loss of key personnel, and a situation where back-up facilities might need to be used for an extended period of time are important factors in effective BCPs.

                Added: January 2020

              • OM-4.2.5

                Licensees may find it useful to consider two-tier plans: one to deal with near-term problems; this should be fully developed and able to be put into immediate effect. The other, which might be in paper form; should deal with a longer-term scenario (e.g. how to accommodate processes that might not be critical immediately but would become so over time).

                Added: January 2020

            • OM-4.3 OM-4.3 Board and Senior Management Responsibilities

              • Establishment of a Policy, Processes & Responsibilities

                • OM-4.3.1

                  A licensee's Board of Directors and Senior Management are collectively responsible for a bank's business continuity. The Board must approve the policies, while senior management must approve procedures and processes for a licensee's BCP.

                  Added: January 2020

                • OM-4.3.2

                  Licensees must establish a Crisis Management Team (CMT) to develop, maintain and test their BCP, as well as to respond to and manage the various stages of a crisis. The CMT must comprise members of senior management and heads of major support functions (e.g. building facilities, IT, corporate communications and human resources).

                  Added: January 2020

                • OM-4.3.3

                  Licensees must establish (and document as part of the BCP) individuals' responsibilities in helping prepare for and manage a crisis; and the process by which a disaster is declared and the BCP initiated (and later terminated).

                  Added: January 2020

              • Monitoring and Reporting

                • OM-4.3.4

                  The CMT must submit regular reports to the Board and senior management on recovery and response activities in the event of major operational disruptions and also on the results of the testing of the BCP (refer to section OM-4.9). Major changes must be developed by CMT, reported to senior management, and endorsed by the Board.

                  Added: January 2020

                • OM-4.3.5

                  The Chief Executive of a licensee must sign a formal annual statement submitted to the Board on whether the response and recovery strategies adopted are still valid and whether the documented BCP is properly tested and maintained. The annual statement must be included in the BCM documentation and will be reviewed as part of the CBB's on-site examinations.

                  Added: January 2020

            • OM-4.4 OM-4.4 Developing a Business Continuity Plan

              • Impact Analysis

                • OM-4.4.1

                  Licensees' BCPs must be based on (i) a business impact analysis (ii) an operational impact analysis, and (iii) a financial impact analysis. These analyses must be comprehensive, including all business functions and departments, not just IT or data processing.

                  Added: January 2020

                • OM-4.4.2

                  The key objective of a Business Impact Analysis is to identify the different kinds of risk to business continuity and to quantify the operational and financial impact of disruptions on a licensee's ability to conduct its critical business processes.

                  Added: January 2020

                • OM-4.4.3

                  A typical business impact analysis is normally comprised of two stages. The first is to identify and prioritise the critical business processes that must be continued in the event of a disaster. The first stage should take account of the impact on customers and reputation, the legal implications and the financial cost associated with downtime. The second stage is a time-frame assessment. This aims to determine how quickly the licensee needs to resume critical business processes identified in stage one.

                  Added: January 2020

                • OM-4.4.4

                  Operational impact analysis focuses on the firm's ability to maintain communications with customers and to retrieve key activity records. It identifies the organizational implications associated with the loss of access, loss of utility, or loss of a facility. It highlights which functions may be interrupted by an outage, and the consequences to the public and customer of such interruptions.

                  Added: January 2020

                • OM-4.4.5

                  A Financial Impact Analysis identifies the financial losses that (both immediate and also consequent to the event) arise out of an operational disruption.

                  Added: January 2020

              • Risk Assessment

                • OM-4.4.6

                  In developing a BCP, licensees must consider realistic threat scenarios that may (potentially) cause disruptions to their business processes.

                  Added: January 2020

                • OM-4.4.7

                  Licensees should analyse a threat by focusing on its impact on the business processes, rather than on the source of a threat. Certain scenarios can be viewed purely in terms of business disruption in specific work areas, systems or facilities. The scenarios should be sufficiently comprehensive to avoid the BCPs becoming too basic and thereby avoiding steps that could improve the resiliency of the licensee to disruptions.

                  Added: January 2020

                • OM-4.4.8

                  BCPs must take into account different types of likely or plausible scenarios to which the bank may be vulnerable considering both the control (pre-event) measures and response (post-event) measures. In particular, the following specific scenarios must at a minimum, be considered in the BCP:

                  (a) Utilities are not available (power, telecommunications);
                  (b) Critical buildings are not available or specific facilities are not accessible;
                  (c) Software and live data are not available or are corrupted;
                  (d) Vendor assistance or (outsourced) service providers are not available;
                  (e) Critical documents or records are not available;
                  (f) Critical personnel are not available; and
                  (g) Significant equipment malfunctions (hardware or telecom).
                  Added: January 2020

                • OM-4.4.9

                  Licensees must distinguish between threats with a higher probability of occurrence and a lower impact to the business process (e.g. brief power interruptions) to those with a lower probability and higher impact (e.g. a terrorist bomb).

                  Added: January 2020

                • OM-4.4.10

                  As a starting point, licensees must perform a "gap analysis". This gap analysis is a methodical comparison of what types of plans the licensee requires in order to maintain, resume or recover critical business operations or services in the event of a disruption, versus what the existing BCP provides. Management and the Board can address the areas that need development in the BCP, using the gap analysis.

                  Added: January 2020

            • OM-4.5 OM-4.5 Recovery Levels & Objectives

              • OM-4.5.1

                The BCM framework must include strategies and procedures to maintain, resume and recover critical business operations or services. The plan must differentiate between critical and non-critical functions. The BCM policy must clearly describe the types of events that would lead up to the formal declaration of a business disruption and the process for activating the BCP.

                Added: January 2020

              • OM-4.5.2

                The BCM policy must clearly identify alternate sites for different operations, the total number of recovery personnel, workspace requirements, and applications and technology requirements. Office facilities and records requirements must also be identified.

                Added: January 2020

              • OM-4.5.3

                Licensees should take note that they might need to cater for processing volumes that exceed those under normal circumstances. The interdependency among critical services is another major consideration in determining the recovery strategies and priority. For example, the resumption of the front office operations is highly dependent on the recovery of the middle office and back office support functions.

                Added: January 2020

              • OM-4.5.4

                Individual critical business and support functions must establish Recovery Time Objectives (RTO), Recovery Point Objectives (RPO) and Maximum Tolerable Period of Disruption (MTPD) with respect to the bank's recovery programme. RTOs, RPOs and MTPDs must be approved by the senior management prior to proceeding to the development of the BCP.

                Added: January 2020

              • List of Contacts and Responsibilities

                • OM-4.5.5

                  The BCM framework must consider a communication strategy, established procedures for communication, methodology for transmitting, writing and reading of relevant information designed for each business unit where appropriate, the nature of information a list of all key resources charged with the tasks and the full listing of employees and relevant stakeholders. The list must include personal contact information on each key employee such as their home address, home telephone number, and cell phone or pager number so they may be contacted in case of a disaster or other emergency.

                  Added: January 2020

                • OM-4.5.6

                  The BCM policy must contain all the necessary process steps to complete each critical business operation or service. Each process must be explained in sufficient detail to allow another employee to perform the job in case of a disaster.

                  Added: January 2020

              • Alternate Sites for Business and Technology Recovery

                • OM-4.5.7

                  Most business continuity efforts are dependent on the availability of an alternate site (i.e. recovery site) for successful execution. The alternate site may be either an external site available through an agreement with a commercial vendor or a site within the Licensee's real estate portfolio. A useable, functional alternate site is an integral component of BCP.

                  Added: January 2020

                • OM-4.5.8

                  Licensees must examine the extent to which key business functions are concentrated in the same or adjacent locations and the proximity of the alternate sites to primary sites. Alternate sites must be sufficiently remote from, and do not depend upon the same physical infrastructure components as a licensee's primary business location. This minimises the risk of both sites being affected by the same disaster (e.g. they must be on separate or alternative power grids and telecommunication circuits).

                  Added: January 2020

                • OM-4.5.9

                  Licensees' alternate sites must be readily accessible and available for occupancy (i.e. 24 hours a day, 7 days a week) within the time requirement specified in their BCP. Should the BCP so require, the alternate sites must have pre-installed workstations, power, telephones and ventilation, and sufficient space. Appropriate physical access controls such as access control systems and security guards must be implemented in accordance with Licensee's security policy.

                  Added: January 2020

                • OM-4.5.10

                  Other than the establishment of alternate sites, licensees should also pay particular attention to the transportation logistics for relocation of operations to alternate sites. Consideration should be given to the impact a disaster may have on the transportation system (e.g. closures of roads). Some staff may have difficulty in commuting from their homes to the alternate sites. Other logistics, such as how to re-route internal and external mail to alternate sites should also be considered. Moreover, pre-arrangement with telecommunication companies for automated telephone call diversion from the primary work locations to the alternate sites should be considered.

                  Added: January 2020

                • OM-4.5.11

                  Alternate sites for technology recovery (i.e. back-up data centres), which may be separate from the primary business site, should have sufficient technical equipment (e.g. workstations, servers, printers, etc.) of appropriate model, size and capacity to meet recovery requirements as specified by licensees' BCPs. The sites should also have adequate telecommunication (including bandwidth) facilities and pre-installed network connections as specified by their BCP to handle the expected voice and data traffic volume.

                  Added: January 2020

                • OM-4.5.12

                  Licensees should avoid placing excessive reliance on external vendors in providing BCP support, particularly where a number of institutions are using the services of the same vendor (e.g. to provide back-up facilities or additional hardware). Licensees should satisfy themselves that such vendors do actually have the capacity to provide the services when needed and the contractual responsibilities of the vendors should be clearly specified. Licensees should recognise that outsourcing a business operation does not transfer the associated business continuity management responsibilities.

                  Added: January 2020

                • OM-4.5.13

                  The contractual terms should include the lead-time and capacity that vendors are committed to deliver in terms of back-up facilities, technical support or hardware. The vendor should be able to demonstrate its own recoverability including the specification of another recovery site in the event that the contracted site becomes unavailable.

                  Added: January 2020

                • OM-4.5.14

                  Certain licensees may rely on a reciprocal recovery arrangement with other institutions to provide recovery capability (e.g. Cheque sorting and cash handling). Licensees should, however, note that such arrangements are often not appropriate for prolonged disruptions or an extended period of time. This arrangement could also make it difficult for Licensees to adequately test their BCP. Any reciprocal recovery agreement should therefore be subject to proper risk assessment and documentation by licensees, and formal approval by the Board.

                  Added: January 2020

            • OM-4.6 OM-4.6 Detailed Procedures for the BCP

              • OM-4.6.1

                Once the recovery levels and recovery objectives for individual business lines and support functions are determined, the development of the detailed BCP should commence. The objective of the detailed BCP is to provide detailed guidance and procedures in a crisis situation, of how to recover critical business operations or services identified in the Business Impact Analysis stage, and to ultimately return to operations as usual.

                Added: January 2020

              • Crisis Management Process

                • OM-4.6.2

                  A BCM framework must include a Crisis Management Plan (CMP) that serves as a documented guidance to assist the CMT in dealing with a crisis situation to avoid spill over effects to the business as a whole. The overall CMP, at a minimum, must contain the following:

                  (a) A process for ensuring early detection of an emergency or a disaster situation and prompt notification to the CMT about the incident;
                  (b) A process for the CMT to assess the overall impact of the crisis situation on the licensee and to make quick decisions on the appropriate responses for action (i.e. staff safety, incident containment and specific crisis management procedures);
                  (c) Arrangements for safe evacuation from business locations (e.g. directing staff to a pre-arranged emergency assembly area, taking attendance of all employees and visitors at the time and tracking missing people through different means immediately after the disaster);
                  (d) Clear criteria for activation of the BCP and/or alternate sites;
                  (e) A process for gathering updated status information for the CMT (e.g. ensuring that regular conference calls are held among key staff from relevant business and support functions to report on the status of the recovery process);
                  (f) A process for timely internal and external communications; and
                  (g) A process for overseeing the recovery and restoration efforts of the affected facilities and the business services.
                  Added: January 2020

                • OM-4.6.3

                  If CMT members need to be evacuated from their primary business locations, the licensee should set up a command centre to provide the necessary workspace and facilities for the CMT. Command centres should be sufficiently distanced from the licensee's primary business locations to avoid being affected by the same disaster.

                  Added: January 2020

              • Business Resumption

                • OM-4.6.4

                  Each relevant business and support function must assign at least one member to be a part of the CMT to carry out the business resumption process for the relevant business and supported function. Appropriate recovery personnel with the required knowledge and skills must be assigned to the team.

                  Added: January 2020

                • OM-4.6.5

                  Generally, the business resumption process consists of three major phases:

                  (a) The mobilisation phase — This phase aims to notify the recovery teams (e.g. via a call-out tree) and to secure the resources (e.g. recovery services provided by vendors) required to resume business services.
                  (b) The alternate processing phase — This phase emphasizes the resumption of the business and service delivery at the alternate site and/or in a different way than the normal process. This may entail record reconstruction and verification, establishment of new controls, alternate manual processes, and different ways of dealing with customers and counterparties; and
                  (c) The full recovery phase — This phase refers to the process for moving back to a permanent site after a disaster. This phase may be as difficult and critical to the business as the process to activate the business resumption process.
                  Added: January 2020

                • OM-4.6.6

                  For the first two phases above, clear responsibilities should be established and activities prioritised. A recovery tasks checklist should be developed and included in the BCM framework.

                  Added: January 2020

              • Technology Recovery

                • OM-4.6.7

                  Business resumption very often relies on the recovery of technology resources that include applications, hardware equipment and network infrastructure as well as electronic records. The technology requirements that are needed during recovery for individual business and support functions should be specified when the recovery strategies for the functions are determined.

                  Added: January 2020

                • OM-4.6.8

                  Licensees should pay attention to Heat, Ventilation and Air Conditioning (HVAC) requirements and resilience of critical technology equipment and facilities such as the uninterruptible power supply (UPS) and the computer cooling systems. Such equipment and facilities should be subject to continuous monitoring and periodic maintenance and testing.

                  Added: January 2020

                • OM-4.6.9

                  Appropriate personnel must be assigned with the responsibility for technology recovery. Alternative personnel need to be identified as back up for key technology recovery personnel in the case of the latter unavailability to perform the recovery process.

                  Added: January 2020

              • Disaster Recovery Models

                • OM-4.6.10

                  There are various disaster recovery models that can be adopted by licensees to handle prolonged disruptions. The traditional model is an "active/back-up" model, which is widely used by many organizations. This traditional model is based on an "active" operating site with a corresponding alternate site (back-up site), both for data processing and for business operations.

                  Added: January 2020

                • OM-4.6.11

                  A split operations model, which is increasingly being used by major institutions, operates with two or more widely separated active sites for the same critical operations, providing inherent back up for each other (e.g. branches). Each site has the capacity to take up some or all of the work of another site for an extended period of time. This strategy can provide nearly immediate resumption capacity and is normally able to handle the issue of prolonged disruptions.

                  Added: January 2020

                • OM-4.6.12

                  The split operations model may incur higher operating costs, in terms of maintaining excess capacity at each site and added operating complexity. It may also be difficult to maintain appropriately trained staff and the split operations model can pose technological issues at multiple sites.

                  Added: January 2020

                • OM-4.6.13

                  The question of what disaster recovery model to adopt is for individual licensees' judgment based on the risk assessment of their business environment and the characteristics of their own operations.

                  Added: January 2020

            • OM-4.7 OM-4.7 Vital Records Management

              • OM-4.7.1

                Each BCM framework must clearly identify information deemed vital for the recovery of critical business and support functions in the event of a disaster as well as the relevant protection measures to be taken for protecting vital information. Licensees must refer to Chapter OM-6 when identifying vital information for business continuity. Vital information includes information stored on both electronic and non-electronic media.

                Added: January 2020

              • OM-4.7.2

                Copies of vital records must be stored off-site as soon as possible after creation. Back-up vital records must be readily accessible for emergency retrieval. Access to back-up vital records must be adequately controlled to ensure that they are reliable for business resumption purposes. For certain critical business operations or services, licensees must consider the need for instantaneous data back up to ensure prompt system and data recovery. There must be clear procedures indicating how and in what priority vital records are to be retrieved or recreated in the event that they are lost, damaged or destroyed.

                Added: January 2020

            • OM-4.8 OM-4.8 Other Policies Standards, and Processes

              • Employee Awareness and Training Plan

                • OM-4.8.1

                  Licensees must implement an awareness plan and business continuity training for employees to ensure that all employees are continually aware of their responsibilities and know how to remain in contact and what to do in the event of a crisis.

                  Added: January 2020

                • OM-4.8.2

                  Key employees should be involved in the business continuity development process, as well as periodic training exercises. Cross training should be utilised to anticipate restoring operations in the absence of key employees. Employee training should be regularly scheduled and updated to address changes to the BCP.

                  Added: January 2020

              • Public Relations & Communication Planning

                • OM-4.8.3

                  Licensees must develop an awareness program and formulate a formal strategy for communication with key external parties (e.g. CBB and other regulators, investors, customers, counterparties, business partners, service providers, the media and other stakeholders) and provide for the type of information to be communicated. The strategy needs to set out all the parties the licensee must communicate to in the event of a disaster. This will ensure that consistent and up-to-date messages are conveyed to the relevant parties. During a disaster, ongoing and clear communication is likely to assist in maintaining the confidence of customers and counterparties as well as the public in general.

                  Added: January 2020

                • OM-4.8.4

                  The BCM framework must clearly indicate who may speak to the media and other key external parties, and have pre-arrangements for redirecting external communications to designated staff during a disaster. Important contact numbers and e-mail addresses of key external parties must be kept in a readily accessible manner (e.g. in wallet cards or licensees' intranet).

                  Added: January 2020

                • OM-4.8.5

                  Licensees may find it helpful to prepare draft press releases as part of their BCP. This will save the CMT time in determining the main messages to convey in a chaotic situation. Important conversations with external parties should be properly logged for future reference.

                  Added: January 2020

                • OM-4.8.6

                  With reference to internal communication, the BCP should set out how the status of recovery can be promptly and consistently communicated to all staff, parent bank, head office, branches and subsidiaries (where appropriate). This may entail the use of various communication channels (e.g. broadcasting of messages to mobile phones of staff, Licensees websites, e-mails, intranet and instant messaging).

                  Added: January 2020

              • Insurance and other Risk Mitigating Measures

                • OM-4.8.7

                  Licensees must have proper insurance coverage to reduce the financial losses that they may face during a disaster. Licensees must regularly review the adequacy and coverage of their insurance policies in reducing any foreseeable risks caused by disasters (e.g. loss of offices, critical IT facilities and equipment).

                  Added: January 2020

              • Government and Community

                • OM-4.8.8

                  Licensees may need to coordinate with community and government officials and the media to ensure the successful implementation of the BCP. This establishes proper protocol in case a city- wide or region- wide event impacts the licensee's operations. During the recovery phase, facilities access, power, and telecommunications systems should be coordinated with various entities to ensure timely resumption of operations. Facilities access should be coordinated with the police and fire department and, depending on the nature and extent of the disaster.

                  Added: January 2020

              • Disclosure Requirements

                • OM-4.8.9

                  Licensees must disclose how their BCP addresses the possibility of a future significant business disruption and how the licensee will respond to events of varying scope. Licensees must also state whether they plan to continue business during disruptions and the planned recovery time. In all cases, BCP disclosures must be reviewed and updated to address changes to the BCP.

                  Added: January 2020

                • OM-4.8.10

                  The licensees might make these disclosures on their websites, or through mailing to key external parties upon request.

                  Added: January 2020

            • OM-4.9 OM-4.9 Maintenance, Testing and Review

              • Testing & Rehearsal

                • OM-4.9.1

                  A BCP is not complete if it has not been subject to proper testing. Testing is needed to ensure that the BCP is operable. Testing verifies the awareness of staff and the preparedness of differing departments/functions of the bank.

                  Added: January 2020

                • OM-4.9.2

                  Licensees must test their BCPs at least annually. Senior management must participate in the annual testing and demonstrate their awareness of what they are required to do in the event of the BCP being involved. Also, the recovery and alternate personnel must participate in testing rehearsals to familiarise themselves with their responsibilities and the back-up facilities and remote sites (where applicable).

                  Added: January 2020

                • OM-4.9.3

                  All of the BCP's related risks and assumptions must be reviewed for relevancy and appropriateness as part of the annual planning of testing. The scope of testing must be comprehensive enough to cover the major components of the BCP as well as coordination and interfaces among important parties. A testing of particular components of the BCP or a fully integrated testing must be decided or depending on the situation. The following points must be included in the annual testing:

                  (a) Staff evacuation and communication arrangements (e.g. call-out trees) must be validated;
                  (b) The alternate sites for business and technology recovery must be activated;
                  (c) Important recovery services provided by vendors or counterparties must form part of the testing scope;
                  (d) Licensees must consider testing the linkage of their back up IT systems with the primary and backup systems of service providers;
                  (e) If back up facilities are shared with other parties (e.g. subsidiaries of the licensee), the licensee needs to verify whether all parties can be accommodated concurrently; and
                  (f) Recovery of vital records must be performed as part of the testing.
                  Added: January 2020

                • OM-4.9.4

                  Formal testing reviews of the BCP must be performed to assess the thoroughness and effectiveness of the testing. Specifically, a post-mortem review report must be prepared at the completion of the testing stage for formal sign-off by Licensees' senior management. If the testing results indicate weaknesses or gaps in the BCP, the plan and recovery strategies must be updated to remedy the situation.

                  Added: January 2020

              • Periodic Maintenance and Updating of a BCP

                • OM-4.9.5

                  Licensees must have formal procedures to keep their BCP updated with respect to any changes to their business. In the event of a plan having been activated, an assessment process must be carried out once normal operations are restored to identify areas for improvement. If vendors are needed to provide vital recovery services, there must be formal processes for regular annual assessment of the appropriateness of the relevant service level agreements.

                  Added: January 2020

                • OM-4.9.6

                  Individual business and support functions, with the assistance of the CMT, must review their business impact analysis and recovery strategy on an annual basis. This aims to confirm the validity of, or whether updates are needed to, the BCP requirements (including the technical specifications of equipment of the alternate sites) for the changing business and operating environment.

                  Added: January 2020

                • OM-4.9.7

                  The contact information for key staff, counterparties, customers and service providers must be updated as soon as possible when notification of changes is received.

                  Added: January 2020

                • OM-4.9.8

                  Significant internal changes (e.g. merger or acquisitions, business re-organisation or departure of key personnel) must be reflected in the plan immediately and reported to senior management.

                  Added: January 2020

                • OM-4.9.9

                  Copies of the BCP document must be stored at locations separate from the primary site. A summary of key steps to be taken in an emergency situation must be made available to senior management and other key personnel.

                  Added: January 2020

              • Audit and Independent Review

                • OM-4.9.10

                  The internal audit function of a licensee or its external auditors must conduct periodic reviews of the BCP to determine whether the plan remains realistic and relevant, and whether it adheres to the policies and standards of the licensee. This review must include assessing the adequacy of business process identification, threat scenario development, business impact analysis and risk assessments, the written plan, testing scenarios and schedules.

                  Added: January 2020

                • OM-4.9.11

                  Significant findings and recommendations must be brought to the attention of the Board and Senior Management within three months of the completion of the review. Furthermore, Senior Management and the Board must ensure that any gaps or shortcomings reported to them are addressed in an appropriate and timely manner.

                  Added: January 2020

          • OM-5 OM-5 Security Measures for Banks

            • OM-5.1 OM-5.1 Security Measures for Retail Banks

              • General Requirement

                • OM-5.1.1

                  Retail banks must maintain up to date Payment Card Industry Data Security Standards (PCI-DSS) certification. Failure to comply with this requirement will trigger a supervisory response, which may include formal enforcement measures, as set out in Module EN (Enforcement).

                  Added: January 2020

                • OM-5.1.2

                  In order to maintain up to date PCI-DSS certification, retail banks will be periodically audited by PCI authorised companies for compliance. Licensees are asked to make certified copies of such documents available if requested by the CBB.

                  Added: January 2020

                • OM-5.1.2A

                  Conventional retail bank licensees must take appropriate measures to counter fraudulent phishing attempts (such as through telephone or WhatsApp calls, SMS or WhatsApp messages, emails and other media) that request customers to provide sensitive personal information that can lead to frauds. The licensees must also enhance their surveillance and monitoring systems to detect suspicious account activity caused by such fraudulent attempts on a timely basis.

                  Added: October 2020

                • OM-5.1.2B

                  Conventional retail bank licensees must raise customer awareness about fraudulent phishing messages by launching extensive customer alert campaigns through media and social media channels. Customers must be warned of such attempts and advised to only use the licensee’s official website, telephone or other channels for communication with it.

                  Added: October 2020

              • External Measures

                • OM-5.1.3

                  All head offices/main offices are required to maintain Ministry of Interior ("MOI") guards on a 24 hours basis. For branches that satisfy the criteria mentioned in Paragraphs OM-5.1.4 to OM-5.1.16 below, they may maintain MOI guards during opening hours only. Furthermore, banks will be allowed to replace MOI armed guards with private security guards subject to the approval of the MOI. Training and approval of private security guards will be given by the MOI.

                  Added: January 2020

                • OM-5.1.4

                  Public entrances to head offices/main offices and branches must be protected by steel rolling shutters, or the external doors must be of solid steel or a similar solid material of equivalent strength and resistance to fire. Other external entrances must have steel doors or be protected by steel rolling shutters. Preferably, all other external entrances must have the following security measures:

                  (a) Magic eye;
                  (b) Locking device (key externally and handle internally);
                  (c) Door closing mechanism;
                  (d) Contact sensor with alarm for prolonged opening time; and
                  (e) Multifactor or combination access control system (e.g. access card and key slot or swipe card and password).
                  Added: January 2020

                • OM-5.1.5

                  External windows must have security measures such as anti-blast films and movement detectors. For ground floor windows, banks must add steel grills fastened into the wall.

                  Amended: April 2021
                  Added: January 2020

                • OM-5.1.6

                  Branch alarm systems must have the following features:

                  (a) PIR motion detectors
                  (b) Door sensors
                  (c) Anti vibration/movement sensors on vaults
                  (d) External siren
                  (e) The intrusion detection system must be linked to the bank's (i.e. head office) monitoring unit and also the MOI Central Monitoring Unit.
                  Added: January 2020

              • Internal Measures

                • OM-5.1.7

                  Teller counters must be screened off from customers by a glass screen of no less than 1 meter in height from the counter work surface or 1.4 meters from the floor.

                  Added: January 2020

                • OM-5.1.8

                  All areas where cash is handled must be screened off from customers and other staff areas.

                  Added: January 2020

                • OM-5.1.9

                  Access to teller areas must be restricted to authorised staff only. The design of the teller area must not allow customers to pass through it.

                  Added: January 2020

                • OM-5.1.10

                  Panic alarm systems for teller staff must be installed. The choice between silent or audible panic alarms is left to individual banks. Kick bars and/or hold up buttons must be spread throughout the teller and customer service areas and the branch manager's office. The panic alarm must be linked to the MOI Central Monitoring Unit.

                  Added: January 2020

              • Cash Safety

                • OM-5.1.11

                  Cash, precious metals and bearer instruments must be kept in fireproof cabinets/safes. These cabinets/safes must be located in strong rooms.

                  Added: January 2020

                • OM-5.1.12

                  Strong rooms must be made of reinforced solid concrete, or reinforced block work. Doors to strong rooms must be steel and have a steel shutter fitted. Dual locking devices must be installed in strong room doors. Strong room doors must be located out of the sight of customers.

                  Added: January 2020

                • OM-5.1.13

                  Strong rooms must not contain any other openings except the entry door and where necessary, an air conditioning outlet. The air conditioning outlet must be protected with a steel grill.

                  Added: January 2020

              • CCTV Network Systems

                • OM-5.1.14

                  All head offices/main offices and branches must have a CCTV network and alarm system which are connected to a central monitoring unit located in the head office/main office, along with a Video Monitoring System (VMS) and to the MOI Central Monitoring Unit.

                  Added: January 2020

                • OM-5.1.15

                  At a minimum, CCTV cameras must cover the following areas:

                  (a) Main entrance;
                  (b) Other external doors;
                  (c) Any other access points (e.g. ground floor windows);
                  (d) The banking hall;
                  (e) Tellers' area;
                  (f) Strong room entrance; and
                  (g) ATMs (by way of internal or external cameras) Refer to Section OM-5.3 for specific CCTV requirements related to ATMs.
                  Added: January 2020

                • OM-5.1.16

                  Notices of CCTV cameras in operation must be put up for the attention of the public. CCTV records must be maintained for a minimum 45-day period. The transmission rate (in terms of the number of frames per second) must be high enough to make for effective monitoring. Delayed transmission of pictures to the Central Monitoring Unit is not acceptable. The CCTV system must be operational 24 hours per day.

                  Added: January 2020

              • Training and Other Measures

                • OM-5.1.17

                  Banks must establish the formal position of security manager. This person will be responsible for ensuring all bank staff are given annual, comprehensive security training. Banks must produce a security manual or procedures for staff, especially those dealing directly with customers. For banks with three or more branches, this position must be a formally identified position. For banks with one or two branches, the responsibilities of this position may be added to the duties of a member of management.

                  Added: January 2020

                • OM-5.1.18

                  The security manager must maintain records on documented security related complaints by customers and take corrective action or make recommendations for action on a timely basis. Actions and recommendations must also be documented.

                  Added: January 2020

                • OM-5.1.19

                  Banks must consider safety and security issues when selecting premises for new branches. Key security issues include prominence of location (i.e. Is the branch on a main street or a back street?), accessibility for emergency services, and assessment of surrounding premises (in terms of their safety or vulnerability), and the number of entrances to the branch. All banks are required to hold an Insurance Blanket Bond (which includes theft of cash in its cover).

                  Added: January 2020

            • OM-5.2 OM-5.2 Payment and ATM cards, Wallets and Point of Sale infrastructure

              • Europay, MasterCard and Visa (EMV) Compliance

                • OM-5.2.1

                  All cards (debit, credit, charge, prepaid, etc.) issued by licensees in the Kingdom of Bahrain must be EMV compliant. Moreover, all ATMs, CDMs, POS, etc. must be EMV compliant for accepting cards issued in the Kingdom of Bahrain. In this context, EMV compliant means using chip and online PIN authentication. However, contactless card payment transactions, where no PIN verification is required, are permitted for small amounts i.e. up to BD50 per transaction, provided that Conventional bank licensees bear full responsibility in case of fraud occurrence.

                  Amended: April 2023
                  Added: January 2020

                • OM-5.2.1A

                  Where contactless payments use Consumer Device Cardholder Verification Method (CDCVM) for payment authentication and approval, then the authentication required for transactions above BD50 limit mentioned in Paragraph OM-5.2.1 is not applicable given that the customer has already been authenticated by his device using PIN, biometric or other authentication methods. This is only applicable where debit/credit card of the customer has already been tokenized in the payment application.

                  Amended: April 2023
                  Added: July 2020

              • Provision of Cash Withdrawal and Payment Services through Various Channels

                • OM-5.2.2

                  Conventional bank licensees are allowed to provide cash withdrawal and payment services using various channels, including but not limited to, contactless, cardless, QR code, e-wallets, biometrics (iris recognition, facial recognition, fingerprint, voiceprint, etc.), subject to explicit consent from the customers using established methods described in OM-3.2 and enrolling them through a registration process for each channel and service, wherein customers' acceptance of products/services terms and conditions are documented and customers are properly authenticated. Such enrolment process must allow an opt-out option if the customer does not want to use a channel for which he has enrolled.

                  Added: January 2020

              • Geolocation Limitations

                • OM-5.2.3

                  All Conventional bank licensees issuing debit, prepaid and/or credit cards must ensure that all Bahrain issued cards enable each customer to maintain a list of 'approved' countries for card ATM/Point of Sale (POS) transactions. Customers must be allowed to determine those countries in which their cards must not be accepted as well as countries or merchant categories in which a card transaction would require a further level of authorisation, (for example, 2-way SMS).

                  Added: January 2020

              • Prohibition of Double Swiping

                • OM-5.2.4

                  Double swiping of cards by merchants is not allowed, and all card acquirer licensees must ensure that the merchants concerned must comply with this requirement.

                  Added: January 2020

                • OM-5.2.5

                  For the purpose of Paragraph OM-5.2.4, card acquirer licensee means a CBB licensee that enters into a contractual relationship with a merchant and the payment card issuer, under a card payment scheme, for accepting and processing payment card transactions. Card acquirers include three-party payment card network operators, who have outsourced their acquiring services to third party service providers.

                  Added: January 2020

                • OM-5.2.6

                  For the purpose of Paragraph OM-5.2.4, double swiping means swiping of a payment card by a merchant at the POS terminal/ECR for the second time, resulting in capturing and storing of payment cardholder data and sensitive authentication data encoded on the magnetic stripe of a customer's payment card, after the merchant received the required card payment authorisation response.

                  Added: January 2020

                • OM-5.2.7

                  All card acquirer licensees must include the following clause into the merchant agreements entered into with all their merchants: "Pursuant to the CBB directions and instructions, the merchant shall stop double swiping of a payment card at a merchant's point-of-sale (POS) terminal/electronic cash register (ECR) to capture or store cardholder and sensitive authentication data encoded on the magnetic stripe of a customer's payment card, after the merchant received the required card payment authorisation response. The merchant asserts its full compliance with the obligation contained in this clause and understands that any breach of this clause will expose the merchant to mandatory contractual and/or legal disciplinary actions by the relevant regulator and/or concerned Ministry."

                  Added: January 2020

                • OM-5.2.8

                  All card acquirer licensees must:

                  (i) Educate the concerned merchants on the regulatory requirement and monitor the implementation of this requirement; and
                  (ii) Educate and facilitate, where necessary, any merchant that has a valid business need to have cardholder data or non-sensitive information, to transmit such data/information through an integration option.
                  Added: January 2020

              • Integration of Hardware Components

                • OM-5.2.9

                  If the Automated Teller Machines (ATM) environment permits access to internal areas where account data is processed and/or stored (e.g., for service or maintenance), these areas must be effectively protected from access by unauthorised persons to mitigate the risk associated with attaching/inserting malicious additional components, especially those which may be designed to capture sensitive data. Banks must encrypt account data or secure access to such data by effective physical barriers such as strong walls, doors, and mechanical locks.

                  Added: January 2020

                • OM-5.2.10

                  All entry to sensitive areas must be recorded, including the name of the persons accessing the area; the date; and the time of access to and exit from the area. CCTV cameras must be installed, and used to record all activities within the ATM environment.

                  Added: January 2020

                • OM-5.2.11

                  Banks are required to implement best industry practice in respect of hardware and software development and integration, including but not limited to formal specification, test plans, and documentation. Hardware and software should only be introduced to the environment following a successful programme of testing.

                  Added: January 2020

                • OM-5.2.12

                  All test plans and the outcomes of these plans must be retained by the bank for a minimum of five years from the date of testing and be available on request to the CBB or their authorised representatives. Examples of instances in which a detailed testing process must be undertaken prior to installation and integration of components include, but are not limited to, secure card readers or EPPs. In all instances the applicable standards relating to Payment Card Industry (PCI), PIN Transaction Security (PTS), and Point of Interaction (POI) requirements must be fully complied with.

                  Added: January 2020

                • OM-5.2.13

                  Banks must ensure that the integration of Secure Card Readers, (SCRs) and, if applicable, any mechanism protecting the SCRs and any anti skimming devices are properly implemented and fully comply with the guidelines provided by the device vendor. SCRs must be PCI Security Standards Council approved and fully comply with all PCI standards at all times.

                  Added: January 2020

                • OM-5.2.14

                  Banks must ensure that all ATMs, including offsite ATMs, are equipped with mechanisms which prevent skimming attacks. There must be no known or demonstrable way to disable or defeat the above-mentioned mechanisms, or to install an external or internal skimming device.

                  Added: January 2020

              • ATM Software

                • OM-5.2.15

                  Banks must ensure that their ATM software security measures comply with the following:

                  (a) Access to sensitive services is controlled by requiring authentication. Entering or exiting sensitive services must not reveal or otherwise compromise the security of sensitive information;
                  (b) ATM software must include controls which are designed to prevent unauthorised modification of the software configuration, including the operating system, drivers, libraries, and individual applications. Software configuration includes the software platform, configuration data, applications loaded to and executed by the platform, and the associated data. The mechanisms must also ensure the integrity of third-party applications, using a controlled process to install such controls;
                  (c) Access to all elements of the ATM environment must be strictly controlled to ensure an effective segregation of functions and an effective segregation of responsibilities exists for all personnel;
                  (d) The logging data must be stored in a way that data cannot be changed under any circumstances, and deleted only after authorisation by a member of bank staff who has specific responsibility delegated by the CEO;
                  (e) Software is protected and stored in a manner which precludes unauthorised modification; and
                  (f) Loading of software into ATMs is performed by a person who has the requisite knowledge and skills, and who has been nominated and authorised by a senior manager in the bank to undertake these tasks.
                  Added: January 2020

                • OM-5.2.16

                  ATMs must incorporate dedicated tampering protection capabilities.

                  Added: January 2020

              • ATM Application Management

                • OM-5.2.17

                  Banks must ensure that their ATM application management complies with the following:

                  (a) The display of a cardholder PIN must be obfuscated on the ATM display and must not be in 'clear' mode;
                  (b) Sensitive information must not be present any longer or used more often than strictly necessary. The ATM must automatically clear its internal buffers when either the transaction is completed, or the ATM has timed out whilst awaiting a response from the cardholder or host; and
                  (c) Prevent the display or disclosure of cardholder account information such as the account number, ID number, address and other personal details etc. on the ATM screen, printed on receipts, or audio transcripts for visually impaired cardholders.
                  Added: January 2020

            • OM-5.3 OM-5.3 ATM Security Measures: Physical Security for Retail Banks

              • Record Keeping

                • OM-5.3.1

                  Banks must record the details of the site risk assessments and retain such records for a period of five years from the date of the ATM installation, or whatever other period required by the Ministry of the Interior or the CBB from time to time, whichever is the longer.

                  Added: January 2020

              • Installation of an Off-site ATM in Bahrain

                • OM-5.3.2

                  Banks must notify the CBB in writing if they install a new off-site ATM or remove/terminate any of its off-site ATMs.

                  Amended: January 2022
                  Added: January 2020

                • OM-5.3.3

                  [This Paragraph has been deleted in January 2022].

                  Deleted: January 2022
                  Added: January 2020

              • General Criteria

                • OM-5.3.4

                  [This Paragraph has been deleted in January 2022].

                  Deleted: January 2022
                  Added: January 2020

                • OM-5.3.5

                  [This Paragraph has been deleted in January 2022].

                  Deleted: January 2022
                  Added: January 2020

                • OM-5.3.6

                  [This Paragraph has been deleted in January 2022].

                  Deleted: January 2022
                  Added: January 2020

                • OM-5.3.7

                  [This Paragraph has been deleted in January 2022].

                  Deleted: January 2022
                  Added: January 2020

                • OM-5.3.8

                  [This Paragraph has been deleted in January 2022].

                  Deleted: January 2022
                  Added: January 2020

                • OM-5.3.9

                  [This Paragraph has been deleted in January 2022].

Deleted: January 2022
Added: January 2020

  • OM-5.3.10

    [This Paragraph has been deleted in January 2022].

    Deleted: January 2022
    Added: January 2020

  • OM-5.3.11

    [This Paragraph has been deleted in January 2022].

    Deleted: January 2022
    Added: January 2020

  • OM-5.3.12

    The CBB may, at its sole discretion, require an off-site ATM to be removed/terminated and decommissioned at any time.

    Added: January 2020

  • ATM Alarms

    • OM-5.3.13

      In addition to alarming the premises, banks must alarm the ATM itself, in a way which activates audibly when the ATM is under attack. The system must be monitored by remote signaling to an appropriate local police response designated by the Ministry of Interior. In doing so, banks must consider the following:

      (a) The design of the system must ensure that the ATM has a panic alarm installed;
      (b) The design of the system must give an immediate, system controlled warning of an attack on the ATM, and all ATMs must be fitted with fully operational fraud detection and inhibiting devices;
      (c) A maintenance record must be kept for the alarm detection system and routine maintenance must be conducted in accordance with at least the manufacturer's recommendations. The minimum must be two planned maintenance visits and tests every 6 months; and
      (d) The alarm system must be monitored from an Alarm Receiving Centre 24 hours daily. It must automatically generate an alarm signal if the telephone/internet line fails or is cut.
      Added: January 2020

  • Closed-circuit Television (CCTV)

    • OM-5.3.14

      Banks must ensure that ATMs are equipped with Closed-circuit television (CCTV). The location of camera installation must be carefully chosen to ensure that images of the ATM are recorded, however keypad entries must not be recorded. The camera must support the detection of the attachment of alien devices to the fascia (external body) and possess the ability to generate an alarm for remote monitoring if the camera is blocked or otherwise disabled. There must be sensors to detect and alert the bank if the camera has been blocked or tampered with.

      Added: January 2020

    • OM-5.3.15

      For the purposes of Paragraph OM-5.3.14, the location of camera installation in drive-thru ATMs must be carefully chosen to ensure that the images of the vehicle number plates are clearly captured during both daytime and nighttime.

      Added: January 2020

    • OM-5.3.16

      As a minimum, CCTV activity must be recorded (preferably in digital format) and, where risk dictates, remotely monitored by a third party Alarm Receiving Centre.

      Added: January 2020

    • OM-5.3.17

      When an ATM is located in an area where a public CCTV system operates, the deployer or agent must liaise with the agency responsible for the CCTV system to include the ATM site in any preset automatic camera settings or to request regular sweeps of the site. The CCTV system must not be able to view the ATM keypad thereby preventing observation of PIN entry.

      Added: January 2020

    • OM-5.3.18

      Banks must ensure that the specifications of CCTV cameras meet the following minimum requirements:

      (a) Analogue Cameras:
      Resolution — Minimum 700 TVL

      Lens — Vari-focal lenses from 2.8 to 12mm

      Sensitivity — Minimum 0.5 Luminance (Lux) without Infrared (IR), 0 Lux with IR

      IR — At least 10 to 20 meters (Camera that detects motion)
      (b) IP Cameras:
      Resolution — 2 MP — 1080 p

      Lens — Vari-focal lenses from 2.8 to 12mm

      Sensitivity — Minimum 0.5 Lux without IR, 0 Lux with IR

      IR — At least 10 to 20 meters
      Added: January 2020

    • OM-5.3.19

      Banks must ensure that the following network requirements are met for connecting the Banks CCTV system to MOI Control room:

      (a) The minimum speed of the upload should be 2 Mbps for each node (ATM's and branches);
      (b) Speed/storage limit threshold must not be applied in a manner which permits a network delay; and
      (c) Access must be restricted to authorised personnel.
      Added: January 2020

  • ATM Lighting

    • OM-5.3.20

      Banks must ensure that adequate and effective lighting is operational at all times within the ATM environment. The standard of the proposed lighting must be agreed with the Ministry of the Interior and other relevant authorities, and tested at least once every three months to ensure that the lighting is in good working order.

      Added: January 2020

    • OM-5.3.21

      Banks must ensure that adequate and effective lighting is operational within drive-thru ATMs to enable the CCTV cameras to capture the vehicle number plates during both daytime and nighttime.

      Added: January 2020

  • Fire Alarm

    • OM-5.3.22

      Banks must ensure that effective fire alarm and fire defense measures, such as a sprinkler, are installed and functioning for all ATMs. These alarms must be linked to the "General Directorate of Civil Defense" in Bahrain.

      Added: January 2020

  • Cash Replenishment

    • OM-5.3.23

      All cash movements between branches, to and from the CBB and to off-site ATMs must be performed by specialised service providers.

      Added: January 2020

  • ATM Service/Maintenance

    • OM-5.3.24

      Banks must maintain a list of all maintenance, replenishment and inspection visits by staff or other authorised parties.

      Added: January 2020

    • OM-5.3.25

      The CBB shall conduct inspections of ATM installations and any non-compliance with the physical security requirements stipulated in this Chapter may lead to suspension of the subject ATMs and trigger other enforcement measures set out in Module EN.

      Added: October 2022

  • OM-5.4 OM-5.4 ATM Security Measures: Additional Measures for Retail Banks

    • OM-5.4.1

      Banks may ensure the adequacy and effectiveness of external security measures throughout the ATM environment through the additional security measures outlined in this Section.

      Added: January 2020

    • Sounders and Flashing Warning Lights

      • OM-5.4.2

        Banks should ensure that street-based ATMs are installed with an audible alarm sounder, and a visual flashing warning light, to indicate when the ATM is under attack.

        Added: January 2020

    • Armored Anti-Bandit Shroud

      • OM-5.4.3

        Banks should obtain and act upon advice provided by the Ministry of Interior in respect of protecting the ATM installation with an armored anti-bandit shroud which is placed around the ATM to prevent any bombing or other physical attempts to damage the ATM.

        Added: January 2020

  • OM-5.5 OM-5.5 Cyber Security Risk Management

    • Role of the Board

      • OM-5.5.1 OM-5.5.1

        The Board of conventional bank licensees must ensure that the licensee has a robust cyber security risk management policy to comprehensively manage the licensee’s cyber security risk and vulnerabilities. The Board must approve the policy and establish clear ownership, decision-making and management accountability for risks associated with cyber-attacks and related risk management and recovery processes. Cyber security must be an item for discussion at Board or Board sub-committee meetings.

        Amended: July 2021
        Added: January 2020

        • OM-5.5.4

          Boards should receive comprehensive reports, in every Board meeting, covering cyber security issues such as the following:

          a. Key Risk Indicators/ Key Performance Indicators;
          b. Status reports on overall cyber security control maturity levels;
          c. Status of staff Information Security awareness;
          d. Updates on latest internal or relevant external cyber security incidents; and
          e. Results from penetration testing exercises.
          Amended: July 2021
          Added: January 2020

        • OM-5.5.2 OM-5.5.2

          The Board of conventional bank licensees must ensure that the cyber security risk management framework encompasses, at a minimum, the following components:

          a) Cyber security strategy;
          b) Cyber security policy; and
          c) Cyber security risk management approach, tools and methodology and, an organization-wide security awareness program.
          Amended: July 2021
          Added: January 2020

          • OM-5.5.5

            The Board must evaluate and approve the cyber security risk management framework for scope coverage, adequacy and effectiveness every three years or when there are significant changes to the risk environment, taking into account emerging cyber threats and cyber security controls.

            Amended: July 2021
            Added: January 2020

          • OM-5.5.3 OM-5.5.3

            The cyber security risk management framework must be developed in accordance with the National Institute of Standards and Technology (NIST) Cyber security framework which is summarized in Appendix C – Cyber security Control Guidelines. At the broader level, the Cyber security framework should be consistent with the licensee’s risk management framework.

            Amended: July 2021
            Added: January 2020

            • OM-5.5.6

              Conventional bank licensees must establish a cyber security risk function, independent of the information technology (IT) department, which must report to an independent risk management function or an equivalent function within the licensee. The cyber security risk management function must monitor and report on the status and maturity of relevant cyber security controls. Branches of foreign bank licensees must be governed under a framework of cyber security risk management policies which ensure that an adequate level of oversight is exercised by the regional office or head office.

              Amended: July 2021
              Added: January 2020

            • OM-5.5.7

              The Board should ensure that appropriate resources are allocated to the cyber security risk management function for implementing the cyber security framework.

              Added: July 2021

            • OM-5.5.8

              The Board must ensure that the cyber security risk management function is headed by suitably qualified Chief Information Security Officer (CISO), with appropriate authority to implement the Cyber Security strategy.

              Added: July 2021

            • OM-5.5.9

              The Board should establish a cyber security committee that is headed by an independent senior manager from a control function (like CFO / CRO), with appropriate authority to approve policies and frameworks needed to implement the cyber security strategy, and act as a governance committee for the cyber security function. Membership of this committee should include senior management members from business functions, IT, Risk and Compliance.

              Added: July 2021

    • Role of Senior Management

      • OM-5.5.10

        The senior management must be responsible for the following activities:

        (a) Create the overall cyber security risk management framework and adequately oversee its implementation;
        (b) Formulate a bank-wide cyber security strategy and cyber security policy;
        (c) Implement and consistently maintain an integrated, bank-wide, cyber security risk management framework, and ensure sufficient resource allocation;
        (d) Monitor the effectiveness of the implementation of cyber security risk management practices and coordinate cyber security activities with internal and external risk management entities;
        (e) Provide quarterly or more frequent reports to the Board on the current situation with respect to cyber threats and cyber security risk treatment;
        (f) Prepare quarterly or more frequent reports on all cyber incidents (internal and external) and their implications on the licensee; and
        (g) Ensure that processes for identifying the cyber security risk levels across the organisation are in place and annually evaluated.
        Added: July 2021

      • OM-5.5.11

        The senior management must ensure that:

        (a) The licensee has identified clear internal ownership and classification for all information assets and data;
        (b) The licensee has maintained an inventory of the information assets and data which is reviewed and updated regularly;
        (c) The cyber security staff are adequate to manage the licensee’s cyber security risks and facilitate the performance and continuous improvement of all relevant cyber security controls;
        (d) It provides and requires cyber security staff to attend regular cyber security update and training sessions (for example Security+, CEH, CISSP, CISA, CISM) to stay abreast of changing cyber security threats and countermeasures.
        Added: July 2021

      • OM-5.5.12

        With respect to Subparagraph OM-5.5.11(a), data classification entails analyzing the data the licensee retains, determining its importance and value, and then assigning it to a category. When classifying data, the following aspects of the policy should be determined:

        a) Who has access to the data;
        b) How the data is secured;
        c) How long the data is retained (this includes backups);
        d) What method should be used to dispose of the data;
        e) Whether the data needs to be encrypted; and
        f) What use of the data is appropriate.

        The general guideline for data classification is that the definition of the classification should be clear enough so that it is easy to determine how to classify the data. In other words, there should be little (if any) overlap in the classification definitions. The owner of data (i.e. the relevant business function) should be involved in such classification.

        Added: July 2021

    • Cyber Security Strategy

      • OM-5.5.13

        A bank-wide cyber security strategy must be defined and documented to include:

        (a) The position and importance of cyber security at the licensee;
        (b) The primary cyber security threats and challenges facing the licensee;
        (c) The licensee’s approach to cyber security risk management;
        (d) The key elements of the cyber security strategy including objectives, principles of operation and implementation approach;
        (e) Scope of risk identification and assessment, which must include the dependencies on third party service providers;
        (f) Approach to planning response and recovery activities; and
        (g) Approach to communication with internal and external stakeholders including sharing of information on identified threats and other intelligence among industry participants.
        Added: July 2021

      • OM-5.5.14

        The cyber security strategy should be communicated to the relevant stakeholders and it should be revised as necessary and, at least, once every three years. Appendix C provides cyber security control guidelines that can be used as reference to support the licensee’s cyber security strategy and cyber security policy.

        Added: July 2021

    • Cyber Security Policy

      • OM-5.5.15

        Conventional bank licensees must implement a written cyber security policy setting forth its policies for the protection of its electronic systems and client data stored on those systems, which must be reviewed and approved by the licensee’s board of directors or senior management, as appropriate, at least annually. The cyber security policy areas including but not limited to the following must be addressed:

        (a) Definition of the key cyber security activities within the licensee, the roles, responsibilities, delegated powers and accountability for these activities;
        (b) A statement of the licensee’s overall cyber risk tolerance as aligned with the licensee’s business strategy. The cyber risk tolerance statement should be developed through consideration of the various impacts of cyber threats including customer impact, service downtime, potential negative media publicity, potential regulatory penalties, financial loss, and others;
        (c) Definition of main cyber security processes and measures and the approach to control and assessment;
        (d) Policies and procedures (including process flow diagrams) for all relevant cyber security functions and controls including the following:
        (a) Asset management (Hardware and software);
        (b) Incident management (Detection and response);
        (c) Vulnerability management;
        (d) Configuration management;
        (e) Access management;
        (f) Third party management;
        (g) Secure application development;
        (h) Secure change management;
        (i) Cyber training and awareness;
        (j) Cyber resilience (business continuity and disaster planning); and
        (k) Secure network architecture.
        Added: July 2021

    • Approach, Tools and Methodology

      • OM-5.5.16

        Conventional bank licensees must ensure that the cyber security policy is effectively implemented through a consistent risk-based approach using tools and methodologies that are commensurate with the size and risk profile of the licensee. The approach, tools and methodologies must cover all cyber security functions and controls defined in the cyber security policy.

        Added: July 2021

      • OM-5.5.17

        Licensees should establish and maintain plans, policies, procedures, process and tools (“playbooks”) that provide well-defined, organised approaches for cyber incident response and recovery activities, including criteria for activating the measures set out in the plans and playbooks to expedite the organisation’s response time. Plans and playbooks should be developed in consultation with business lines to ensure business recovery objectives are met, and are approved by senior management before broadly shared across the licensee. They should be reviewed and updated regularly to incorporate improvements and/or changes in the organisation. Licensees may enlist external subject matter experts to review complex and technical content in the playbook, where appropriate. A number of plans and playbooks should be developed for specific purposes (e.g. response, recovery, contingency, communication) that align with the overall cyber security strategy.

        Added: July 2021

    • Prevention Controls

      • OM-5.5.18

        A conventional bank licensee must develop and implement preventive measures across all relevant technologies to minimise the licensee’s exposure to cyber security risk. Such preventive measures must include, at a minimum, the following:

        (a) Deployment of End Point Protection (EPP) and Endpoint Detection and Response including anti-virus software and anti-malware programs to detect, prevent, and isolate malicious code;
        (b) Data leakage prevention solutions to detect and prevent confidential data from leaving the licensee’s technology environment;
        (c) Use of firewalls for network segmentation including use of Web Application Firewalls (WAF) for filtering and monitoring HTTP traffic between a web application and the Internet, and access control lists to limit unauthorized system access between network segments;
        (d) Rigorous security testing at software development stage as well as after deployment to limit the number of vulnerabilities;
        (e) Use of Privileged Access Management (PAM) to secure, control, manage and monitor privileged access to critical assets;
        (f) Use of a secure email gateway to limit email based cyber attacks such as malware attachments, malicious links, and phishing scams (for example use of Microsoft Office 365 Advanced Threat Protection tools for emails);
        (g) Use of a Secure Web Gateway to limit browser based cyber-attacks, malicious websites and enforce organization policies;
        (h) Creating a list of whitelisted applications and application components (libraries, configuration files, etc.) that are authorized to be present or active on the organization’s systems;
        (i) Use of mobile device management solutions including implementing Bring Your Own Device “BYOD” security policies to secure all mobile devices with any access to bank systems, applications, and networks through security measures such as encryption, remote wipe capabilities, and password enforcement; and
        (j) Network access control to secure physical network ports against connection to computers which are unauthorised to connect to the licensee’s network or which do not meet the minimum security requirements defined for licensee computer systems; and
        (k) Identity and access management solutions to limit the exploitation and monitor the use of privileged and non-privileged accounts.
        Added: July 2021

      • OM-5.5.19

        Conventional bank licensees must set up anti-spam and anti-spoofing measures to authenticate the licensee’s mail server and to prove to ISPs, mail services and other receiving mail servers that senders are truly authorized to send the email. Examples of such measures include:

        • SPF “Sender Policy Framework”;
        • DKIM “Domain Keys Identified Mail”; and
        • DMARC “Domain-based Message Authentication, Reporting and Conformance”.
        Added: July 2021

      • OM-5.5.20

        Conventional bank licensees should subscribe to one of the Cyber Threat Intelligence services in order to stay abreast of emerging cyber threats, cybercrime actors and state of the art tools and security measures.

        Added: July 2021

      • OM-5.5.21

        Licensees must use a single unified private email domain or its subdomains for communication with customers to prevent abuse by third parties. Licensees must not utilise third-party email provider domains for communication with customers. The email domains must comply with the requirements with respect to SPF, DKIM and DMARC in this Module. With respect to URLs or other clickable links in communications with customers, licensees must comply with the following requirements:

        (a) Limit the use of links in SMS and other short messages (such as WhatsApp) to messages sent as a result of customer request or action. Examples of such customer actions include verification links for customer onboarding, payment links for customer-initiated transactions etc;
        (b) Refrain from using shortened links in communication with customers;
        (c) Implement one or more of the following measures for links sent to customers:
        i. ensure customers receive clear instructions in communications sent with the links;
        ii. prior notification to the customer such as through a phone call informing the customer to expect a link from the licensee;
        iii. provision of transaction details such as the transaction amount and merchant name in the message sent to the customer with the link;
        iv. use of other verification measures like password or biometric authentication; and
        (d) Create customer awareness campaigns to educate their customers on the risk of fraud related to links they receive in SMS, short messages and emails with clear instructions to customers that licensees will not send clickable links in SMS, emails and other short messages to request information or payments unless it is as a result of customer request or action.
        Amended: October 2022
        Added: July 2021

      • OM-5.5.21A

        For the purpose of Paragraph OM-5.5.21, subject to CBB’s approval, licensees may be allowed to use additional domains for email communications with customers under certain circumstances. Examples of such circumstances include emails sent to customers by:

        (a) Head/regional office of a licensee; and
        (b) Third-party service providers subject to prior arrangements being made with customers. Examples of such third-party services include informational subscription services (e.g. Bloomberg) and document management services (e.g. DocuSign).
        Added: October 2022

    • Cyber Risk Identification and Assessments

      • OM-5.5.22

        Conventional bank licensees must conduct periodic assessments of cyber threats. For the purpose of analysing and assessing current cyber threats relevant to the licensee, it should take into account the factors detailed below:

        (a) Cyber threat entities including cyber criminals, cyber activists, insider threats;
        (b) Methodologies and attack vectors across various technologies including cloud, email, websites, third parties, physical access, or others as relevant;
        (c) Changes in the frequency, variety, and severity of cyber threats relevant to the region;
        (d) Dark web surveillance to identify any plot for cyber attacks;
        (e) Examples of cyber threats from past cyber attacks on the licensee if available; and
        (f) Examples of cyber threats from recent cyber attacks on other organisations.
        Added: July 2021

      • OM-5.5.23

        Conventional bank licensees must conduct periodic assessments of the maturity, coverage, and effectiveness of all cyber security controls. Cyber security control assessment must include an analysis of the controls’ effectiveness in reducing the likelihood and probability of a successful attack.

        Added: July 2021

      • OM-5.5.24

        Licensees should ensure that the periodic assessments of cyber threats and cyber security controls cover all critical technology systems. A risk treatment plan should be developed for all residual risks which are considered to be above the licensee’s risk tolerance levels.

        Added: July 2021

      • OM-5.5.25

        Conventional bank licensees must conduct regular technical assessments to identify potential security vulnerabilities for systems, applications, and network devices. The vulnerability assessments must be comprehensive and cover internal technology, external technology, and connections with third parties. Preferably monthly assessments are conducted for internal technology and weekly or more frequent assessments for external public facing services and systems.

        Added: July 2021

      • OM-5.5.26

        With respect to Paragraph OM-5.5.25, external technology refers to the licensee’s public facing technology such as websites, apps and external servers. Connections with third parties includes any API or other connections with fintech companies, technology providers, outsourcing service providers etc.

        Added: July 2021

      • OM-5.5.27

        Conventional bank licensees must have in place vulnerability and patch management processes which include remediation processes to ensure that the vulnerabilities identified are addressed and that security patches are applied where relevant within a timeframe that is commensurate with the risks posed by each vulnerability.

        Added: July 2021

      • OM-5.5.28

        All licensees must perform penetration testing of their systems, applications, and network devices to verify the robustness of the security controls in place at least twice a year. These tests must be used to simulate real world cyber-attacks on the technology environment and must:

        (a) Follow a risk-based approach based on an internationally recognized methodology, such as National Institute of Standards and Technology “NIST” and Open Web Application Security Project “OWASP”;
        (b) Include both Grey Box and Black Box testing in its scope;
        (c) Be conducted by qualified and experienced security professionals who are certified in providing penetration testing services;
        (d) Be performed by internal and external independent third parties which should be changed at least every two years; and
        (e) Be performed on either the production environment or on non-production exact replicas of the production environment.
        Added: July 2021

      • OM-5.5.29

        CBB may require additional red teaming exercises to be performed as needed. A red team is a group of ethical hackers with varying backgrounds, that would test the organization's blue team's threat response activity. The red team may attack 3 fronts: cyber, social (attack on people's behavior) and physical (attack on an organization's physical facility and or 3rd party premises). A red teaming exercise is like a penetration test in many ways but more targeted. The goal is not to find as many vulnerabilities as possible. The goal is to test the organization's detection and response capabilities. The red team will try to get in and access sensitive information in any way possible, as quietly as possible.

        Added: July 2021

      • OM-5.5.30

        Where licensees have been required to conduct a red teaming exercise the results of such an exercise must be provided to CBB within one month of the completion of the exercise together with a comprehensive plan to address any observed weaknesses.

        Added: July 2021

    • Cyber Incident Detection and Management

      • OM-5.5.31

        Conventional bank licensees must implement cyber security incident management processes to ensure timely detection, response and recovery for cyber security incidents. This includes implementing a Security Information & Event Management “SIEM” system.

        Added: July 2021

      • OM-5.5.32

        Licensees should consider the adequacy of the SIEM, keeping in view it should receive data on a real time basis from all relevant systems, applications, and network devices including operational and business systems. The monitoring system should be capable of identifying indicators of cyber incidents and initiate alerts, reports, and response activities based on the defined cyber security incident management process.

        Added: July 2021

      • OM-5.5.33

        Licensees should retain the logs and other information from the SIEM for detecting cyber incidents, including "low-and-slow" attacks, in order to facilitate incident investigations, for 5 years or longer.

        Added: July 2021

      • OM-5.5.34

        Once a cyber incident is detected, licensees should activate their containment measures, processes and technologies best suited to each type of cyber incident to prevent a cyber incident from inflicting further damage. This may involve, after considering the costs, business impact and operational risks, shutting down or isolating all or affected parts of their systems and networks as deemed necessary for containment and diagnosis.

        Added: July 2021

      • OM-5.5.35

        Conventional bank licensees must establish a Security Operations Centre (SOC) that is tailored to the needs of the licensee to detect, identify, investigate and respond to cyber incidents that could impact the licensee’s infrastructure, services and customers. Capabilities for log collection and monitoring SIEM must be built into the SOC. The SOC must maintain the licensee’s asset inventory and network diagrams.

        Added: July 2021

      • OM-5.5.36

        Conventional bank licensees must regularly identify, test, review and update current cyber security risk scenarios and the corresponding response plan. This is to ensure that the scenarios and response plan remain relevant and effective, taking into account changes in the operating environment, systems or the emergence of new cyber security threats. If any gaps are identified, the SIEM system must be updated with new use cases and rule sets which are capable of detecting the current cyber incident scenarios.

        Added: July 2021

      • OM-5.5.37

        The cyber incident scenario tests should include high-impact-low-probability events and scenarios that may result in failure. Common cyber incident scenarios include distributed denial of service (DDoS) attacks, system intrusion, data exfiltration and system disruption. Licensees should regularly use threat intelligence to update the scenarios so that they remain current and relevant. Licensees should periodically review current cyber incident scenarios for the purpose of assessing the licensee’s ability to detect and respond to these scenarios if they were to occur.

        Added: July 2021

      • OM-5.5.38

        Conventional bank licensees must ensure that critical cyber security incidents detected are escalated to an incident response team, management and the Board, in accordance with the licensee’s business continuity plan and crisis management plan, and that an appropriate response is implemented promptly. See also Paragraph OM-5.5.57 for the requirement to report to CBB.

        Added: July 2021

      • OM-5.5.39

        Conventional bank licensees should clearly define the roles, responsibilities and accountabilities for cyber incident detection and response activities to one or more named individuals that meet the pre-requisite role requirements. Potential conflicts of interest are minimised by ensuring a separation of implementation and oversight roles where possible. The roles should include:

        Incident Owner: An individual that is responsible for handling the overall cyber incident detection and response activities according to the incident type and services affected. The Incident Owner is delegated appropriate authority to manage the mitigation or preferably, removal of all impacts due to the incident.
        Spokesperson: An individual, from External Communications Unit or another suitable department, that is responsible for managing the communications strategy by consolidating relevant information and views from subject matter experts and the organisation’s management to update the internal and external stakeholders with consistent information.
        Record Keeper: An individual that is responsible for maintaining an accurate record of the cyber incident throughout its different phases, as well as documenting actions and decisions taken during and after a cyber incident. The record serves as an accurate source of reference for after-action reviews to improve future cyber incident detection and response activities.
        Added: July 2021

      • OM-5.5.40

        For the purpose of managing a critical cyber incident, the licensee should operate a situation room, and should include in the incident management procedure a definition of the authorities and responsibilities of staff members, internal and external reporting lines, communication channels, tools and detailed working procedures. The situation room or a war room is a physical room or a virtual room where relevant members of the management gather to handle a crisis in the most efficient manner possible.

        Added: July 2021

      • OM-5.5.41

        Licensees should record and document in an orderly manner the incidents that have been handled and the actions that were taken by the relevant functions. In particular, the licensee should maintain an "incident log" in which all the notifications, decisions and actions taken, in relation to cyber incidents, are documented, as close as possible to the time of their occurrence. It should also include the status of the issue whether it is open or has been resolved and person in charge of resolving the issue/incident. The logs should be stored and preserved in a secure and legally admissible manner.

        Added: July 2021

      • OM-5.5.42

        Licensees should utilise pre-defined taxonomy for classifying cyber incidents according to, for example, the type of incident, threat actors, threat vectors and repercussions; and a pre-established severity assessment framework to help gauge the severity of the cyber incident. For example, taxonomies that can be used when describing cyber incidents:

        (a) Describe the cause of the cyber incident (e.g. process failure, system failure, human error, external event, malicious action);
        (b) Describe whether the cyber incident due to a third-party service provider;
        (c) Describe the attack vector (e.g. malware, virus, worm, malicious hyperlink);
        (d) Describe the delivery channel used (e.g. e-mail, web browser, removable storage media);
        (e) Describe the impact (e.g. service degradation/disruption, service downtime, potential impact to customers, data leakage, unavailability of data, data destruction/corruption, tarnishing of reputation);
        (f) Describe the type of incident (e.g. zero-day attack, exploiting a known vulnerability, isolated incident);
        (g) Describe the intent (e.g. malicious, theft, monetary gain, fraud, political, espionage, opportunistic);
        (h) Describe the threat actor (e.g. script kiddies, amateur, criminal syndicate, hacktivist, nation state);

        The cyber incident severity may be classified as:

        (a) Severity 1 incident has or will cause a serious disruption or degradation of critical service(s) and there is potentially high impact on public confidence in the licensee.
        (b) Severity 2 incident has or will cause some degradation of critical services and there is medium impact on public confidence in the licensee.
        (c) Severity 3 incident has little or no impact to critical services and there is no visible impact on public confidence in the licensee.
        Added: July 2021

      • OM-5.5.43

        Licensees should determine the effects of the cyber incident on customers and to the wider banking system as a whole and report the results of such an assessment to CBB if it is determined that the cyber incident may have a systemic impact. Licensees may also share non-sensitive information on cyber incidents, effective cyber security strategies and risk management practices through malware information sharing platforms (MISP). Technical information, such as Indicators of Compromise (IoCs) or vulnerabilities exploited can be shared through MISP.

        Added: July 2021

      • OM-5.5.44

        Licensees should establish metrics to measure the impact of a cyber incident and to report to management the performance of response activities. Examples include:

        1. Metrics to measure impact of a cyber incident:
        (a) Duration of unavailability of critical functions and services;
        (b) Number of stolen records or affected accounts;
        (c) Volume of customers impacted;
        (d) Amount of lost revenue due to business downtime, including both existing and future business opportunities;
        (e) Percentage of service level agreements breached.
        2. Performance metrics for incident management:
        (a) Volume of incidents detected and responded via automation;
        (b) Dwell time (i.e. the duration a threat actor has undetected access until completely removed);
        (c) Recovery Point objectives (RPO) and recovery time objectives (RTO) satisfied.
        Added: July 2021

    • Recovery

      • OM-5.5.45

        Conventional bank licensees must identify the critical systems and services within its operating environment that must be recovered on a priority basis in order to provide certain minimum level of services during the downtime and determine how much time the licensee will require to return to full service and operations.

        Added: July 2021

      • OM-5.5.46

        Critical incidents are defined as incidents that trigger the BCP and the crisis management plan. Critical systems and services are those whose failure can have material impact on any of the following elements:

        a) Financial situation;
        b) Reputation;
        c) Regulatory, legal and contractual obligations; and
        d) Operational aspects and delivery of key products and services.
        Added: July 2021

      • OM-5.5.47

        Conventional bank licensees must define a program for recovery activities for timely restoration of any capabilities or services that were impaired due to a cyber security incident. Licensees must establish recovery time objectives (“RTOs”), i.e. the time in which the intended process is to be covered, and recovery point objectives (“RPOs”), i.e. point to which information used must be restored to enable the activity to operate on resumption”. Licensees must also consider the need for communication with third party service providers, customers and other relevant external stakeholders as may be necessary.

        Added: July 2021

      • OM-5.5.48

        Conventional bank licensees must ensure that all critical systems are able to recover from a cyber security breach within the licensee’s defined RTO in order to provide important services or some level of minimum services for a temporary period of time.

        Added: July 2021

      • OM-5.5.49

        Licensees should validate that recovered assets are free of compromise, fully functional and meet the security requirements before returning the systems to normal business operations. This includes performing checks on data to ensure data integrity. In some cases, licensees may need to use backup data kept in a disaster recovery site or plan for the reconstruction of data from external stakeholders such as business partners and customers.

        Added: July 2021

      • OM-5.5.50

        Conventional bank licensees must define a program for exercising the various response mechanisms, taking into account the various types of exercises such as attack simulations, "war games" and "table top" exercises, and with reference to the relevant stakeholders such as technical staff, crisis management team, decision-makers and spokespersons.

        Added: July 2021

      • OM-5.5.51

        Conventional bank licensees must define the mechanisms for ensuring accurate, timely and actionable communication of cyber incident response and recovery activities with the internal stakeholders, including to the board or designated committee of the board.

        Added: July 2021

      • OM-5.5.52

        A conventional bank licensee must ensure its business continuity plan is comprehensive and includes a recovery plan for its systems, operations and services arising from a cyber security incident.

        Added: July 2021

    • Cyber Security Insurance

      • OM-5.5.53

        Conventional bank licensees must arrange to seek cyber risk insurance cover from a suitable insurer, following a risk-based assessment of cyber security risk is undertaken by the respective licensee and independently verified by the insurance company. The insurance policy may include some or all of the following types of coverage, depending on the risk assessment outcomes:

        (a) Crisis management expenses, such as costs of notifying affected parties, costs of forensic investigation, costs incurred to determine the existence or cause of a breach, regulatory compliance costs, costs to analyse the insured’s legal response obligations;
        (b) Claim expenses such as costs of defending lawsuits, judgments and settlements, and costs of responding to regulatory investigations; and
        (c) Policy also provides coverage for a variety of torts, including invasion of privacy or copyright infringement. First-party coverages may include lost revenue due to interruption of data systems resulting from a cyber or denial of service attack and other costs associated with the loss of data collected by the insured.
        Added: July 2021

    • Training and Awareness

      • OM-5.5.54

        Conventional bank licensees must evaluate improvement in the level of awareness and preparedness to deal with cyber security risk to ensure the effectiveness of the training programmes implemented.

        Added: July 2021

      • OM-5.5.55

        The licensee must ensure that all employees receive adequate training on a regular basis, in relation to cyber security and the threats they could encounter, such as through testing employee reactions to simulated cyber attack scenarios. All relevant employees must be informed on the current cyber security breaches and threats. Additional training should be provided to ‘higher risk staff’.

        Added: July 2021

      • OM-5.5.56

        The conventional bank licensees must ensure that role specific cyber security training is provided on a regular basis to relevant staff including:

        (a) Executive board and senior management;
        (b) Cyber security roles;
        (c) IT staff; and
        (d) Any high-risk staff as determined by the licensee.
        Added: July 2021

    • Reporting to CBB

      • OM-5.5.57

        Upon occurrence or detection of any cyber security incident, whether internal or external, that compromises customer information or disrupts critical services that affect operations, conventional bank licensees must contact the CBB, immediately (within one hour), on 17547477 and submit Section A of the Cyber Security Incident Report (Appendix OM-1) to CBB’s cyber incident reporting email, incident.retail@cbb.gov.bh (for retail banks) or incident.wholesale@cbb.gov.bh (for wholesale banks), within two hours.

        Amended: April 2022
        Added: July 2021

      • OM-5.5.58

        Following the submission referred to in Paragraph OM-5.5.57, the licensee must submit to CBB Section B of the Cyber Security Incident Report (Appendix OM-1) within 10 calendar days of the occurrence of the cyber security incident. Licensees must include all relevant details in the report, including the full root cause analysis of the cyber security incident, its impact on the business operations and customers, and all measures taken by the licensee to stop the attack, mitigate its impact and to ensure that similar events do not recur. In addition, a weekly progress update must be submitted to CBB until the incident is fully resolved.

        Amended: April 2022
        Added: July 2021

      • OM-5.5.59

        With regards to the submission requirement mentioned in Paragraph OM-5.5.58, the licensee should submit the report with as much information as possible even if all the details have not been obtained yet.

        Added: July 2021

      • OM-5.5.60

        The comprehensive cyber security incident report referred to in Paragraph OM-5.5.58 should include the following details:

        (a) Date and time of discovery of the incident;
        (b) Time elapsed from detection to restoration of critical services;
        (c) Who discovered the incident (e.g. third-party service provider, customer, employee);
        (d) Type of cyber incident (e.g. DDoS, malware, intrusion/unauthorised access, hardware/firmware failure, system software bugs;)
        (e) Impact of the incident (e.g. impact to availability of services, loss of confidential information) including financial, legal and reputational impact and to which group of stakeholders (e.g. retail and corporate customers, settlement institutions, service providers);
        (f) Affected systems and technical details of the incident (e.g. source IP address and post, IOCs, tactics, techniques, procedures (TTPs));
        (g) Root cause analysis; and
        (h) Actions taken:
        • Escalation steps taken;
        • Stakeholders informed;
        • Response and recovery activities;
        • Lessons learnt.
        Added: July 2021

      • OM-5.5.61

        The penetration testing report as per Paragraph OM-5.5.28, along with the steps taken to mitigate the risks must be maintained by the licensee for a five year period from the date of the report and must be provided to CBB within two months following the end of the month where the testing took place, i.e. for a June test, the report must be submitted at the latest by 31st August and for a December test, by 28th February.

        Amended: April 2022
        Added: July 2021

  • OM-6 OM-6 Books and Records

    • OM-6.1 OM-6.1 General Requirements

      • OM-6.1.1

        The requirements in Section OM-6.1 apply to Bahraini Conventional bank licensees, with respect to the business activities of the whole bank (whether booked in Bahrain or in a foreign branch). The requirements in Section OM-6.1 also apply to overseas Conventional bank licensees, but only with respect to the business booked in their branch in Bahrain.

        Added: January 2020

      • OM-6.1.2

        With reference to Articles 59 and 60 of the CBB Law, all Conventional bank licensees must maintain books and records (whether in electronic or hard copy form) sufficient to produce financial statements and show a complete record of the business undertaken by a licensee. These records must be retained for at least 10 years according to Article 60 of the CBB Law.

        Added: January 2020

      • OM-6.1.3

        OM-6.1.2 includes accounts, books, files and other records (e.g. trial balance, general ledger, nostro/vostro statements, reconciliations and list of counterparties). It also includes records that substantiate the value of the assets, liabilities and off-balance sheet activities of the licensee (e.g. client activity files and valuation documentation).

        Added: January 2020

      • OM-6.1.4

        Unless otherwise agreed with the CBB in writing, records must be kept in either English or Arabic; or else accompanied by a certified English or Arabic translation. Records must be kept current. The records must be sufficient to allow an audit of the licensee's business or an on-site examination of the licensee by the CBB.

        Added: January 2020

      • OM-6.1.5

        If a licensee wishes to retain certain records in a language other than English or Arabic without translation, the licensee should write to the CBB, explaining which types of records it wishes to keep in a foreign language, and why systematically translating these may be unreasonable. Generally, only loan contracts or similar original transaction documents may be kept without translation. Where exemptions are granted by CBB, the licensee is nonetheless asked to confirm that it will make available certified translations of such documents, if requested by CBB for an inspection or other supervisory purpose.

        Added: January 2020

      • OM-6.1.6

        Translations produced in compliance with Rule OM-6.1.5 may be undertaken in-house, by an employee or contractor of the licensee, provided they are certified by an appropriate officer of the licensee.

        Added: January 2020

      • OM-6.1.7

        Records must be accessible at any time from within the Kingdom of Bahrain, or as otherwise agreed with the CBB in writing.

        Added: January 2020

      • OM-6.1.8

        Where older records have been archived, or in the case of records relating to overseas branches of Bahraini Conventional banks, the CBB may accept that records be accessible within a reasonably short time frame (e.g. within 5 business days), instead of immediately. The CBB may also agree similar arrangements for overseas Conventional banks, as well as Bahraini Conventional banks, where elements of record retention and management have been centralised in another group company, whether inside or outside of Bahrain.

        Added: January 2020

      • OM-6.1.9

        All original account opening documentation, due diligence and transaction documentation should normally be kept in Bahrain, if the business is booked in Bahrain. However, where a licensee books a transaction in Bahrain, but the transaction documentation is handled entirely by another (overseas) branch or affiliate of the licensee, the relevant transaction documentation may be held in the foreign office, provided electronic or hard copies are retained in Bahrain; the foreign office is located in a FATF member state; and the foreign office undertakes to provide the original documents should they be required.

        Added: January 2020

      • OM-6.1.10

        Licensees should also note that to perform effective consolidated supervision of a group (or sub-group), the CBB needs to have access to financial information from foreign operations of a licensee, in order to gain a full picture of the financial condition of the group: see Module BR (CBB Reporting), regarding the submission of consolidated financial data. If a licensee is not able to provide to the CBB full financial information on the activities of its branches and subsidiaries, it should notify the CBB of the fact, to agree alternative arrangements: these may include requiring the group to restructure or limit its operations in the jurisdiction concerned.

        Added: January 2020

      • OM-6.1.11

        In the case of Bahraini Conventional banks with branch operations overseas, where local record-keeping requirements are different, the higher of the local requirements or those contained in this Chapter must be followed.

        Added: January 2020

    • OM-6.2 OM-6.2 Transaction Records

      • OM-6.2.1

        Conventional bank licensees must keep completed transaction records for as long as they are relevant for the purposes for which they were made (with a minimum period in all cases of five years from the date when the transaction was completed — see Module Section FC-7.1). Records of completed transactions must be kept whether in hard copy or electronic format, for at least five years from the date of the transaction as per the Legislative Decree No. (54) of 2018 with respect to Electronic Transactions "The Electronic Communications and Transactions Law" and its amendments.

        Added: January 2020

      • OM-6.2.2

        Rule OM-6.2.1 applies to all transactions entered into by a Bahraini Conventional bank licensee, whether booked in Bahrain or in an overseas branch. With respect to overseas Conventional bank licensees, it applies only to transactions booked in the Bahrain branch.

        Added: January 2020

      • OM-6.2.3

        In the case of overseas Conventional bank licensees, Rule OM-6.2.1 therefore only applies to business booked in the Bahrain branch, not in the rest of the company.

        Added: January 2020

    • OM-6.3 OM-6.3 Other Records

      • Corporate Records

        • OM-6.3.1

          Conventional bank licensees must maintain the following records in original form or in hard copy at their premises in Bahrain:

          (a) Internal policies, procedures and operating manuals;
          (b) Corporate records, including minutes of shareholders', Directors' and management meetings;
          (c) Correspondence with the CBB and records relevant to monitoring compliance with CBB requirements;
          (d) Reports prepared by the Conventional bank licensee's internal and external auditors; and
          (e) Employee training manuals and records.
          Added: January 2020

        • OM-6.3.2

          In the case of Bahrain Conventional bank licensees, these requirements apply to the licensee as a whole, including any overseas branches. In the case of overseas Conventional bank licensees, all the requirements of Chapter OM-6 are limited to the business booked in their branch in Bahrain and the records of that branch (see Rule OM-6.1.1). They are thus not required to hold copies of shareholders' and Directors' meetings, except where relevant to the branch's operations.

          Added: January 2020

      • Customer Records

        • OM-6.3.3

          Record-keeping requirements with respect to customer records, including customer identification and due diligence records, are contained in Module FC (Financial Crime). These requirements address specific requirements under the Amiri Decree Law No. 4 of 2001, the standards promulgated by the Financial Action Task Force, as well as to the best practice requirements of the Basel Committee Core Principles methodology, and its paper on "Customer due diligence for banks".

          Added: January 2020

      • Promotional Schemes

        • OM-6.3.4

          Conventional bank licensees must maintain all material related to promotional schemes as outlined in Section BC-1.1 for a minimum period of 5 years.

          Added: January 2020

  • Appendix A Loss Event Type Classification

    Appendix A

    Event-Type Category (Level 1) Definition Categories (Level 2) Activity Examples (Level 3)
    Internal Fraud Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/discrimination events, which involves at least one internal party. Unauthorised Activity
    •   Transactions not reported (intentional)
    •   Transaction type unauthorised (w/monetary loss)
    •   Mismarking of position (intentional)
    Theft and Fraud
    •   Fraud/credit fraud/worthless deposits
    •   Theft/extortion/embezzlement/robbery
    •   Misappropriation of assets
    •   Malicious destruction of assets, forgery, check kiting and smuggling
    •   Account take-over/impersonation/etc.
    •   Tax non-compliance/evasion (wilful)
    •   Bribes/kickbacks
    •   Insider trading (not on firm's account)
    External fraud Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party. Theft and Fraud
    •   Theft/robbery
    •   Forgery and check kiting
    Systems Security
    •   Hacking damage
    •   Theft of information (w/monetary loss)
    Employment Practices and Workplace Safety Losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims, or from diversity/discrimination events. Employee Relations
    •   Compensation, benefit, termination issues
    •   Organised labour activity
    Safe Environment
    •   General liability (slip and fall, etc.)
    •   Employee health & safety rules events
    •   Workers compensation
    Diversity and Discrimination
    •   All discrimination types
    Clients, Products and Business Practices Losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product. Suitability, Disclosure and Fiduciary
    •   Fiduciary breaches/guideline violations
    •   Suitability/disclosure issues (KYC, etc.)
    •   Retail customer disclosure violations
    •   Breach of privacy
    •   Aggressive sales
    •   Account churning
    •   Misuse of confidential information
    •   Lender liability
        Improper Business or Market Practices
    •   Antitrust
    •   Improper trade/market practices
    •   Market manipulation
    •   Insider trading (on firm's account)
    •   Unlicensed activity
    •   Money laundering
    Product Flaws
    •   Product defects (unauthorised, etc.)
    •   Model errors
    Selection, Sponsorship and Exposure
    •   Failure to investigate client per guidelines
    •   Exceeding client exposure limits
    Advisory Activities
    •   Disputes over performance of advisory activities
    Damage to Physical Assets Losses arising from loss or damage to physical assets from natural disaster or other events. Disasters and other events
    •   Natural disaster losses
    •   Human losses from external sources (terrorism, vandalism)
    Business disruption and system failures Losses arising from disruption of business or system failures. Systems
    •   Hardware
    •   Software
    •   Telecommunications
    •   Utility outage/disruptions
    Execution, Delivery and Process Management Losses from failed transaction processing or process management, from relations with trade counterparties and vendors. Transaction Capture, Execution and Maintenance
    •   Miscommunication
    •   Data entry, maintenance or loading error
    •   Missed deadline or responsibility
    •   Model/system misoperation
    •   Accounting error/entity attribution error
    •   Other task misperformance
    •   Delivery failure
    •   Collateral management failure
    •   Reference data Maintenance
    Monitoring and Reporting
    •   Failed mandatory reporting obligation
    •   Inaccurate external report (loss incurred)
    Customer Intake and Documentation
    •   Client permissions/disclaimers missing
    •   Legal documents missing/incomplete
    Customer/Client Account Management
    •   Unapproved access given to accounts
    •   Incorrect client records (loss incurred)
    •   Negligent loss or damage of client assets
    Trade Counterparties
    •   Non-client counterparty misperformance
    •   Misc. non-client counterparty disputes
    Vendors and suppliers
    •   Outsourcing
    •   Vendor disputes

    Appendix B

    Set out below are examples of Shariah requirements that are to be complied with by the banks in respect of the financing contracts. The list is for guidance purposes and not conclusive and may vary according to the views of the various Shariah Supervisory Board (SSB):

    (a) Murabahah and Ijarah contracts
    •   The asset is in existence at the time of sale or lease or, in case of Ijarah, the lease contract should be preceded by acquisition of the usufruct of the asset except if the asset was agreed upon based on a general specification.
    •   The asset is legally owned by the bank when it is offered for sale.
    •   The asset is intended to be used by the buyer/lessee for activities or businesses permissible by Shariah; if the asset is leased back to its owner in the first lease period, it should not lead to contract of 'inah, by varying the rent or the duration.
    •   There is no late payment, penalty fee or increase in price in exchange for extending or rescheduling the date of payment of accounts receivable or lease receivable, irrespective of whether the debtor is solvent or insolvent.
    (b) Salam and Istisna' contracts
    •   A sale and purchase contract cannot be inter-dependent and inter-conditional on each other, such as Salam and Parallel Salam; Istisna' and Parallel Istisna'.
    •   It is not allowed to stipulate a penalty clause in respect of delay in delivery of a commodity that is purchased under Salam contract, however it is allowed under Istisna' or Parallel Istisna'.
    •   The subject-matter of an Istisna' contract may not physically exist upon entering into the contract.
    (c) Musharakah and Mudarabah contracts
    •   The capital of the bank is to be invested in Shariah compliant investments or business activities.
    •   A partner in Musharakah cannot guarantee the capital of another partner or a Midrib guarantees the capital of the Mudarabah.
    •   The purchase price of other partner's share in a Musharakah with a binding promise to purchase can only be set as per the market value or as per the agreement at the date of buying. It is not permissible, however, to stipulate that the share be acquired at its face value.
    Added: January 2020

  • Appendix B

  • Appendix C – Cyber Security Control Guidelines

    The Control Guidelines consists of five Core tasks which are defined below. These Functions are not intended to form a serial path or lead to a static desired end state. Rather, the Functions should be performed concurrently and continuously to form an operational culture that addresses the dynamic cyber security risk.

    Identify – Develop a bank-wide understanding to manage cyber security risk to systems, people, assets, data, and capabilities. The activities in the Identify Function are foundational for effective use of the Cyber Security Risk Management Framework. Understanding the business context, the resources that support critical functions, and the related cyber security risks enables a bank to focus and prioritize its efforts, consistent with its risk management strategy and business needs.

    Protect – Develop and implement appropriate safeguards to ensure delivery of critical services. The Protect Function supports the ability to limit or contain the impact of a potential cyber security incident.

    Detect – Develop and implement appropriate activities to identify the occurrence of a cyber security incident. The Detect Function enables timely discovery of cyber security events.

    Respond – Develop and implement appropriate activities to take action regarding a detected cyber security incident. The Respond Function supports the ability to contain the impact of a potential cyber security incident.

    Recover – Develop and implement appropriate activities to maintain plans for resilience and to restore any capabilities or services that were impaired due to a cyber security incident. The Recover Function supports timely recovery to normal operations to reduce the impact from a cyber security incident.

    Below is a listing of the specific cyber security activities that are common across all critical infrastructure sectors:

    IDENTIFY

    Asset Management: The data, personnel, devices, systems, and facilities that enable the bank to achieve business purposes are identified and managed consistent with their relative importance to organizational objectives and the bank’s risk strategy.

    1. Physical devices and systems within the bank are inventoried.
    2. Software platforms and applications within the bank are inventoried.
    3. Communication and data flows are mapped.
    4. External information systems are catalogued.
    5. Resources (e.g., hardware, devices, data, time, personnel, and software) are prioritized based on their classification, criticality, and business value.
    6. Cyber security roles and responsibilities for the entire workforce and third-party stakeholders (e.g., suppliers, customers, partners) are established.

    Business Environment: The bank’s mission, objectives, stakeholders, and activities are understood and prioritized; this information is used to inform cyber security roles, responsibilities, and risk management decisions.

    1. Priorities for the bank’s mission, objectives, and activities are established and communicated.
    2. Dependencies and critical functions for delivery of critical services are established.
    3. Resilience requirements to support delivery of critical services are established for all operating states (e.g. under duress/attack, during recovery, normal operations).

    Governance: The policies, procedures, and processes to manage and monitor the bank’s regulatory, legal, risk, environmental, and operational requirements are understood and inform the management of cyber security risk.

    1. Bank’s cyber security policy is established and communicated.
    2. Cyber security roles and responsibilities are coordinated and aligned with internal roles and external partners.
    3. Legal and regulatory requirements regarding cyber security, including privacy and civil liberties obligations, are understood and managed.
    4. Governance and risk management processes address cyber security risks.

    Risk Assessment: The bank understands the cyber security risk to bank’s operations (including mission, functions, image, or reputation), bank’s assets, and individuals.

    1. Asset vulnerabilities are identified and documented.
    2. Cyber threat intelligence is received from information sharing forums and sources.
    3. Threats, both internal and external, are identified and documented.
    4. Potential business impacts and likelihoods are identified.
    5. Threats, vulnerabilities, likelihoods, and impacts are used to determine risk.
    6. Risk responses are identified and prioritized.

    Risk Management Strategy: The bank’s priorities, constraints, risk tolerances, and assumptions are established and used to support operational risk decisions.

    1. Risk management processes are established, managed, and agreed to by bank’s stakeholders.
    2. The bank’s risk tolerance is determined and clearly expressed.
    3. The bank’s determination of risk tolerance is informed by its role in critical infrastructure and sector specific risk analysis.

    Third Party Risk Management: The bank’s priorities, constraints, risk tolerances, and assumptions are established and used to support risk decisions associated with managing third party risk. The bank has established and implemented the processes to identify, assess and manage supply chain risks.

    1. Cyber third party risk management processes are identified, established, assessed, managed, and agreed to by the bank’s stakeholders.
    2. Suppliers and third party partners of information systems, components, and services are identified, prioritized, and assessed using a cyber third party risk assessment process.
    3. Contracts with suppliers and third-party partners are used to implement appropriate measures designed to meet the objectives of an bank’s cyber security program.
    4. Suppliers and third-party partners are routinely assessed using audits, test results, or other forms of evaluations to confirm they are meeting their contractual obligations.
    5. Response and recovery planning and testing are conducted with suppliers and third-party providers.

    PROTECT

    Identity Management, Authentication and Access Control: Access to physical and logical assets and associated facilities is limited to authorized users, processes, and devices, and is managed consistent with the assessed risk of unauthorized access to authorized activities and transactions.

    1. Identities and credentials are issued, managed, verified, revoked, and audited for authorized devices, users and processes.
    2. Physical access to assets is managed and protected.
    3. Remote access is managed.
    4. Access permissions and authorizations are managed, incorporating the principles of least privilege and separation of duties
    5. Network integrity is protected (e.g., network segregation, network segmentation).
    6. Identities are proofed and bound to credentials and asserted in interactions
    7. Users, devices, and other assets are authenticated (e.g., single-factor, multi-factor) commensurate with the risk of the transaction (e.g., individuals’ security and privacy risks and other organizational risks).

    Awareness and Training: The bank’s personnel and partners are provided cyber security awareness education and are trained to perform their cyber security-related duties and responsibilities consistent with related policies, procedures, and agreements.

    1. All users are informed and trained on a regular basis.
    2. Bank’s security awareness programs are updated at least annually to address new technologies, threats, standards, and business requirements.
    3. Privileged users understand their roles and responsibilities.
    4. Third-party stakeholders (e.g., suppliers, customers, partners) understand their roles and responsibilities.
    5. The Board and senior management understand their roles and responsibilities.
    6. Physical and cyber security personnel understand their roles and responsibilities.
    7. Software development personnel receive training in writing secure code for their specific development environment and responsibilities.

    Data Security: Information and records (data) are managed consistent with the bank’s risk strategy to protect the confidentiality, integrity, and availability of information.

    1. Data-at-rest classified as critical or confidential is protected through strong encryption.
    2. Data-in-transit classified as critical or confidential is protected through strong encryption.
    3. Assets are formally managed throughout removal, transfers, and disposition
    4. Adequate capacity to ensure availability is maintained.
    5. Protections against data leaks are implemented.
    6. Integrity checking mechanisms are used to verify software, firmware, and information integrity.
    7. The development and testing environment(s) are separate from the production environment.
    8. Integrity checking mechanisms are used to verify hardware integrity.

    Information Protection Processes and Procedures: Security policies (that address purpose, scope, roles, responsibilities, management commitment, and coordination among organizational units), processes, and procedures are maintained and used to manage protection of information systems and assets.

    1. A baseline configuration of information technology/industrial control systems is created and maintained incorporating security principles (e.g. concept of least functionality).
    2. A System Development Life Cycle to manage systems is implemented
    3. Configuration change control processes are in place.
    4. Backups of information are conducted, maintained, and tested.
    5. Policy and regulations regarding the physical operating environment for bank’s assets are met.
    6. Data is destroyed according to policy.
    7. Protection processes are improved.
    8. Effectiveness of protection technologies is shared.
    9. Response plans (Incident Response and Business Continuity) and recovery plans (Incident Recovery and Disaster Recovery) are in place and managed.
    10. Response and recovery plans are tested.
    11. Cyber security is included in human resources practices (e.g., deprovisioning, personnel screening).
    12. A vulnerability management plan is developed and implemented.

    Maintenance: Maintenance and repairs of information system components are performed consistent with policies and procedures.

    1. Maintenance and repair of bank’s assets are performed and logged, with approved and controlled tools.
    2. Remote maintenance of bank’s assets is approved, logged, and performed in a manner that prevents unauthorized access.

    Protective Technology: Technical security solutions are managed to ensure the security and resilience of systems and assets, consistent with related policies, procedures, and agreements.

    1. Audit/log records are determined, documented, implemented, and reviewed in accordance with policy.
    2. Removable media is protected and its use restricted according to policy.
    3. The principle of least functionality is incorporated by configuring systems to provide only essential capabilities.
    4. Communications and control networks are protected.
    5. Mechanisms (e.g., failsafe, load balancing, hot swap) are implemented to achieve resilience requirements in normal and adverse situations.

    DETECT

    Anomalies and Events: Anomalous activity is detected and the potential impact of events is understood.

    1. A baseline of network operations and expected data flows for users and systems is established and managed.
    2. Detected events are analyzed to understand attack targets and methods.
    3. Event data are collected and correlated from multiple sources and sensors
    4. Impact of events is determined.
    5. Incident alert thresholds are established.

    Security Continuous Monitoring: The information system and assets are monitored to identify cyber security events and verify the effectiveness of protective measures.

    1. The network is monitored to detect potential cyber security events.
    2. The physical environment is monitored to detect potential cyber security events
    3. Personnel activity is monitored to detect potential cyber security events.
    4. Malicious code is detected.
    5. Unauthorized mobile code is detected.
    6. External service provider activity is monitored to detect potential cyber security events.
    7. Monitoring for unauthorized personnel, connections, devices, and software is performed.
    8. Vulnerability scans are performed at least quarterly.

    Detection Processes: Detection processes and procedures are maintained and tested to ensure awareness of anomalous events.

    1. Roles and responsibilities for detection are well defined to ensure accountability.
    2. Detection activities comply with all applicable requirements.
    3. Detection processes are tested.
    4. Event detection information is communicated.
    5. Detection processes are continuously improved.

    RESPOND

    Response Planning: Response processes and procedures are executed and maintained, to ensure response to detected cyber security incidents. Response plan is executed during or after an incident.

    Communications: Response activities are coordinated with internal and external stakeholders.

    1. Personnel know their roles and order of operations when a response is needed.
    2. Incidents are reported consistent with established criteria.
    3. Information is shared consistent with response plans.
    4. Coordination with internal and external stakeholders occurs consistent with response plans.
    5. Voluntary information sharing occurs with external stakeholders to achieve broader cyber security situational awareness.
    6. Incident response exercises and scenarios across departments are conducted at least annually.

    Analysis: Analysis is conducted to ensure effective response and support recovery activities.

    1. Notifications from detection systems are investigated.
    2. The impact of the incident is understood.
    3. Forensics are performed.
    4. Incidents are categorized consistent with response plans.
    5. Processes are established to receive, analyze and respond to vulnerabilities disclosed to the bank from internal and external sources (e.g. internal testing, security bulletins, or security researchers).

    Mitigation: Activities are performed to prevent expansion of an event, mitigate its effects, and resolve the incident.

    1. Incidents are contained.
    2. Incidents are mitigated.
    3. Newly identified vulnerabilities are mitigated or documented as accepted risks.

    Improvements: The response activities are improved by incorporating lessons learned from current and previous detection/response activities.

    1. Response plans incorporate lessons learned.
    2. Response strategies are updated.

    RECOVER

    Recovery Planning: Recovery processes and procedures are executed and maintained to ensure restoration of systems or assets affected by cyber security incidents. Recovery plan is executed during or after a cyber security incident.

    Improvements: Recovery planning and processes are improved by incorporating lessons learned into future activities.

    1. Recovery plans incorporate lessons learned.
    2. Recovery strategies are updated.

    Communications: Restoration activities are coordinated with internal and external parties (e.g. coordinating centers, Internet Service Providers, owners of attacking systems, victims, other CSIRTs, and vendors).

    1. Public relations are managed.
    2. Reputation is repaired after an incident.
    3. Recovery activities are communicated to internal and external stakeholders as well as executive and management teams.
    Added: July 2021

  • FC FC Financial Crime

    • FC-A FC-A Introduction

      • FC-A.1 FC-A.1 Purpose

        • Executive Summary

          • FC-A.1.1

            This Module applies, to all conventional bank licensees, a comprehensive framework of Rules and Guidance aimed at combating money laundering and terrorist financing. In so doing, it helps implement the FATF Recommendations on combating money laundering and financing of terrorism and proliferation, issued by the Financial Action Task Force (FATF), and the requirements of the Basel Committee 'Customer Due Diligence for Banks' paper, that are relevant to conventional bank licensees. (Further information on these can be found in Chapter FC-10.)

            Amended: October 2014
            October 07

          • FC-A.1.2

            The Module requires conventional bank licensees to have effective anti-money laundering ('AML') policies and procedures, in addition to measures for combating the financing of terrorism ('CFT'). The Module contains detailed requirements relating to customer due diligence, reporting and the role and duties of the Money Laundering Reporting Officer (MLRO). Furthermore, examples of suspicious activity are provided, to assist conventional bank licensees monitor transactions and fulfil their reporting obligations under Bahrain law.

            October 07

        • Legal Basis

          • FC-A.1.3

            This Module contains the Central Bank of Bahrain's ('CBB') Directive (as amended from time to time) regarding the combating money laundering and terrorism financing and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all conventional bank licensees.

            Amended: January 2022
            Amended: January 2011
            October 07

          • FC-A.1.4

            For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

            October 07

      • FC-A.2 FC-A.2 Module History

        • Changes to the Module

          • FC-A.2.1

            This Module was first issued in July 2004 by the BMA as part of the conventional principles volume. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

            October 07

          • FC-A.2.2

            When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

            October 07

          • FC-A.2.3

            A list of recent changes made to this Module is detailed in the table below:

            Module Ref.Change DateDescription of Changes
            FC-1.11.101/01/06New text for syndicated business
            FC-1.1.3, FC-1.2.8, FC-1.2.11, FC-3.1.401/01/06Correction of minor typos
            FC-A.110/2007Updated to reflect new CBB Law: new Rule FC-A.1.3 introduced Categorising this Module as a Directive.
            FC-5.3.110/2007Updated new e-mail address for the Compliance Directorate.
            FC-7.1.110/2007Guidance on customer instructions moved from OM-7.1
            FC-1.11.1 & FC-4.3.504/2008Minor guidance changes
            FC-1.6.5–607/2009New authorization requirement in respect of transfers of funds to and from foreign countries on behalf of charities.
            FC-4.1.410/2009Appointment of Deputy MLRO to require CBB prior approval.
            FC-A.1.301/2011Clarified legal basis.
            FC-1.6.4, FC-4.2.101/2011Corrected name of Compliance Directorate.
            FC-1.10A01/2011Added Section on Enhanced due diligence: cross border cash transactions equal to an above BD 6,000 by courier.
            FC-4.3.5 and FC-4.3.601/2011Corrected minor typo.
            FC-4.1.610/2011Clarified requirements for MLRO.
            FC-4.310/2011Amended Section to allow for CBB-approved consultancy firm to do required sample testing and report under Paragraph FC-4.3.1.
            FC-4.3.5 and FC-4.3.601/2012Amended to reflect the addition of approved consultancy firm.
            FC-1.601/2013Added requirement dealing with sport associations registered with the Bahrain Olympic Committee (BOC).
            FC-1.11.101/2013Updated reference to Bahrain Bourse ('BHB').
            FC-1.1.10 to FC-1.1.16, and FC-1.3.410/2013Amended and updated due diligence requirements, including requirements in dealing with non-resident accounts.
            FC-1.1.13 to FC-1.1.13C04/2014Added requirements regarding the opening of accounts for non-residents or companies under formation.
            FC10/2014Updated to reflect February 2012 update to FATF Recommendations
            FC-1.507/2016Aligned definition of PEPs with FATF and moved to Glossary.
            FC-4.1.107/2016Deleted reference for Appendix FC-4 as requirements are covered under Form 3.
            FC-5.2.307/2016Updated instructions for STR.
            FC-B.2.410/2016Deleted reference to Module PCD
            FC-1.2.9A01/2017Added guidance paragraph on CR printing
            FC-8.2.1AA04/2017Implementing and complying with the United Nations Security Council resolutions requirement.
            FC-1.1.2B10/2017Amended paragraph on CDD requirements.
            FC-1.1.13D — FC-1.1.13H10/2017Added guidance paragraphs on opening accounts for companies under formation.
            FC-1.2.710/2017Amended paragraph.
            FC-1.2.8A10/2017Added new paragraph on legal entities or legal arrangements CDD.
            FC-1.1210/2017Added new Section on Simplified CDD: For entities Operating under Regulatory Sandbox.
            FC-2.2.10 — FC-2.2.1110/2017Amended paragraphs on On-going CDD and Transaction Monitoring.
            FC-4.1.3A10/2017Added paragraph on combining the MLRO or DMLRO position with any other position within the licensee.
            FC-B.2.401/2018Amended paragraph.
            FC-1.8.101/2018Amended paragraph.
            FC-1.9.101/2018Amended paragraph.
            FC-1.11.101/2018Deleted sub-paragraph (g).
            FC-5.2.601/2018Amended paragraph.
            FC-8.1.401/2018Amended paragraph.
            FC-8.2.201/2018Deleted paragraph.
            FC-1.1.207/2018Deleted sub-paragraph (g).
            FC-1.10A07/2018Amended Section title deleting the threshold.
            FC-1.10A.207/2018Amended Paragraph deleting the threshold.
            FC-1.11.307/2018Deleted Paragraph.
            FC-1.11.807/2018Deleted Paragraph.
            FC-1.12.1007/2018Amended Paragraph number (f).
            FC-4.3.2C10/2018Amended Paragraph and changed from Guidance to Rule.
            FC-1.11.101/2019Amended references.
            FC-4.3.2 - FC-4.3.501/2019Amended references.
            FC-7.1.201/2019Amended references.
            FC-1.6.1A07/2019Amended Paragraph (GOYS changed to Ministry of Youth & Sport Affairs).
            FC-1.6.207/2019Amended Paragraph (GOYS changed to Ministry of Youth & Sport Affairs).
            FC-1.6.2A07/2019Added a new Paragraph on opening additional bank accounts for Clubs and Youth Centres.
            FC-1.6.507/2019Amended Paragraph on Fund Transfers.
            FC-1.3.410/2019Amended Paragraph on enhanced due diligence measures for non-GCC account holders.
            FC-3.2.410/2019Amended authority name.
            FC-4.2.110/2019Amended authority name
            FC-5.2.310/2019Amended authority name.
            FC-5.3.210/2019Amended authority address.
            FC-8.2.1AA10/2019Defined 'without delay'.
            FC-1.1.101/2020Amended Paragraph on procedures approval.
            FC-1.2.101/2020Added a new sub-Paragraph.
            FC-3.2.401/2020Amended Paragraph.
            FC-4.2.1(d)01/2020Amended sub-Paragraph.
            FC-4.3.501/2020Amended Paragraph on report submission date.
            FC-5.2.301/2020Amended Paragraph.
            FC-2.1.3 & FC-2.1.404/2020Added new Paragraphs on KPIs compliance with AML/CFT requirements.
            FC-1.1.1401/2021Amended Paragraph on account opening for non-residents.
            FC-3.1.10A01/2021Added a new Paragraph on rejecting payment transactions.
            FC-6.1.6A01/2021Added a new Paragraph on requirements to hire new employees.
            FC-1.1.1404/2021Amended Paragraph.
            FC-A.1.301/2022Amended Paragraph to replace financial crime with money laundering and terrorism financing
            FC-C01/2022New chapter on risk-based approach (RBA)
            FC-1.101/2022Amendments to general requirements to introduce additional rules for non-resident customers, amendments to customers onboarded prior to full completion of customer due diligence, digital onboarding etc.
            FC-1.201/2022Amendments to recognise E-KYC and electronic documents law.
            FC-1.301/2022Amendments to introduce additional guidance in enhanced due diligence requirements.
            FC-1.401/2022Amendments to introduce detailed requirements for digital onboarding and related requirements.
            FC-1.501/2022Amendments relating to digital onboarding of Bahraini PEPs.
            FC-1.11.7A01/2022Added a new Paragraph on not applying simplified CDD in situations where the licensee has identified high ML/TF/PF risks.
            FC-1.1201/2022Deleted Section on simplified due diligence requirements relating to Regulatory Sandbox since they will be covered separately in the Regulatory Sandbox Framework.
            FC-4.3.1B01/2022Amended Paragraph.
            FC-4.3.201/2022Amended Paragraph.
            FC-4.3.501/2022Amended Paragraph.
            FC-4.3.601/2022Deleted Paragraph.
            FC-6.1.6A01/2022Deleted Paragraph.
            FC-1.1.14A07/2022Added a new Paragraph on opening accounts for Bahraini national not physically present in Bahrain through a digital onboarding process.
            FC-C.2.301/2023Minor amendment to Paragraph.
            FC-1.1.1401/2023Amended Paragraph on opening accounts for non-residents.
            FC-1.1.14B01/2023Added a new Paragraph on opening accounts for non-residents with golden visa.
            FC-8.2.4(c)01/2023Added a new Sub-paragraph on reporting any frozen assets or actions taken.
            FC-1.1.12A10/2023Amended Sub-Paragraph on the enhanced diligence for the non-resident accounts.
            FC-1.1.12E10/2023Deleted Paragraph.
            FC-1.1.1410/2023Deleted Paragraph.
            FC-1.1.14A10/2023Deleted Paragraph.
            FC-1.1.14B10/2023Deleted Paragraph.
            FC-1.1.1710/2023Added a new Paragraph on CDD and Customer onboarding requirements.
            FC-1.1310/2023Added a new Section on reliance on third parties for customer due diligence.
            FC-1.101/2024Amended Section on the general requirements for companies under formation and new arrivals.
            FC-1.2.101/2024Amended Paragraph on customer due diligence.

        • Evolution of the Module

          • FC-A.2.4

            Prior to the introduction of Volume 1 (Conventional Banks) of the CBB Rulebook, the BMA had issued various circulars containing requirements covering different aspects of financial crime. These requirements were consolidated into Version 01 of this Module. Some of these requirements remain in their original form; others have since been updated. These circulars and their original location in this Module are listed below:

            Circular Ref. Date ofIssue Module Ref.(Version 01) Circular Subject
            BC/17/97 10 Nov 1997 FC-B.1 Money Laundering
            OG/308/89 14 Oct 1989 FC-B.1 Money Laundering
            EDBC/6/01 14 Oct 2001 FC-1, FC-4 — FC-7 Re: Money Laundering Regulation
            BC/1/02 27 Jan 2002 FC-3 FATF Special Recommendations on Terrorism Financing
            BC/3/00 5 Mar 2000 FC-1.5 Re: Accounts for Charity Organisations
            October 07

    • FC-B FC-B Scope of Application

      • FC-B.1 FC-B.1 License Categories

        • FC-B.1.1

          This Module applies to all conventional bank licensees, including branches of banks incorporated outside of Bahrain, and Bahrain-incorporated subsidiaries of overseas groups.

          October 07

        • FC-B.1.2

          The requirements of this Module are in addition to and supplement the requirements contained in Decree Law No. (4) of 2001 with respect to the prevention and prohibition of the laundering of money: this Law was subsequently updated, with the issuance of Decree Law No. 54 of 2006 with respect to amending certain provisions of Decree No. 4 of 2001 (collectively, 'the AML Law'). The AML Law imposes obligations generally in relation to the prevention of money laundering and the combating of the financing of terrorism, to all persons resident in Bahrain. All conventional bank licensees are therefore under the statutory obligations of that Law, in addition to the more specific requirements contained in this Module. Nothing in this Module is intended to restrict the application of the AML Law (a copy of which is contained in Part B of Volume 1 (conventional banks), under 'Supplementary Information'). Also included in Part B is a copy of Decree Law No. 58 of 2006 with respect to the protection of society from terrorism activities ('the anti-terrorism law').

          October 07

      • FC-B.2 FC-B.2 Overseas Subsidiaries and Branches

        • FC-B.2.1

          Conventional bank licensees must apply the requirements in this Module to all their branches and subsidiaries operating both in the Kingdom of Bahrain and in foreign jurisdictions. Where local standards differ, the higher standard must be followed. Conventional bank licensees must pay particular attention to procedures in branches or subsidiaries in countries that do not or insufficiently apply the FATF Recommendations and do not have adequate AML/CFT procedures, systems and controls (see also Section FC-8.1).

          Amended: October 2014
          October 07

        • FC-B.2.2

          Where another jurisdiction's laws or regulations prevent a conventional bank licensee (or any of its foreign branches or subsidiaries) from applying the same standards contained in this Module or higher, the licensee must immediately inform the CBB in writing.

          October 07

        • FC-B.2.3

          In such instances, the CBB will review alternatives with the conventional bank licensee. Should the CBB and the licensee be unable to reach agreement on the satisfactory implementation of this Module in a foreign subsidiary or branch, the conventional bank licensee may be required by CBB to cease the operations of the subsidiary or branch in the foreign jurisdiction in question.

          October 07

        • FC-B.2.4

          Financial groups (e.g. a bank with at least one financial entity as a subsidiary) must implement groupwide programmes against money laundering and terrorist financing, including policies and procedures for sharing information within the group for AML/CFT purposes, which must also be applicable, and appropriate to, all branches and subsidiaries of the financial group. These must include:

          (a) The development of internal policies, procedures and controls, including appropriate compliance management arrangements, and adequate screening procedures to ensure high standards when hiring employees;
          (b) An ongoing employee training programme;
          (c) An independent audit function to test the system;
          (d) Policies and procedures for sharing information required for the purposes of CDD and money laundering and terrorist financing risk management;
          (e) The provision at group-level compliance, audit, and/or AML/CFT functions of customer, account and transaction information from branches and subsidiaries when necessary for AML/CFT purposes; and
          (f) Adequate safeguards on the confidentiality and use of information exchanged.
          Amended: January 2018
          Amended: October 2016
          Added: October 2014

    • FC-C: FC-C: Risk Based Approach

      • FC-C.1 FC-C.1 Risk Based Approach

        • FC-C.1.1

          A conventional bank licensee must implement Risk Based Approach (RBA) in establishing an AML/CFT/CPF program and conduct ML/TF/PF risk assessments prior to and during the establishment of a business relationship and, on an ongoing basis, throughout the course of its relationship with the customer. The licensee must establish and implement policies, procedures, tools and systems commensurate with the size, nature and complexity of its business operations to support its RBA.

          Added: January 2022

        • FC-C.1.2

          A conventional bank licensee must perform enhanced measures where higher ML/TF/PF risks are identified to effectively manage and mitigate those higher risks.

          Added: January 2022

        • FC-C.1.3

          A conventional bank licensee must maintain and regularly review and update the documented risk assessment. The risk management and mitigation measures implemented by a licensee must be commensurate with the identified ML/TF/PF risks.

          Added: January 2022

        • FC-C.1.4

          Conventional bank licensees must allocate adequate financial, human and technical resources and expertise to effectively implement and take appropriate preventive measures to mitigate ML/TF/PF risks.

          Added: January 2022

      • FC-C.2 FC-C.2 Risk Assessment

        • FC-C.2.1

          A conventional bank licensee must ensure that it takes measures to identify, assess, monitor, manage and mitigate ML/TF/PF risks to which it is exposed and that the measures taken are commensurate with the nature, scale and complexities of its activities. The risk assessment must enable the licensee to understand how, and to what extent, it is vulnerable to ML/TF/PF.

          Added: January 2022

        • FC-C.2.2

          In the context of the risk assessment, “proliferation financing risk” refers to the potential breach, non-implementation or evasion of the targeted financial sanctions obligations referred to in FATF Recommendation 7.

          Added: January 2022

        • FC-C.2.3

          The risk assessment must be properly documented, regularly updated and communicated to the conventional bank licensee’s senior management. Licensees must have in place policies, controls and procedures, which are approved by senior management, to enable them to manage and mitigate the risks that have been identified. In conducting its risk assessments, the licensee must consider quantitative and qualitative information obtained from the relevant internal and external sources to identify, manage and mitigate these risks. This must include consideration of the risk and threat assessments using, national risk assessments, sectorial risk assessments, crime statistics, typologies, risk indicators, red flags, guidance and advisories issued by inter-governmental organisations, national competent authorities and the FATF, and AML/CFT/CPF mutual evaluation and follow-up reports by the FATF or associated assessment bodies.

          Amended: January 2023
          Added: January 2022

        • FC-C.2.4

          A conventional bank licensee must assess country/geographic risk, customer/investor risk, product/ service/ transactions risk and distribution channel risk taking into consideration the appropriate factors in identifying and assessing the ML/TF/PF risks, including the following:

          a) The nature, scale, diversity and complexity of its business, products and target markets;
          b) Products, services and transactions that inherently provide more anonymity, ability to pool underlying customers/funds, cash-based, face-to-face, non-face-to-face, domestic or cross-border;
          c) The volume and size of its transactions, nature of activity and the profile of its customers;
          d) The proportion of customers identified as high risk;
          e) Its target markets and the jurisdictions it is exposed to, either through its own activities or the activities of customers, especially jurisdictions with relatively higher levels of corruption or organised crime, and/or deficient AML/CFT/CPF controls and listed by FATF;
          f) The complexity of the transaction chain (e.g. complex layers of intermediaries and sub intermediaries or distribution channels that may anonymise or obscure the chain of transactions) and types of distributors or intermediaries;
          g) The distribution channels, including the extent to which the licensee deals directly with the customer and the extent to which it relies (or is allowed to rely) on third parties to conduct CDD and the use of technology; and
          h) Internal audit, external audit or regulatory inspection findings.
          Added: January 2022

        • Country/Geographic risk

          • FC-C.2.5

            Country/geographic area risk, in conjunction with other risk factors, provides useful information as to potential ML/TF/PF risks. Factors that may be considered as indicators of higher risk include:

            (a) Countries identified by credible sources, such as mutual evaluation or detailed assessment reports or published follow-up reports, as not having adequate AML/CFT/CPF systems;
            (b) Countries or geographic areas identified by credible sources as providing funding or support for terrorist activities, or that have designated terrorist organisations operating within their country;
            (c) Countries identified by credible sources as having significant levels of corruption or organized crime or other criminal activity, including source or transit countries for illegal drugs, human trafficking and smuggling and illegal gambling;
            (d) Countries subject to sanctions, embargoes or similar measures issued by international organisations such as the United Nations Organisation; and
            (e) Countries identified by credible sources as having weak governance, law enforcement, and regulatory regimes, including countries identified by the FATF statements as having weak AML/CFT/CPF regimes, and for which financial institutions should give special attention to business relationships and transactions.
            Added: January 2022

        • Customer/Investor risk

          • FC-C.2.6

            Categories of customers which may indicate a higher risk include:

            (a) The business relationship is conducted in unusual circumstances (e.g. significant unexplained geographic distance between the financial institution and the customer).
            (b) Non-resident customers;
            (c) Legal persons or arrangements that are personal asset-holding vehicles;
            (d) Companies that have nominee shareholders or shares in bearer form;
            (e) Businesses that are cash-intensive;
            (f) The ownership structure of the company appears unusual or excessively complex given the nature of the company’s business;
            (g) Customer is sanctioned by the relevant national competent authority for non-compliance with the applicable AML/CFT/CPF regime and is not engaging in remediation to improve its compliance;
            (h) Customer is a PEP or customer’s family members, or close associates are PEPs (including where a beneficial owner of a customer is a PEP);
            (i) Customer resides in or whose primary source of income originates from high-risk jurisdictions;
            (j) Customer resides in countries considered to be uncooperative in providing beneficial ownership information; customer has been mentioned in negative news reports from credible media, particularly those related to predicate offences for AML/CFT/CPF or to financial crimes;
            (k) Customer’s transactions indicate a potential connection with criminal involvement, typologies or red flags provided in reports produced by the FATF or national competent authorities;
            (l) Customer is engaged in, or derives wealth or revenues from, a high-risk cash-intensive business;
            (m) The number of STRs and their potential concentration on particular client groups;
            (n) Customers who have sanction exposure; and
            (o) Customer has a non-transparent ownership structure.
            Added: January 2022

        • Product/Service/Transactions risk

          • FC-C.2.7

            An overall risk assessment should include determining the potential risks presented by product, service, transaction or the delivery channel of the conventional bank licensee. A licensee should assess, using a RBA, the extent to which the offering of its product, service, transaction or the delivery channel presents potential vulnerabilities to placement, layering or integration of criminal proceeds into the financial system.

            Added: January 2022

          • FC-C.2.8

            Determining the risks of product, service, transaction or the delivery channel offered to customers may include a consideration of their attributes, as well as any associated risk mitigation measures. Products and services that may indicate a higher risk include:

            (a) Private banking;
            (b) Anonymous transactions (which may include cash);
            (c) Non-face-to-face business relationships or transactions;
            (d) Payment received from unknown or un-associated third parties;
            (e) Products or services that may inherently favour anonymity or obscure information about underlying customer transactions;
            (f) The geographical reach of the product or service offered, such as those emanating from higher risk jurisdictions;
            (g) Products with unusual complexity or structure and with no obvious economic purpose;
            (h) Products or services that permit the unrestricted or anonymous transfer of value (by payment or change of asset ownership) to an unrelated third party, particularly those residing in a higher risk jurisdiction; and
            (i) Use of new technologies or payment methods not used in the normal course of business by the conventional bank licensee.
            Added: January 2022

        • Distribution Channel Risk

          • FC-C.2.9

            A customer may request transactions that pose an inherently higher risk to the conventional bank licensee. Factors that may be considered as indicators of higher risk include:

            (a) A request is made to transfer funds to a higher risk jurisdiction/country/region without a reasonable business purpose provided; and
            (b) A transaction is requested to be executed, where the licensee is made aware that the transaction will be cleared/settled through an unregulated entity.
            Added: January 2022

          • FC-C.2.10

            A conventional bank licensee should analyse the specific risk factors, which arise from the use of intermediaries and their services. Intermediaries’ involvement may vary with respect to the activity they undertake and their relationship with the licensees. Licensees should understand who the intermediary is and perform a risk assessment on the intermediary prior to establishing a business relationship. Licensees and intermediaries should establish clearly their respective responsibilities for compliance with applicable regulation.

            Added: January 2022

    • FC-1 FC-1 Customer Due Diligence Requirements

      • FC-1.1 FC-1.1 General Requirements

        • Verification of Identity and Source of Funds

          • FC-1.1.1

            Conventional bank licensees must establish effective systematic internal procedures for establishing and verifying the identity of their customers and the source of their funds. Such procedures must be set out in writing and approved by the licensee's senior management and must be strictly adhered to.

            Amended: January 2020
            Amended: October 2014
            October 07

          • FC-1.1.2

            Conventional bank licensees must implement the customer due diligence measures outlined in Chapters 1, 2 and 3 when:

            (a) Establishing business relations with a new or existing customer;
            (b) A change to the signatory or beneficiary of an existing account or business relationship is made;
            (c) A significant transaction takes place;
            (d) There is a material change in the way that the bank account is operated or in the manner in which the business relationship is conducted;
            (e) Customer documentation standards change substantially;
            (f) The conventional bank licensee has doubts about the veracity or adequacy of previously obtained customer due diligence information;
            (g) [This Sub-paragraph was deleted in July 2018];
            (h) Carrying out wire transfers irrespective of amount; or
            (i) There is a suspicion of money laundering or terrorist financing.
            Amended: July 2018
            October 07

          • FC-1.1.2A

            Conventional bank licensees must understand, and as appropriate, obtain information on the purpose and intended nature of the business relationship.

            Added: October 2014

          • FC-1.1.2B

            Conventional bank licensees must conduct ongoing due diligence on the business relationship, including:

            a) Scrutinizing transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution's knowledge of the customer, their business and risk profile, including, where necessary, the source of funds; and
            b) Ensuring that documents, data or information collected under the CDD process is kept up-to-date and relevant, by undertaking reviews of existing records, particularly for higher risk categories of customers.
            Amended: October 2017
            Added: October 2014

          • FC-1.1.2C

            A conventional bank licensee must also review and update the customers’ risk profile based on their level of ML/TF/PF risk upon onboarding and regularly throughout the life of the relationship. The risk management and mitigation measures implemented by a licensee must be commensurate with the risk profile of the customer or type of customer.

            Added: January 2022

          • FC-1.1.3

            For the purposes of this Module, 'customer' includes counterparties such as financial markets counterparties, except where financial institutions are acting as principals where simplified due diligence measures may sometimes apply. These simplified measures are set out in Section FC 1.11.

            October 07

          • FC-1.1.4

            The CBB's specific minimum standards to be followed with respect to verifying customer identity and source of funds are contained in Section FC-1.2. Enhanced requirements apply under certain high-risk situations: these requirements are contained in Sections FC-1.3 to FC-1.8 inclusive. Additional requirements apply where a conventional bank licensee is relying on a professional intermediary to perform certain parts of the customer due diligence process: these are detailed in Section FC-1.9. Simplified customer due diligence measures may apply in defined circumstances: these are set out in Section FC-1.11.

            October 07

        • Verification of Third Parties

          • FC-1.1.5

            Conventional bank licensees must obtain a signed statement, in hard copy or through digital means from all new customers confirming whether or not the customer is acting on his own behalf or not. This undertaking must be obtained prior to conducting any transactions with the customer concerned.

            Amended: January 2022
            October 07

          • FC-1.1.6

            Where a customer is acting on behalf of a third party, the conventional bank licensee must also obtain a signed statement from the third party, confirming they have given authority to the customer to act on their behalf. Where the third party is a legal person, the conventional bank licensee must have sight of the original Board resolution (or other applicable document) authorising the customer to act on the third party's behalf, and retain a certified copy.

            October 07

          • FC-1.1.7

            Conventional bank licensees must establish and verify the identity of the customer and (where applicable) the party/parties on whose behalf the customer is acting, including the Beneficial Owner of the funds. Verification must take place in accordance with the requirements specified in this Chapter.

            October 07

          • FC-1.1.8

            Where financial services are provided to a minor or other person lacking full legal capacity, the normal identification procedures as set out in this Chapter must be followed. In the case of minors, licensees must additionally verify the identity of the parent(s) or legal guardian(s). Where a third party on behalf of a person lacking full legal capacity wishes to open an account, the licensee must establish the identity of that third party as well as the intended account holder.

            October 07

        • Anonymous and Nominee Accounts

          • FC-1.1.9

            Conventional bank licensees must not establish or keep anonymous accounts or accounts in fictitious names. Where conventional bank licensees maintain a nominee account, which is controlled by or held for the benefit of another person, the identity of that person must be disclosed to the conventional bank licensee and verified by it in accordance with the requirements specified in this Chapter.

            October 07

        • Timing of Verification

          • FC-1.1.10

            Conventional bank licensees must not commence a business relationship or undertake a transaction with a customer before completion of the relevant customer due diligence measures specified in Chapters 1, 2 and 3. However, verification may be completed after receipt of funds in the case of: Bahrain companies under formation which are being registered with the Ministry of Industry and Commerce; or newly arrived persons in Bahrain who are taking up employment or residence.

            Amended: January 2024
            Amended: January 2022
            Amended: October 2014
            Amended: October 2013
            October 07

          • FC-1.1.10A

            Conventional bank licensees must ensure they adopt adequate risk management procedures and perform risk assessments with respect to the conditions under which a customer may utilise the business relationship prior to verification.

            Added: Jan 2024

        • Companies under Formation

          • FC-1.1.10B

            Conventional bank licensees may open a bank account for the purpose of injection of initial capital (bank account for depositing capital) for a company under formation. No transfers or disbursement of funds must take place from such bank account until all the CDD requirements have been fully met.

            Added: Jan 2024

          • FC-1.1.10C

            Conventional bank licensees should only deny a request for opening accounts due to serious reasons or in case of suspicions arising from AML/CFT risk assessments. An example of a serious reason includes the detection of the fact that one of the shareholders of the company under formation appears in local, regional or international sanction lists.

            Added: Jan 2024

          • FC-1.1.10D

            Conventional bank licensees may open a separate bank account for the purpose of payment of formation expenses under conditions to be agreed with the customer.

            Added: Jan 2024

          • FC-1.1.10E

            All bank accounts of the company under formation must be closed and funds returned (see Paragraph FC-1.1.11) or suspended if the final CR is not received and the customer has not completed the customer due diligence requirements within a period of six months from the date of opening the account. The six-month period may be extended subject to a bilateral arrangement between the licensee and the customer.

            Added: Jan 2024

          • FC-1.1.10F

            For the purposes of account mentioned in Paragraph FC-1.1.10Dconventional bank licensees should follow the guidance below:

            (a) Licensees should receive from the customer, information regarding the nature of transactions, volume and prospective vendors during the formation stages;
            (b) Licensees may agree with the customer a limit for maximum payments to be made out of this account;
            (c) Licensees should ensure that payments from such accounts are only through EFTS; and
            (d) Licensees should integrate their systems with Sijilat system of the Ministry of Industry and Commerce for real-time access to allow opening of accounts in a timely and efficient manner.
            Added: Jan 2024

        • New Arrivals

          • FC-1.1.10G

            In the case of newly arrived persons in Bahrain who are taking up employment or residence, an account may be opened after undertaking initial customer due diligence and obtaining and verifying the identity information of the customer. However, no transfers or disbursement of funds must take place from such bank account until all the CDD requirements have been fully met.

            Added: Jan 2024

          • FC-1.1.10H

            In complying with the requirements of Paragraph FC-1.1.10G, examples of serious reasons for denying the request for opening an account may include failure to provide a valid passport. It may also include instances where a potential customer’s conduct or activity appears suspicious, or the customer’s name appears in one of the local, regional or international sanction lists.

            Added: Jan 2024

        • Incomplete Customer Due Diligence

          • FC-1.1.11

            Where a conventional bank licensee is unable to comply with the requirements specified in Chapters 1, 2 and 3, it must consider whether: it should freeze any funds received and file a suspicious transaction report; or to terminate the relationship; or not proceed with the transaction; or to return the funds to the counterparty in the same method as received.

            Amended: October 2013
            October 07

          • FC-1.1.12

            See also Chapter FC-5, which covers the filing of suspicious transaction reports. Regarding the return of funds to the counterparty, if funds are received in cash, funds should be returned in cash. If funds are received by wire transfer, they should be returned by wire transfer.

            Amended: October 2013
            October 07

        • Non-Resident Accounts

          • FC-1.1.12A

            Conventional retail bank licensees that open bank accounts or otherwise transact or deal with non-resident customers must have documented criteria for acceptance of business from such persons. For non-resident customers, conventional retail bank licensees must ensure the following:

            (a) Ensure there is a viable economic reason for the business relationship;
            (b) Perform enhanced due diligence where required in accordance with Paragraph FC-1.1.17;
            (c) Obtain and document the country of residence for tax purposes where relevant;
            (d) Obtain evidence of banking relationships in the country of residence;
            (e) Obtain the reasons for dealing with licensee in Bahrain;
            (f) Obtain an indicative transaction volume and/or value of incoming funds; and
            (g) Test that the persons are contactable without unreasonable delays.
            Amended: October 2023
            Added: January 2022

          • FC-1.1.12B

            Conventional retail bank licensees that open bank accounts or otherwise transact or deal with non-resident customers must have documented approved policies in place setting out the products and services which will be offered to non-resident customers. Such policy document must take into account a comprehensive risk assessment covering all risks associated with the products and services offered to non-residents. The licensee must also have detailed procedures to address the risks associated with the dealings with non-resident customers including procedures and processes relating to authentication, genuineness of transactions and their purpose.

            Added: January 2022

          • FC-1.1.12C

            Conventional bank licensees must not accept non-residents customers from high risk jurisdictions subject to a call for action by FATF.

            Added: January 2022

          • FC-1.1.12D

            Conventional bank licensees must take adequate precautions and risk mitigation measures before onboarding non-resident customers from high risk jurisdictions. The licensees must establish detailed assessments and criteria that take into consideration FATF mutual evaluations, FATF guidance, the country national risk assessments (NRAs) and other available guidance on onboarding and retaining non-resident customers from the following high risk jurisdictions:

            (a) Jurisdictions under increased monitoring by FATF;
            (b) Countries upon which United Nations sanctions have been imposed except those referred to in Paragraph FC-1.1.12C; and
            (c) Countries that are the subject of any other sanctions.
            Added: January 2022

          • FC-1.1.12E

            [This Paragraph was deleted in October 2023].

            Added: January 2022
            Deleted: October 2023

          • FC-1.1.12F

            All conventional bank licensees must establish systems and measures that are proportional to the risk relevant to each jurisdiction and this must be documented. Such a document must show the risks, mitigation measures for each jurisdiction and for each non-resident customer.

            Added: January 2022

          • FC-1.1.12G

            All conventional bank licensees must establish a comprehensive documented policy and procedures describing also the tools, methodology and systems that support the licensee’s processes for:

            (a) The application of RBA;
            (b) Customer due diligence;
            (c) Ongoing transaction monitoring; and
            (d) Reporting in relation to their transactions or dealings with nonresident customers.
            Added: January 2022

          • FC-1.1.12H

            Conventional bank licensees must ensure that only official/government documents are accepted for the purpose of information in Subparagraphs FC-1.2.1 (a) to (f) in the case of non-resident customers.

            Added: January 2022

          • FC-1.1.13

            [This Paragraph was deleted in January 2024].

            Deleted: January 2024
            Amended: January 2022
            Amended: April 2014
            Added: October 2013

          • FC-1.1.13A

            [This Paragraph was deleted in January 2024].

            Deleted: January 2024
            Added: April 2014
             

          • FC-1.1.13B

            [This Paragraph was deleted in January 2024].

            Deleted: January 2024
            Added: April 2014
             

          • FC-1.1.13C

            [This Paragraph was deleted in January 2024].

            Deleted: January 2024
            Added: April 2014
             

          • FC-1.1.13D

            [This Paragraph was deleted in January 2024].

            Deleted: January 2024
            Added: October 2017
             

          • FC-1.1.13E

            [This Paragraph was deleted in January 2024].

            Deleted: January 2024
            Added: October 2017
             

          • FC-1.1.13F

            [This Paragraph was deleted in January 2024].

            Deleted: January 2024
            Added: October 2017

          • FC-1.1.13G

            [This Paragraph was deleted in January 2024].

            Deleted: January 2024
            Added: October 2017

          • FC-1.1.13H

            [This Paragraph was deleted in January 2024].

            Deleted: January 2024
            Added: October 2017

          • FC-1.1.14

            [This Paragraph was deleted in October 2023].

            Deleted: October 2023
            Amended: January 2023
            Amended: April 2021
            Amended: January 2021
            Added: October 2013

          • FC-1.1.14A

            [This Paragraph was deleted in October 2023].

            Added: July 2022
            Deleted: October 2023

          • FC-1.1.14B

            [This Paragraph was deleted in October 2023].

            Added: January 2023
            Deleted: October 2023

          • FC-1.1.15

            Where a non-resident account is opened, the customer must be informed by the conventional bank licensee of any services which may be restricted or otherwise limited, as a result of their non-resident status.

            Added: October 2013

          • FC-1.1.16

            For purposes of Paragraph FC-1.1.15, examples of limitations or restrictions for non-resident accounts may include limitations on banking services being offered including the granting of loans or other facilities, including credit cards or cheque books.

            Added: October 2013

          • FC-1.1.17

            Conventional bank licensees must follow the below CDD and customer onboarding requirements:

              Enhanced Due Diligence Digital Onboarding
            Bahrainis and GCC nationals (wherever they reside) and expatriates resident in Bahrain No Yes
            Others Yes Yes
            Added: October 2023

      • FC-1.2 FC-1.2 Face-to-face Business

        • Natural Persons

          • FC-1.2.1

            If the customer is a natural person, conventional bank licensees must identify the person’s identity and obtain the following information before providing financial services of any kind:

            (a) Full legal name and any other names used;
            (b) Full permanent address (i.e. the residential address of the customer; a post office box is insufficient);
            (c) Date of birth;
            (d) Nationality;
            (e) Passport number (if the customer is a passport holder);
            (f) Current CPR or Iqama number (for residents of Bahrain or GCC states) or government issued national identification proof;
            (g) Telephone/fax number and email address (where applicable);
            (h) Occupation or public position held (where applicable);
            (i) Employer's name and address (if self-employed, the nature of the self-employment);
            (j) Type of account, and nature and volume of anticipated business dealings with the conventional bank licensee;
            (k) Signature of the customer(s);
            (l) Source of funds;
            (m) Reason for opening the account; and
            (n) Place of birth.
            Amended: January 2024
            Amended: January 2022
            Amended: January 2020
            October 07

          • FC-1.2.1A

            Conventional bank licensees obtaining the information and customer signature electronically using digital applications must comply with the applicable laws governing the onboarding/business relationship including but not limited to the Electronic Transactions Law (Law No. 54 of 2018) for the purposes of obtaining signatures as required in Subparagraph FC-1.2.1 (k) above.

            Added: January 2022

          • FC-1.2.2

            See Part B, Volume 1 (Conventional Banks), for Guidance Notes on source of funds (FC-1.2.1 (1)) and requirements for residents of Bahrain (FC-1.2.1 (c) & (f)).

            October 07

          • FC-1.2.2A

            Conventional retail bank licensees must verify the information in Paragraph FC-1.2.1 (a) to (f) by the following methods; at least one of the copies of the identification documents mentioned in (a) and (b) below must include a clear photograph of the customer:

            (a) Confirmation of the date of birth and legal name, by use of the national E-KYC application and if this is not practical, obtaining a copy of a current valid official original identification document (e.g. birth certificate, passport, national identity card, CPR or Iqama); and
            (b) Confirmation of the permanent residential address by use of the national E-KYC application and if this is not practical, obtaining a copy of a recent utility bill, bank statement or similar statement from another licensee or financial institution, or some form of official correspondence or official documentation card, such as national identity card or CPR, from a public/governmental authority, or a tenancy agreement or record of home visit by an official of the conventional bank licensee.
            Added: January 2022

          • FC-1.2.3

            Conventional wholesale bank licensees must verify the information in Paragraph FC-1.2.1 (a) to (f) by the following methods below; at least one of the copies of the identification documents mentioned in (a) and (b) below must include a clear photograph of the customer:

            (a) Confirmation of the date of birth and legal name, by taking a copy of a current valid official original identification document (e.g. birth certificate, passport, national identity card, CPR or Iqama);
            (b) Confirmation of the permanent residential address by taking a copy of a recent utility bill, bank statement or similar statement from another licensee or financial institution, or some form of official correspondence or official documentation card, such as CPR, from a public/governmental authority, or a tenancy agreement or record of home visit by an official of the conventional bank licensee; and
            (c) Where appropriate, direct contact with the customer by phone, letter or email to confirm relevant information, such as residential address information.
            Amended: January 2022
            October 07

          • FC-1.2.4

            Any document copied or obtained for the purpose of identification verification in a face-to-face customer due diligence process must be an original. An authorised official of the licensee must certify the copy, by writing on it the words 'original sighted', together with the date and his signature. Equivalent measures must be taken for electronic copies.

            Amended: January 2022
            October 07

          • FC-1.2.5

            Identity documents which are not obtained by an authorised official of the licensee in original form (e.g. due to a customer sending a copy by post following an initial meeting) must instead be certified (as per FC-1.2.4) by one of the following from a GCC or FATF member state:

            (a) A lawyer;
            (b) A notary;
            (c) A chartered/certified accountant;
            (d) An official of a government ministry;
            (e) An official of an embassy or consulate; or
            (f) An official of another licensed financial institution or of an associate company of the licensee.
            October 07

          • FC-1.2.6

            The individual making the certification under FC-1.2.5 must give clear contact details (e.g. by attaching a business card or company stamp). The conventional bank licensee must verify the identity of the person providing the certification through checking membership of a professional organisation (for lawyers or accountants), or through checking against databases/websites, or by direct phone or email contact.

            October 07

        • Legal Entities or Legal Arrangements (such as trusts)

          • FC-1.2.7

            If the customer is a legal entity or a legal arrangement such as a trust, the conventional bank licensee must obtain and record the following information from original identification documents, databases or websites, in hard copy or electronic form, to identify the customer and to take reasonable measures to verify its identity, legal existence and structure:

            (a) The entity's full name and other trading names used;
            (b) Registration number (or equivalent);
            (c) Legal form and proof of existence;
            (d) Registered address and trading address (where applicable);
            (e) Type of business activity;
            (f) Date and place of incorporation or establishment;
            (g) Telephone, fax number and email address;
            (h) Regulatory body or listing body (for regulated activities such as financial services and listed companies);
            (hh) The names of the relevant persons having a senior management position in the legal entity or legal arrangement;
            (i) Name of external auditor (where applicable);
            (j) Type of account, and nature and volume of anticipated business dealings with the conventional bank licensee; and
            (k) Source of funds.
            Amended: October 2017
            October 07

          • FC-1.2.8

            The information provided under FC-1.2.7 must be verified by obtaining certified copies of the following documents, as applicable (depending on the legal form of the entity):

            (a) Certificate of incorporation and/or certificate of commercial registration or trust deed;
            (b) Memorandum of association;
            (c) Articles of association;
            (d) Partnership agreement;
            (e) Board resolution seeking the banking services (only necessary in the case of private or unlisted companies);
            (f) Identification documentation of the authorised signatories to the account (certification not necessary for companies listed in a GCC/FATF state);
            (g) Copy of the latest financial report and accounts, audited where possible (audited copies do not need to be certified); and
            (h) List of authorised signatories of the company for the account and a Board resolution (or other applicable document) authorising the named signatories or their agent to operate the account (resolution only necessary for private or unlisted companies).
            Amended: October 2014
            Amended: January 2012
            October 07

          • FC-1.2.8A

            For customers that are legal persons, conventional bank licensees must identify and take reasonable measures to verify the identity of beneficial owners through the following information:

            (a) The identity of the natural person(s) who ultimately have a controlling ownership interest in a legal person, and
            (b) To the extent that there is doubt under (a) as to whether the person(s) with the controlling ownership interest is the beneficial owner(s), or where no natural person exerts control of the legal person or arrangement through other means; and
            (c) Where no natural person is identified under (a) or (b) above, the identity of the relevant natural person who holds the position of senior managing official.
            Added: October 2017

          • FC-1.2.9

            Documents obtained to satisfy the requirements in FC-1.2.8 above must be certified in the manner specified in FC-1.2.4 to FC-1.2.6.

            October 07

          • FC-1.2.9A

            For the purpose of Paragraph FC-1.2.8(a), the requirement to obtain a certified copy of the commercial registration, may be satisfied by obtaining a commercial registration abstract printed directly from the Ministry of Industry, Commerce and Tourism's website, through "SIJILAT Commercial Registration Portal".

            Added: January 2017

          • FC-1.2.10

            The documentary requirements in FC-1.2.8 above do not apply in the case of FATF/GCC listed companies: see Section FC-1.11 below. Also, the documents listed in FC-1.2.8 above are not exhaustive: for customers from overseas jurisdictions, documents of an equivalent nature may be produced as satisfactory evidence of a customer's identity.

            October 07

          • FC-1.2.11

            Licensees must also obtain and document the following due diligence information. These due diligence requirements must be incorporated in the licensee's new business procedures:

            (a) Enquire as to the structure of the legal entity or trust sufficient to determine and verify the identity of the ultimate beneficial owner of the funds, the ultimate provider of funds (if different), and the ultimate controller of the funds (if different);
            (b) Ascertain whether the legal entity has been or is in the process of being wound up, dissolved, struck off or terminated;
            (c) Obtain the names, country of residence and nationality of Directors or partners (only necessary for private or unlisted companies);
            (d) Require, through new customer documentation or other transparent means, updates on significant changes to corporate ownership and/or legal structure;
            (e) Obtain and verify the identity of shareholders holding 20% or more of the issued capital (where applicable). The requirement to verify the identity of these shareholders does not apply in the case of FATF/GCC listed companies;
            (f) In the case of trusts or similar arrangements, establish the identity of the settlor(s), trustee(s), and beneficiaries (including making such reasonable enquiries as to ascertain the identity of any other potential beneficiary, in addition to the named beneficiaries of the trust); and
            (g) Where a licensee has reasonable grounds for questioning the authenticity of the information supplied by a customer, conduct additional due diligence to confirm the above information.
            October 07

          • FC-1.2.12

            For the purposes of Paragraph FC-1.2.11, acceptable means of undertaking such due diligence might include taking bank references; visiting or contacting the company by telephone; undertaking a company search or other commercial enquiries; accessing public and private databases (such as stock exchange lists); making enquiries through a business information service or credit bureau; confirming a company's status with an appropriate legal or accounting firm; or undertaking other enquiries that are commercially reasonable.

            October 07

          • FC-1.2.13

            Where a licensee is providing investment management services to a regulated mutual fund, and is not receiving investors' funds being paid into the fund, it may limit its CDD to confirming that the administrator of the fund is subject to FATF-equivalent customer due diligence measures (see FC-1.9 for applicable measures). Where there are reasonable grounds for believing that investors' funds being paid into the fund are not being adequately verified by the administrator, then the licensee should consider terminating its relationship with the fund.

            October 07

      • FC-1.3 FC-1.3 Enhanced Customer Due Diligence: General Requirements

        • FC-1.3.1

          Enhanced customer due diligence must be performed on those customers identified as having a higher risk profile, and additional inquiries made or information obtained in respect of those customers.

          October 07

        • FC-1.3.2

          Licensees should examine, as far as reasonably possible, the background and purpose of all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or lawful purpose. Where the risks of money laundering or terrorist financing are higher, licensees should conduct enhanced CDD measures, consistent with the risks identified. In particular, they should increase the degree and nature of monitoring of the business relationship, in order to determine whether those transactions or activities appear unusual or suspicious. The additional inquiries or information referred to in Paragraph FC-1.3.1 include:

          (a) Obtaining additional information on the customer (e.g. occupation, volume of assets, information available through public databases, internet, etc.), and updating more regularly the identification data of customer and beneficial owner;
          (b) Obtaining additional information on the intended nature of the business relationship;
          (c) Obtaining information on the source of funds or source of wealth of the customer;
          (d) Obtaining information on the reasons for intended or performed transactions;
          (e) Obtaining the approval of senior management to commence or continue the business relationship;
          (f) Conducting enhanced monitoring of the business relationship, by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination;
          (g) Taking specific measures to identify the source of the first payment in this account and applying RBA to ensure that there is a plausible explanation in any case where the first payment was not received from the same customer’s account;
          (h) Obtaining evidence of a person's permanent address through the use of a credit reference agency search, or through independent governmental database or by home visit;
          (i) Obtaining a personal reference (e.g. by an existing customer of the conventional bank licensee);
          (j) Obtaining another licensed entity's reference and contact with the concerned licensee regarding the customer;
          (k) Obtaining documentation outlining the customer's source of wealth;
          (l) Obtaining additional documentation outlining the customer's source of income; and
          (m) Obtaining additional independent verification of employment or public position held.
          Amended: January 2022
          October 07

        • FC-1.3.3

          In addition to the general rule contained in Paragraph FC-1.3.1 above, special care is required in the circumstances specified in Sections FC-1.4 to FC-1.9 inclusive.

          October 07

        • FC-1.3.4

          Additional enhanced due diligence measures for non-resident account holders may include the following:

          (a) References provided by a regulated bank from a FATF country;
          (b) Certified copies of bank statements for a recent 3-month period; or
          (c) References provided by a known customer of the conventional bank licensee.
          Amended: October 2019
          Added: October 2013

      • FC-1.4 FC-1.4 Enhanced Customer Due Diligence: Non face-to-face Business and New Technologies

        • FC-1.4.1

          Conventional bank licensees must establish specific procedures for verifying customer identity where no face-to-face contact takes place.

          October 07

        • FC-1.4.2

          Where no face-to-face contact takes place, conventional bank licensees must take additional measures (to those specified in Section FC-1.2), in order to mitigate the potentially higher risk associated with such business. In particular, conventional bank licensees must take measures:

          (a) To ensure that the customer is the person they claim to be; and
          (b) To ensure that the address provided is genuinely the customer's.
          October 07

        • FC-1.4.3

          There are a number of checks that can provide a conventional bank licensee with a reasonable degree of assurance as to the authenticity of the applicant. They include:

          (a) Telephone contact with the applicant on an independently verified home or business number;
          (b) With the customer's consent, contacting an employer to confirm employment, via phone through a listed number or in writing;
          (c) Salary details appearing on recent bank statements;
          (d) Independent verification of employment (e.g.: through the use of a national E-KYC application, or public position held;
          (e) Carrying out additional searches (e.g. internet searches using independent and open sources) to better inform the customer risk profile;
          (f) Carrying out additional searches focused on financial crime risk indicator (i.e. negative news);
          (g) Evaluating the information provided with regard to the destination of fund and the reasons for the transaction;
          (h) Seeking and verifying additional information from the customer about the purpose and intended nature of the transaction or the business relationship; and
          (i) Increasing the frequency and intensity of transaction monitoring.
          Amended: January 2022
          October 07

        • FC-1.4.4

          Financial services provided using digital channels or internet pose greater challenges for customer identification and AML/CFT purposes. Conventional bank licensees must identify and assess the money laundering or terrorist financing risks relevant to any new technology or channel and establish procedures to prevent the misuse of technological developments in money laundering or terrorist financing schemes. Specifically, licensees which provide electronic and internet banking services to their customers, must establish systems or programmes to monitor, detect and highlight unusual transactions. The risk assessments must be consistent with the requirements in Section FC-C-2.

          Amended: January 2022
          October 07

        • FC-1.4.5

          Conventional bank licensees must identify and assess the money laundering or terrorist financing risks that may arise in relation to:

          (a) The development of new products and new business practices, including new delivery mechanisms; and
          (b) The use of new or developing technologies for both new and pre-existing products.
          Added: October 2014

        • FC-1.4.6

          For purposes of Paragraph FC-1.4.5, such a risk assessment consistent with the requirements in Section FC-C.2 and must take place prior to the launch of the new products, business practices or the use of new or developing technologies. Conventional bank licensees must take appropriate measures to manage and mitigate those risks.

          Amended: January 2022
          Added: October 2014

        • Enhanced Monitoring

          • FC-1.4.7

            Customers on boarded digitally must be subject to enhanced on-going account monitoring measures.

            Added: January 2022

          • FC-1.4.8

            The CBB may require a licensee to share the details of the enhanced monitoring and the on-going monitoring process for non face-to-face customer relationships.

            Added: January 2022

        • Licensee’s digital ID applications

          • FC-1.4.9

            Conventional bank licensees may use its digital ID applications that use secure audio-visual real time (live video conferencing/live photo selfies) communication means to identify the natural person.

            Added: January 2022

          • FC-1.4.10

            Conventional bank licensees must maintain a document available upon request for the use of its digital ID applications that includes all the following information:

            (a) A description of the nature of products and services for which the proprietary digital ID application is planned to be used with specific references to the rules in this Module for which it will be used;
            (b) A description of the systems and IT infrastructure that are planned to be used;
            (c) A description of the technology and applications that have the features for facial recognition or biometric recognition to authenticate independently and match the face and the customer identification information available with the licensee. The process and the features used in conjunction with video conferencing include, among others, face recognition, three-dimensional face matching techniques etc.;
            (d) “Liveness” checks created in the course of the identification process;
            (e) A description of the governance arrangements related to this activity including the availability of specially trained personnel with sufficient level of seniority; and
            (f) Record keeping arrangements for electronic records to be maintained and the relative audit.
            Added: January 2022

          • FC-1.4.11

            Conventional bank licensees that intend to use its digital ID application to identify the customer and verify identity information must meet the following additional requirements:

            (a) The digital ID application must make use of secure audio visual real time (live video conferencing /live photo selfies) technology to (i) identify the customer, (ii) verify his/her identity, and also (iii) ensure the data and documents provided are authentic;
            (b) The picture/sound quality must be adequate to facilitate unambiguous identification;
            (c) The digital ID application must include or be combined with capability to read and decrypt the information stored in the identification document’s machine readable zone (MRZ) for authenticity checks from independent and reliable sources;
            (d) Where the MRZ reader is with an outsourced provider, the licensee must ensure that such party is authorized to carry out such services and the information is current and up to date and readily available such that the licensee can check that the decrypted information matches the other information in the identification document;
            (e) The digital ID application has the features for allowing facial recognition or biometric recognition that can authenticate and match the face and the customer identification documents independently;
            (f) The digital ID solution has been tested by an independent expert covering the governance and control processes to ensure the integrity of the solution and underlying methodologies, technology and processes and risk mitigation. The report of the expert’s findings must be retained and available upon request;
            (g) The digital ID application must enable an ongoing process of retrieving and updating the digital files, identity attributes, or data fields which are subject to documented access rights and authorities for updating and changes; and
            (h) The digital ID application must have the geo-location features which must be used by the licensee to ensure that it is able to identify any suspicious locations and to make additional inquiries if the location from which a customer is completing the onboarding process does not match the location of the customer based on the information and documentation submitted.
            Added: January 2022

          • FC-1.4.12

            Conventional bank licensees using its digital ID application must establish and implement an approved policy which lays down the governance, control mechanisms, systems and procedures for the CDD which include:

            (a) A description of the nature of products and services for which customer due diligence may be conducted through video conferencing or equivalent electronic means;
            (b) A description of the systems, controls and IT infrastructure planned to be used;
            (c) Governance mechanism related to this activity;
            (d) Specially trained personnel with sufficient level of seniority; and
            (e) Record keeping arrangements for electronic records to be maintained and the relative audit trail.
            Added: January 2022

          • FC-1.4.13

            Conventional bank licensees must ensure that the information referred to in Paragraph FC-1.2.1 is collected in adherence to privacy laws and other applicable laws of the country of residence of the customer.

            Added: January 2022

          • FC-1.4.14

            Conventional bank licensees must ensure that the information referred to in Subparagraphs FC-1.2.1 (a) to (f) is obtained prior to commencing the digital verification such that:

            (a) The licensee can perform its due diligence prior to the digital interaction/communication and can raise targeted questions at such interaction/communication session; and
            (b) The licensee can verify the authenticity, validity and accuracy of such information through digital means (See Paragraph FC.1.4.16 below) or by use of the methods mentioned in Paragraph FC-1.2.3 and /or FC-1.4.3 as appropriate.
            Added: January 2022

          • FC-1.4.15

            The licensee must also obtain the customer’s explicit consent to record the session and capture images as may be needed.

            Added: January 2022

          • FC-1.4.16

            Conventional bank licensees must verify the information in Paragraph FC-1.2.1 (a) to (f) by the following methods below:

            (a) Confirmation of the date of birth and legal name by digital reading and authenticating current valid passport or other official original identification using machine readable zone (MRZ) or other technology which has been approved under paragraph FC-1.4.9, unless the information was verified using national E-KYC application;
            (b) Performing real time video calls with the applicant to identify the person and match the person’s face and /other features through facial recognition or bio-metric means with the office documentation, (e.g. passport, CPR);
            (c) Matching the official identification document, (e.g. passport, CPR) and related information provided with the document captured/displayed on the live video call; and
            (d) Confirmation of the permanent residential address by, unless the information was verified using national E-KYC application capturing live, the recent utility bill, bank statement or similar statement from another licensee or financial institution, or some form of official correspondence or official documentation card, such as national identity card or CPR, from a public/governmental authority, or a tenancy agreement or record of home visit by an official of the conventional bank licensee.
            Added: January 2022

          • FC-1.4.17

            For the purposes of Paragraph FC-1.4.16, actions taken for obtaining and verifying customer identity could include:

            (a) Collection: Present and collect identity attributes and evidence, either in person and/or online (e.g., by filling out an online form, sending a selfie photo, uploading photos of documents such as passport or driver’s license, etc.);
            (b) Certification: Digital or physical inspection to ensure the document is authentic and its data or information is accurate (for example, checking physical security features, expiration dates, and verifying attributes via other services);
            (c) De-duplication: Establish that the identity attributes and evidence relate to a unique person in the ID system (e.g., via duplicate record searches, biometric recognition and/or deduplication algorithms);
            (d) Verification: Link the individual to the identity evidence provided (e.g., using biometric solutions like facial recognition and liveness detection); and
            (e) Enrolment in identity account and binding: Create the identity account and issue and link one or more authenticators with the identity account (e.g., passwords, one-time code (OTC) generator on a smartphone, etc.). This process enables authentication.
            Added: January 2022

          • FC-1.4.18

            Not all elements of a digital ID system are necessarily digital. Some elements of identity proofing and enrolment can be either digital or physical (documentary), or a combination, but binding and authentication must be digital.

            Added: January 2022

          • FC-1.4.19

            Sufficient controls must be put in place to safeguard the data relating to customer information collected through the video conference and due regard must be paid to the requirements of the Personal Data Protection Law (PDPL). Additionally, controls must be put in place to minimize the increased impersonation fraud risk in such non face-to-face relationship where there is a chance that customer may not be who he claims he is.

            Added: January 2022

        • Overseas branches

          • FC-1.4.20

            Where conventional bank licensees intend to use a digital ID application in a foreign jurisdiction in which it operates, it must ensure that the digital ID application meets with the requirements under Paragraph FC-B.2.1.

            Added: January 2022

      • FC-1.5 FC-1.5 Enhanced Customer Due Diligence: Politically Exposed Persons ('PEPs')

        • FC-1.5.1

          Conventional bank licensees must have appropriate risk management systems to determine whether a customer or beneficial owner is a Politically Exposed Person ('PEP'), both at the time of establishing business relations and thereafter on a periodic basis. Conventional bank licensees must utilise publicly available databases and information to establish whether a customer is a PEP.

          Amended: July 2016
          Amended: October 2014
          October 07

        • FC-1.5.2

          Conventional bank licensees must establish a client acceptance policy with regard to PEPs, taking into account the reputational and other risks involved. Senior management approval must be obtained before a PEP is accepted as a customer. Licensees must not accept a non-Bahraini PEP as a customer based on customer due diligence undertaken using digital ID applications.

          Amended: January 2022
          Added: October 2007

        • FC-1.5.3

          Where an existing customer is a PEP, or subsequently becomes a PEP, enhanced monitoring and customer due diligence measures must include:

          (a) Analysis of complex financial structures, including trusts, foundations or international business corporations;
          (b) A written record in the customer file to establish that reasonable measures have been taken to establish both the source of wealth and the source of funds;
          (c) Development of a profile of anticipated customer activity, to be used in on-going monitoring;
          (d) Approval of senior management for allowing the customer relationship to continue; and
          (e) On-going account monitoring of the PEP's account by senior management (such as the MLRO).
          October 07

        • FC-1.5.3A

          In cases of higher risk business relationships with such persons, mentioned in Paragraph FC-1.5.1, conventional bank licensees must apply, at a minimum, the measures referred to in (b), (d) and (e) of Paragraph FC-1.5.3.

          Added: October 2014

        • FC-1.5.3B

          The requirements for all types of PEP must also apply to family or close associates of such PEPs.

          Added: October 2014

        • FC-1.5.3C

          For the purpose of Paragraph FC-1.5.3B, 'family' means spouse, father, mother, sons, daughters, sisters and brothers. 'Associates' are persons associated with a PEP whether such association is due to the person being an employee or partner of the PEP or of a firm represented or owned by the PEP, or family links or otherwise.

          Added: October 2014

        • FC-1.5.4

          [This Paragraph was deleted in July 2016 and the definition moved to the Glossary under Part B.]

          Deleted: July 2016
          Amended: October 2014
          October 07

      • FC-1.6 FC-1.6 Enhanced Due Diligence: Charities, Clubs and Other Societies

        • FC-1.6.1

          Financial services must not be provided to charitable funds and religious, sporting, social, cooperative and professional and other societies, until an original certificate authenticated by the relevant Ministry confirming the identities of those purporting to act on their behalf (and authorising them to obtain the said service) has been obtained.

          Amended: October 2014
          Amended: January 2013
          October 07

        • FC-1.6.1A

          For the purpose of Paragraph FC-1.6.1, for clubs and societies registered with the Ministry of Youth and Sport Affairs, conventional bank licensees must contact the Ministry to clarify whether the account may be opened in accordance with the rules of the Ministry. In addition, in the case of sport associations registered with the Bahrain Olympic Committee (BOC), conventional bank licensees must contact BOC to clarify whether the account may be opened in accordance with the rules of BOC.

          Amended: July 2019
          Added: January 2013

        • FC-1.6.2

          Conventional bank licensees are reminded that clubs and societies registered with the Ministry of Youth and Sport Affairs may only have one account with banks in Bahrain.

          Amended: July 2019
          Amended: January 2013
          October 07

        • FC-1.6.2A

          Pursuant to Article (20) of the Consolidated Financial Regulations for Sports Clubs issued in 2005, Conventional bank licensees must not change or open additional bank accounts for Clubs and Youth Centres without obtaining the prior approval of the Ministry of Youth and Sport Affairs.

          Added: July 2019

        • FC-1.6.3

          Charities should be subject to enhanced transaction monitoring by banks. Conventional bank licensees should develop a profile of anticipated account activity (in terms of payee countries and recipient organisations in particular).

          Amended: January 2013
          October 07

        • FC-1.6.4

          Conventional bank licensees must provide a monthly report of all payments and transfers of BD3,000 (or equivalent in foreign currencies) and above, from accounts held by charities registered in Bahrain. The report must be submitted to the CBB's Compliance Directorate Unit (see FC-5.3 for contact address), giving details of the amount transferred, account name, number and beneficiary name account and bank details. Conventional bank licensees must ensure that such transfers are in accordance with the spending plans of the charity (in terms of amount, recipient and country).

          Amended: January 2013
          Amended: January 2011
          October 07

        • FC-1.6.5

          Article 20 of Decree Law No. 21 of 1989 (issuing the Law of Social and Cultural Societies and Clubs and Private Organizations Operating in the Area of Youth and Sport and Private Institutions) provides that Conventional bank licensees must not accept or process any incoming or outgoing fund transfers in any form (wire transfer, cheques, etc.) from or to any foreign association on behalf of charity and non-profit organisations, societies and clubs licensed by the Ministry of Labour and Social Development or the Ministry of Youth and Sport Affairs without the prior approval of the relevant Ministry.

          Amended: July 2019
          Amended: October 2014
          Added July 09

        • FC-1.6.6

          The receipt of a Ministry letter mentioned in FC-1.6.5 above does not exempt the concerned bank from conducting normal CDD measures as outlined in other parts of this Module.

          Added July 09

      • FC-1.7 FC-1.7 Enhanced Due Diligence: 'Pooled Funds'

        • FC-1.7.1

          Where conventional bank licensees receive pooled funds managed by professional intermediaries (such as investment and pension fund managers, stockbrokers and lawyers or authorised money transferors), they must apply CDD measures contained in Section FC-1.9 to the professional intermediary. In addition, conventional bank licensees must verify the identity of the beneficial owners of the funds where required as shown in Paragraphs FC-1.7.2 or FC-1.7.3 below.

          October 07

        • FC-1.7.2

          Where funds pooled in an account are not co-mingled (i.e. where there are 'sub-accounts' attributable to each beneficiary), all beneficial owners must be identified by the conventional bank licensee, and their identity verified in accordance with the requirements in Section FC-1.2.

          Amended: October 2014
          October 07

        • FC-1.7.3

          For accounts held by intermediaries resident in Bahrain, where such funds are co-mingled, the conventional bank licensee must make a reasonable effort (in the context of the nature and amount of the funds received) to look beyond the intermediary and determine the identity of the beneficial owners or underlying clients, particularly where funds are banked and then transferred onward to other financial institutions (e.g. in the case of accounts held on behalf of authorised money transferors). Where, however, the intermediary is subject to equivalent regulatory and money laundering regulation and procedures (and, in particular, is subject to the same due diligence standards in respect of its client base) the CBB will not insist upon all beneficial owners being identified provided the conventional bank licensee has undertaken reasonable measures to determine that the intermediary has engaged in a sound customer due diligence process, consistent with the requirements in Section FC-1.8.

          Amended: October 2014
          October 07

        • FC-1.7.4

          For accounts held by intermediaries from foreign jurisdictions, the intermediary must be subject to requirements to combat money laundering and terrorist financing consistent with the FATF Recommendations and the intermediary must be supervised for compliance with those requirements. The bank must obtain documentary evidence to support the case for not carrying out customer due diligence measures beyond identifying the intermediary. The bank must satisfy itself that the intermediary has identified the underlying beneficiaries and has the systems and controls to allocate the assets in the pooled accounts to the relevant beneficiaries. The due diligence process contained in Section FC-1.8 must be followed.

          Amended: October 2014
          October 07

        • FC-1.7.5

          Where the intermediary is not empowered to provide the required information on beneficial owners (e.g. lawyers bound by professional confidentiality rules) or where the intermediary is not subject to the same due diligence standards referred to above, a bank must not permit the intermediary to open an account or allow the account to continue to operate, unless specific permission has been obtained in writing from the CBB.

          October 07

      • FC-1.8 FC-1.8 Enhanced Due Diligence for Correspondent Banking Relationships

        • FC-1.8.1

          Conventional bank licensees which intend to act as correspondent banks must gather sufficient information (e.g. through a questionnaire) about their respondent banks to understand the nature of the respondent's business. Factors to consider to provide assurance that satisfactory measures are in place at the respondent bank include:

          (a) Information about the respondent bank's ownership structure and management;
          (b) Major business activities of the respondent and its location (i.e. whether it is located in a FATF compliant jurisdiction) as well as the location of its parent (where applicable);
          (c) Where the customers of the respondent bank are located;
          (d) The respondent's AML/CFT controls;
          (e) The purpose for which the account will be opened;
          (f) Confirmation that the respondent bank has verified the identity of any third party entities that will have direct access to the correspondent banking services without reference to the respondent bank (e.g. in the case of 'payable through' accounts);
          (g) The extent to which the respondent bank performs on-going due diligence on customers with direct access to the account, and the condition of bank regulation and supervision in the respondent's country (e.g. from published FATF reports). Banks should take into account the country where the respondent bank is located and whether that country abides by the FATF Recommendations when establishing correspondent relationships with foreign banks. Banks should obtain where possible copies of the relevant laws and regulations concerning AML/CFT and satisfy themselves that respondent banks have effective customer due diligence measures consistent with the FATF Recommendations;
          (h) Confirmation that the respondent bank is able to provide relevant customer identification data on request to the correspondent bank; and
          (i) Whether the respondent bank has been subject to a money laundering or terrorist financing investigation.
          Amended: January 2018
          Amended: October 2014
          Amended: April 2011
          October 07

        • FC-1.8.2

          Conventional bank licensees must implement the following additional measures, prior to opening a correspondent banking relationship:

          (a) Complete a signed statement that outlines the respective responsibilities of each institution in relation to money laundering detection and monitoring responsibilities; and
          (b) Ensure that the correspondent banking relationship has the approval of senior management.
          Amended: April 2011
          October 07

        • FC-1.8.3

          Conventional bank licensees must refuse to enter into or continue a correspondent banking relationship with a bank incorporated in a jurisdiction in which it has no physical presence and which is unaffiliated with a regulated financial group (i.e. 'shell banks', see Section FC-1.10). Banks must pay particular attention when entering into or continuing relationships with respondent banks located in jurisdictions that have poor KYC standards or have been identified by the FATF as being 'non-cooperative' in the fight against money laundering/terrorist financing.

          October 07

      • FC-1.9 FC-1.9 Introduced Business from Professional Intermediaries

        • FC-1.9.1

          A conventional bank licensee may only accept customers introduced to it by other financial institutions or intermediaries, if it has satisfied itself that the financial institution or intermediary concerned is subject to FATF-equivalent measures and customer due diligence measures. Where conventional bank licensees delegate part of the customer due diligence measures to another financial institution or intermediary, the responsibility for meeting the requirements of Chapters 1 and 2 remains with the conventional bank licensee, not the third party.

          Amended: January 2018
          October 07

        • FC-1.9.2

          Conventional bank licensees may only accept introduced business if all of the following conditions are satisfied:

          (a) The customer due diligence measures applied by the introducer are consistent with those required by the FATF Recommendations;
          (b) A formal agreement is in place defining the respective roles of the licensee and the introducer in relation to customer due diligence measures. The agreement must specify that the customer due diligence measures of the introducer will comply with the FATF Recommendations;
          (c) The introducer immediately provides all necessary information required in Paragraph FC-1.2.1 or FC-1.2.7 and FC-1.1.2A pertaining to the customer's identity, the identity of the customer and beneficial owner of the funds (where different), the purpose of the relationship and, where applicable, the party/parties on whose behalf the customer is acting; also, the introducer has confirmed that the conventional bank licensee will be allowed to verify the customer due diligence measures undertaken by the introducer at any stage; and
          (d) Written confirmation is provided by the introducer confirming that all customer due diligence measures required by the FATF Recommendations have been followed and the customer's identity established and verified. In addition, the confirmation must state that any identification documents or other customer due diligence material can be accessed by the conventional bank licensee and that these documents will be kept for at least five years after the business relationship has ended.
          Amended: October 2014
          October 07

        • FC-1.9.3

          The conventional bank licensee must perform periodic reviews ensuring that any introducer on which it relies is in compliance with the FATF Recommendations. Where the introducer is resident in another jurisdiction, the conventional bank licensee must also perform periodic reviews to verify whether the jurisdiction is in compliance with the FATF Recommendations.

          Amended: October 2014
          October 07

        • FC-1.9.4

          Should the conventional bank licensee not be satisfied that the introducer is in compliance with the requirements of the FATF Recommendations, the licensee must conduct its own customer due diligence on introduced business, or not accept further introductions, or discontinue the business relationship with the introducer.

          Amended: October 2014
          October 07

      • FC-1.10 FC-1.10 Shell Banks

        • FC-1.10.1

          Conventional bank licensees must not establish business relations with banks, which have no physical presence or 'mind and management' in the jurisdiction in which they are licensed and which is unaffiliated with a regulated financial group ('shell banks'). Banks must not knowingly establish relations with banks that have relations with shell banks.

          October 07

        • FC-1.10.2

          Conventional bank licensees must make a suspicious transaction report to the Anti-Money Laundering Unit and the Compliance Directorate if they are approached by a shell bank or an institution they suspect of being a shell bank.

          October 07

      • FC-1.10A FC-1.10A Enhanced Due Diligence: Cross Border Cash Transactions by Courier

        Amended: July 2018

        • FC-1.10A.1

          The cross-border movement of cash funds warrants special attention under the FATF Recommendations where transactions are large in value (Recommendation 12), in addition to the general requirement under Recommendation 32 to verify monitor, declare and keep records of all cross-border transfers of cash. Cash shipments are therefore subject to inspection and investigation procedures by the Customs Directorate of the Kingdom of Bahrain. There are also certain specific legal measures mentioned below which are relevant to cross-border cash shipments. Under Article 4 of Decree Law No. 4 of 2001, licensees of the CBB are required to comply with the CBB's Rules and Regulations concerning the prevention and prohibition of money laundering, which include regulations concerning the cross-border movement of cash. Also, licensees' attention is drawn to the disclosure provisions of Decree Law No 54 of 2006 and Ministerial Order No 6 of 2008 with respect to cross-border transportation of funds (see Part B of the Rulebook for Decree Law No 54). Licensees are also reminded of the rules of the unified customs arrangements of the Gulf Cooperation Council as laid out in Decree Law No 10 of 2002. With respect to the above Law No. 4 of 2001 and the concerned parts of other legislation mentioned above, all money changers must implement the enhanced measures below in respect of all cash received from foreign countries or sold/transferred to foreign countries.

          Amended: October 2014
          Adopted: January 2011

        • FC-1.10A.2

          Cash coming into Bahrain via courier (whether a representative of a Bahrain money changer or a foreign institution) must be accompanied by original documentation stating the source of funds and identity of the originator of the funds. Furthermore, the documentation must state the full name and address of the beneficiary of the funds. This documentation must be signed in original by (a representative) of the originator of the cash. This means that where a courier is importing cash via any customs point of entry (e.g. via the Causeway or the Airport), the aforementioned courier must carry original documentation which clearly shows the source of funds and identity of the originator of the funds and the intended beneficiaries' names and address.

          Amended: July 2018
          Adopted: January 2011

        • FC-1.10A.3

          In the case of incoming cash, the courier must carry original documentation signed by the originator stating whether the cash shipment is for local use or for onward transmission.

          Adopted: January 2011

        • FC-1.10A.4

          If the imported cash is for onward transmission, the original documentation must provide the full name and address of the final beneficiaries, as well as the local recipient (e.g. the bank).

          Adopted: January 2011

        • FC-1.10A.5

          Failure to provide complete and detailed original signed documentation by the originator of the funds referred to in Paragraph FC-1.10A.2 may cause the cash shipment to be blocked, whereupon the blocking costs will be borne by the concerned money changer in Bahrain. Licensees are also reminded of the penalties and enforcement measures in Law No. 4 of 2001, Decree Law No. 54 of 2006, Ministerial Order No. 7 of 2001 issued by the Minister of Finance and National Economy, the rules of the unified customs arrangements of the Gulf Cooperation Council as laid out in Decree Law No. 10 of 2002 and the CBB Law No. 64 of 2006.

          Adopted: January 2011

      • FC-1.11 FC-1.11 Simplified Customer Due Diligence

        • FC-1.11.1

          Conventional bank licensees may apply simplified customer due diligence measures, as described in Paragraphs FC-1.11.2 to FC-1.11.7, if:

          (a) The customer is the Central Bank of Bahrain ('CBB'), the Bahrain Bourse ('BHB') or a licensee of the CBB;
          (b) The customer is a Ministry of a Gulf Cooperation Council ('GCC') or Financial Action Task Force ('FATF') member state government, a company in which a GCC or FATF government is a majority shareholder, or a company established by decree in the GCC;
          (c) The customer is a company listed on a GCC or FATF member state stock exchange (where the FATF state stock exchange has equivalent disclosure standards to those of the BHB);
          (d) The customer is a financial institution whose entire operations are subject to AML/CFT requirements consistent with the FATF Recommendations and it is supervised by a financial services supervisor in a FATF or GCC member state for compliance with those requirements;
          (e) The customer is a financial institution which is a subsidiary of a financial institution located in a FATF or GCC member state, and the AML/CFT requirements applied to its parent also apply to the subsidiary;
          (f) The customer is a borrower in a syndicated transaction where the agent bank is a financial institution whose entire operations are subject to AML/CFT requirements consistent with the FATF Recommendations and it is supervised by a financial services supervisor in a FATF or GCC member state for compliance with those requirements; or
          (g) [This sub-paragraph was deleted in January 2018].
          Amended: January 2019
          Amended: January 2018
          Amended: October 2014
          Amended: April 2013
          Amended: January 2013
          Amended: April 2008
          October 07

        • FC-1.11.2

          For customers falling under categories a-f specified in Paragraph FC-1.11.1, the information required under Paragraph FC-1.2.1 (for natural persons) or FC-1.2.7 (for legal entities or legal arrangements such as trusts) must be obtained. However, the verification and certification requirements in Paragraphs FC-1.2.3 and FC-1.2.8, and the due diligence requirements in Paragraph FC-1.2.11, may be dispensed with. Where the account is a correspondent banking relationship, enhanced due diligence applies. Refer to Section FC-1.8.

          October 07

        • FC-1.11.3

          [This Paragraph was deleted in July 2018.]

          Deleted: July 2018

        • FC-1.11.4

          Conventional bank licensees wishing to apply simplified due diligence measures as allowed for under Paragraph FC-1.11.1 must retain documentary evidence supporting their categorisation of the customer.

          October 07

        • FC-1.11.5

          Examples of such documentary evidence may include a printout from a regulator's website, confirming the licensed status of an institution, and internal papers attesting to a review of the AML/CFT measures applied in a jurisdiction.

          October 07

        • FC-1.11.6

          Conventional bank licensees may use authenticated SWIFT messages as a basis for confirmation of the identity of a financial institution under FC-1.11.1 (d) and (e) where it is dealing as principal. For customers coming under Paragraph FC-1.11.1 (d) and (e), conventional bank licensees must also obtain and retain a written statement from the parent institution of the subsidiary concerned, confirming that the subsidiary is subject to the same AML/CFT measures as its parent.

          October 07

        • FC-1.11.7

          Simplified customer due diligence measures must not be applied where a conventional bank licensee knows, suspects, or has reason to suspect, that the applicant is engaged in money laundering or terrorism financing or that the transaction is carried out on behalf of another person engaged in money laundering or terrorism financing.

          October 07

        • FC-1.11.7A

          Simplified customer due diligence measures must not be applied in situations where the licensee has identified high ML/TF/PF risks.

          Added: January 2022

        • FC-1.11.8

          [This Paragraph was deleted in July 2018.]

          Deleted: July 2018

      • FC-1.12 FC-1.12 [This Section has been deleted and moved to the CBB Regulatory Sandbox Framework in January 2022]

        • General Requirements

          • FC-1.12.1

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

          • FC-1.12.2

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

          • FC-1.12.3

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

          • FC-1.12.4

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

        • Face to Face Business

          • FC-1.12.5

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

          • FC-1.12.6

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

          • FC-1.12.7

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

          • FC-1.12.8

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

          • FC-1.12.9

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

          • FC-1.12.10

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Amended: July 2018
            Added: October 2017

          • FC-1.12.11

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

        • Non Face To Face Business and Technologies

          • FC-1.12.12

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

          • FC-1.12.13

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

          • FC-1.12.14

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: October 2017

      • FC-1.13 Reliance on Third Parties for Customer Due Diligence

        • FC-1.13.1

          Licensees are permitted to rely on third parties to perform elements of CDD measures and recordkeeping requirements stipulated in Chapter FC-1 related to customer and beneficial owner identity, verification of their identity and information on the purpose and intended nature of the business relationship with the licensee, subject to complying with the below:

          (a) Licensees remain ultimately responsible for CDD measures;
          (b) Licensees immediately obtain the relevant CDD information from the third party upon onboarding clients;
          (c) There is an agreement with the third party for the arrangement with clear contractual terms on the obligations of the third party;
          (d) The third party without delay makes available the relevant documentation relating to the CDD requirements upon request;
          (e) Licensees ensure that the third party is a financial institution that is regulated and supervised for, and has measures in place for compliance with, CDD and recordkeeping requirements in line with FATF Recommendations 10 and 11; and
          (f) For third parties based abroad, licensees must consider the information available on the level of country risk.
          Added: October 2023

        • FC-1.13.2

          Where a licensee relies on a third-party that is part of the same financial group, the licensee can consider that:

          (a) The requirements under Subparagraphs FC-1.13.1 (d) and (e) are complied with through its group programme, provided the group satisfies the following conditions:
          (i) The group applies CDD and record keeping requirements consistent with FATF Recommendations 10, 11 and 12 and has in place internal controls in accordance with FATF Recommendation 18; and
          (ii) The implementation of CDD, record keeping and AML/CFT measures are supervised at a group level by a financial services regulatory authority for compliance with AML/CFT requirements consistent with standards set by the FATF.
          (b) The requirement under Subparagraph FC-1.13.1 (f) is complied with if the country risk is adequately mitigated by the group’s AML/CFT policies.
          Added: October 2023

        • FC-1.13.3

          This Section does not apply to outsourcing or agency arrangements in which the outsourced entity applies the CDD measures on behalf of the delegating licensee, in accordance with its procedures.

          Added: October 2023

    • FC-2 FC-2 AML / CFT Systems and Controls

      • FC-2.1 FC-2.1 General Requirements

        • FC-2.1.1

          Conventional bank licensees must implement programmes against money laundering and terrorist financing which establish and maintain appropriate systems and controls for compliance with the requirements of this Module and which limit their vulnerability to financial crime. These systems and controls must be documented, and approved and reviewed annually by the Board of the licensee. The documentation, and the Board's review and approval, must be made available upon request to the CBB.

          Amended: October 2014
          October 07

        • FC-2.1.2

          The above systems and controls, and associated documented policies and procedures, should cover standards for customer acceptance, on-going monitoring of high-risk accounts, staff training and adequate screening procedures to ensure high standards when hiring employees.

          October 07

        • FC-2.1.3

          Conventional bank licensees must incorporate Key Performance Indicators (KPIs) to ensure compliance with AML/CFT requirements by all staff. The performance against the KPIs must be adequately reflected in their annual performance evaluation and in their remuneration (See also Paragraph HC-5.4.9A).

          Added: April 2020

        • FC-2.1.4

          In implementing the policies, procedures and monitoring tools for ensuring compliance with Paragraph FC-2.1.3, conventional bank licensees should consider the following:

          (a) The business policies and practices should be designed to reduce incentives for staff to expose the conventional bank licensee to AML/CFT compliance risk;
          (b) The performance measures of departments/divisions/units and personnel should include measures to address AML/CFT compliance obligations;
          (c) AML/CFT compliance breaches and deficiencies should be attributed to the relevant departments/divisions/units and personnel within the organisation as appropriate;
          (d) Remuneration and bonuses should be adjusted for AML/CFT compliance breaches and deficiencies; and
          (e) Both quantitative measures and human judgement should play a role in determining any adjustments to the remuneration and bonuses resulting from the above.
          Added: April 2020

      • FC-2.2 FC-2.2 On-going Customer Due Diligence and Transaction Monitoring

        • Risk Based Monitoring

          • FC-2.2.1

            Conventional bank licensees must develop risk-based monitoring systems appropriate to the complexity of their business, their number of clients and types of transactions. These systems must be configured to identify significant or abnormal transactions or patterns of activity. Such systems must include limits on the number, types or size of transactions undertaken outside expected norms; and must include limits for cash and non-cash transactions.

            October 07

          • FC-2.2.2

            Conventional bank licensees' risk-based monitoring systems should therefore be configured to help identify:

            (a) Transactions which do not appear to have a clear purpose or which make no obvious economic sense;
            (b) Significant or large transactions not consistent with the normal or expected behaviour of a customer; and
            (c) Unusual patterns of activity (relative to other customers of the same profile or of similar types of transactions, for instance because of differences in terms of volumes, transaction type, or flows to or from certain countries), or activity outside the expected or regular pattern of a customer's account activity.
            October 07

        • Automated Transaction Monitoring

          • FC-2.2.3

            Conventional bank licensees must consider the need to include automated transaction monitoring as part of their risk-based monitoring systems to spot abnormal or unusual flows of funds. In the absence of automated transaction monitoring systems, all transactions above BD 6,000 must be viewed as 'significant' and be captured in a daily transactions report for monitoring by the MLRO or a relevant delegated official, and records retained by the conventional bank licensee for five years after the date of the transaction.

            October 07

          • FC-2.2.4

            CBB would expect larger conventional bank licensees to include automated transaction monitoring as part of their risk-based monitoring systems. See also Chapters FC-4 and FC-7, regarding the responsibilities of the MLRO and record-keeping requirements.

            October 07

        • Unusual Transactions or Customer Behaviour

          • FC-2.2.5

            Where a conventional bank licensee's risk-based monitoring systems identify significant or abnormal transactions (as defined in FC-2.2.2 and FC-2.2.3), it must verify the source of funds for those transactions, particularly where the transactions are above the transactions threshold of BD 6,000. Furthermore, conventional bank licensees must examine the background and purpose to those transactions and document their findings.

            Amended: January 2022
            Added: October 07

          • FC-2.2.6

            The investigations required under FC-2.2.5 must be carried out by the MLRO (or relevant delegated official). The documents relating to these findings must be maintained for five years from the date when the transaction was completed (see also FC-7.1.1 (b)).

            October 07

          • FC-2.2.7

            Conventional bank licensees must consider instances where there is a significant, unexpected or unexplained change in customer activity.

            October 07

          • FC-2.2.8

            When an existing customer closes one account and opens another, the conventional bank licensee must review its customer identity information and update its records accordingly. Where the information available falls short of the requirements contained in Chapter FC-1, the missing or out of date information must be obtained and re-verified with the customer.

            October 07

          • FC-2.2.9

            Once identification procedures have been satisfactorily completed and, as long as records concerning the customer are maintained in line with Chapters FC-1 and FC-7, no further evidence of identity is needed when transactions are subsequently undertaken within the expected level and type of activity for that customer, provided reasonably regular contact has been maintained between the parties and no doubts have arisen as to the customer's identity.

            October 07

        • On-going Monitoring

          • FC-2.2.10

            Conventional bank licensees must take reasonable steps to:

            (a) Scrutinize transactions undertaken throughout the course of that relationship to ensure that transactions being conducted are consistent with the conventional bank licensee's knowledge of the customer, their business risk and risk profile; and
            (b) Ensure that they receive and maintain up-to-date and relevant copies of the identification documents specified in Chapter FC-1, by undertaking reviews of existing records, particularly for higher risk categories of customers. Conventional bank licensees must require all customers to provide up-to-date identification documents in their standard terms and conditions of business.
            Amended: October 2017
            October 07

          • FC-2.2.11

            Conventional bank licensees must review and update their customer due diligence information at least every three years, particularly for higher risk categories of customers. If, upon performing such a review, copies of identification documents are more than 12 months out of date, the conventional bank licensee must take steps to obtain updated copies as soon as possible.

            Amended: October 2017
            October 07

    • FC-3 FC-3 Money Transfers and Alternative Remittances

      • FC-3.1 FC-3.1 Electronic Transfers

        • Outward Transfers

          • FC-3.1.1

            Conventional bank licensees must include all required originator information and required beneficiary information details with the accompanying electronic transfers of funds they make on behalf of their customers. Non-routine transfers must not be batched, if batching increases the risks of money laundering or terrorist financing. This obligation does not apply where the transfer is made by a bank acting as principal or acting on behalf of another bank as principal such as in the case of payment of spot FX transactions.

            Amended: October 2014
            October 07

          • FC-3.1.2

            [This Paragraph has been deleted in October 2014 and its contents moved to Paragraph FC-3.1.5.]

            Deleted: October 2014

          • FC-3.1.3

            [This paragraph has been deleted in October 2014 and its contents moved to Paragraph FC-3.1.10.]

            Deleted: October 2014

        • Inward Transfers

          • FC-3.1.4

            Banks must:

            (a) Maintain records (in accordance with Chapter FC-7 of this Module) of all originator information received with an inward transfer; and
            (b) Carefully scrutinise inward transfers which do not contain originator information (i.e. full name, address and account number or a unique customer identification number). Licensees must presume that such transfers are 'suspicious transactions' and pass them to the MLRO for review for determination as to possible filing of an STR, unless (a), the originating institution is able to promptly (i.e. within two business days) advise the licensee in writing of the originator information upon the licensee's request; or (b) the originating institution and the licensee are acting on their own behalf (as principals).
            Amended: October 2014
            Amended: April 2011
            October 07

        • Cross-Border Wire Transfers

          • FC-3.1.5

            Information accompanying all wire transfers must always contain:

            (a) The name of the originator;
            (b) The originator account number or IBAN where such an account is used to process the transaction;
            (c) The originator's address, or national identity number, or customer identification number, or date and place of birth;
            (d) The name of the beneficiary; and
            (e) The beneficiary account number where such an account is used to process the transaction.
            Added: October 2014

          • FC-3.1.6

            In the absence of an account, a unique transaction reference number should be included which permits traceability of the transaction.

            Added: October 2014

          • FC-3.1.7

            Where several individual cross-border wire transfers from a single originator are bundled in a batch file for transmission to beneficiaries, they may be exempted from the requirements of Paragraph FC-3.1.5 in respect of originator information, provided that they include the originator's account number or unique transaction reference number (as described in Paragraph FC-3.1.6), and the batch file contains required and accurate originator information, and full beneficiary information, that is fully traceable within the beneficiary country.

            Added: October 2014

        • Domestic Wire Transfers

          • FC-3.1.8

            Information accompanying domestic wire transfers must also include originator information as indicated for cross-border wire transfers, unless this information can be made available to the beneficiary financial institution and the CBB by other means. In this latter case, the originating financial institution need only include the account number or a unique transaction reference number, provided that this number or identifier will permit the transaction to be traced back to the originator or the beneficiary.

            Added: October 2014

          • FC-3.1.9

            For purposes of Paragraph FC-3.1.8, the information should be made available by the originating financial institution within three business days of receiving the request either from the beneficiary financial institution or from the CBB.

            Added: October 2014

          • FC-3.1.10

            It is not necessary for the recipient institution to pass the originator information on to the beneficiary. The obligation is discharged simply by notifying the beneficiary financial institution of the originator information at the time the transfer is made.

            Added: October 2014

        • Rejecting Payment Transactions

          • FC-3.1.10A

            Licensees have the right to reject (i.e. reverse) any payment transaction where it has come to their knowledge that the relevant customer did not actually initiate the transaction instruction. The fund-transmitting licensees must file a Suspicious Transactions Report for such cases.

            Added: January 2021

        • Responsibilities of Originating, Intermediary and Beneficiary Banks

          • Originating Bank

            • FC-3.1.11

              The originating bank must ensure that wire transfers contain required and accurate originator information, and required beneficiary information.

              Added: October 2014

            • FC-3.1.12

              The originating bank must maintain all originator and beneficiary information collected in accordance with Paragraph FC-7.1.1.

              Added: October 2014

            • FC-3.1.13

              The originating bank must not execute the wire transfer if it does not comply with the requirements of Paragraphs FC-3.1.11 andFC-3.1.12}.

              Added: October 2014

          • Intermediary Bank

            • FC-3.1.14

              For cross-border wire transfers, banks processing an intermediary element of such chains of wire transfers must ensure that all originator and beneficiary information that accompanies a wire transfer is retained with it.

              Added: October 2014

            • FC-3.1.15

              Where technical limitations prevent the required originator or beneficiary information accompanying a cross-border wire transfer from remaining with a related domestic wire transfer, a record must be kept, for at least five years, by the receiving intermediary bank of all the information received from the originating bank or another intermediary bank.

              Added: October 2014

            • FC-3.1.16

              An intermediary bank must take reasonable measures to identify cross-border wire transfers that lack required originator information or required beneficiary information. Such measures must be consistent with straight-through processing.

              Added: October 2014

            • FC-3.1.17

              An intermediary bank must have effective risk-based policies and procedures for determining:

              (a) When to execute, reject, or suspend a wire transfer lacking required originator or required beneficiary information; and
              (b) The appropriate follow-up action.
              Added: October 2014

          • Beneficiary Bank

            • FC-3.1.18

              A beneficiary bank must take reasonable measures to identify cross-border wire transfers that lack required originator or required beneficiary information. Such measures may include post-event monitoring or real-time monitoring where feasible.

              Added: October 2014

            • FC-3.1.19

              For wire transfers, a beneficiary bank must verify the identity of the beneficiary, if the identity has not been previously verified, and maintain this information in accordance with Paragraph FC-7.1.1.

              Added: October 2014

            • FC-3.1.20

              A beneficiary bank must have effective risk-based policies and procedures for determining:

              (a) When to execute, reject, or suspend a wire transfer lacking required originator or required beneficiary information; and
              (b) The appropriate follow-up action.
              Added: October 2014

      • FC-3.2 FC-3.2 Remittances on behalf of Money or Value Transfer Service (MVTS) Providers

        • FC-3.2.1

          Whenever a conventional bank licensee uses the services of Authorised Money or Value Transfer Service Providers to effect the transfer of funds for a customer to a person or organisation in another country, that licensee must, in respect of the amount so transferred, maintain records of:

          (a) The identity of its customer(s) in accordance with Chapters FC-1 and FC-7 of this Module; and
          (b) The exact amount transferred for each such customer (particularly where a single transfer is effected for more than one customer).
          Amended: October 2014
          Amended: April 2011
          October 07

        • FC-3.2.1A

          For purposes of this Section, money or value transfer service (MVTS) refers to financial services that involve the acceptance of cash, cheques, other monetary instruments or other stores of value and the payment of a corresponding sum in cash or other form to a beneficiary by means of a communication, message, transfer, or through a clearing network to which the MVTS provider belongs. Transactions performed by such services can involve one or more intermediaries and a final payment to a third party, and may include new payment methods.

          Added: October 2014

        • FC-3.2.2

          Conventional bank licensees must be able to produce this information for inspection immediately upon request by the CBB.

          October 07

        • FC-3.2.3

          Conventional bank licensees must not transfer funds for customers to a person or organisation in another country by any means other than through an authorised MVTS provider. Where a licensee is found to be in contravention of this rule, the Central Bank will not hesitate to impose sanctions upon that licensee (and in serious cases may revoke that licensee's license).

          Amended: October 2014
          October 07

        • FC-3.2.4

          In the case of an authorised MVTS provider that controls both the ordering and the beneficiary side of a wire transfer, the authorised MVTS provider:

          (a) Must take into account all the information from both the ordering and beneficiary sides in order to determine whether an STR has to be filed; and
          (b) Must file an STR in any country affected by the suspicious wire transfer, and make relevant transaction information available to the Financial Intelligence Directorate.
          Amended: January 2020
          Amended: October 2019
          Added: October 2014

    • FC-4 FC-4 Money Laundering Reporting Officer (MLRO)

      • FC-4.1 FC-4.1 Appointment of MLRO

        • FC-4.1.1

          Conventional bank licensees must appoint a Money Laundering Reporting Officer ('MLRO') who is an approved person. The MLRO must be approved by CBB prior to his appointment. The licensee must submit to the CBB a completed Form 3, in accordance with Chapter LR-1A.

          Amended: July 2016
          October 07

        • FC-4.1.2

          The position of MLRO must not be combined with functions that create potential conflicts of interest, such as an internal auditor or business line head. The position of MLRO may not be outsourced.

          October 07

        • FC-4.1.3

          Subject to Paragraph FC-4.1.2, however, the position of MLRO may otherwise be combined with other functions in the conventional bank licensee, such as that of Compliance Officer, in cases where the volume and geographical spread of the business is limited and, therefore, the demands of the function are not likely to require a full time resource. Paragraph FC-4.1.6 requires that the MLRO is a Director or employee of the licensee, so the function may not be outsourced to a third party employee.

          October 07

        • FC-4.1.3A

          For the purpose of Paragraphs FC-4.1.2 and FC-4.1.3 above, conventional bank licensees must clearly state in the Application for Approved Person Status — Form 3 — when combining the MLRO or DMLRO position with any other position within the conventional bank licensee.

          Added: October 2017

        • FC-4.1.4

          Conventional bank licensees must appoint at least one deputy MLRO (or more depending on the scale and complexity of the licensee's operations) to act for the MLRO in his absence. The position of Deputy MLRO is a controlled function and the DMLRO is an approved person. The DMLRO must be approved by CBB prior to his appointment. The DMLRO must satisfy the conditions outlined in Subparagraphs FC-4.1.6 (d) to (g).

          Amended: July 2016
          Amended: October 2009
          October 2007

        • FC-4.1.5

          Conventional bank licensees should note that although the MLRO may delegate some of his functions, either within the licensee or even possibly (in the case of larger groups) to individuals performing similar functions for other group entities, that the responsibility for compliance with the requirements of this Module remains with the licensee and the designated MLRO.

          October 07

        • FC-4.1.6

          So that he can carry out his functions effectively, conventional bank licensees must ensure that their MLRO:

          (a) Is a member of senior management of the licensee;
          (b) Has a sufficient level of seniority within the conventional bank licensee, has the authority to act without interference from business line management and has direct access to the Board and senior management (where necessary);
          (c) Has sufficient resources, including sufficient time and (if necessary) support staff, and has designated a replacement to carry out the function should the MLRO be unable to perform his duties;
          (d) Has unrestricted access to all transactional information relating to any financial services provided by the conventional bank licensee to a customer, or any transactions conducted by the conventional bank licensee on behalf of that customer;
          (e) Is provided with timely information needed to identify, analyse and effectively monitor customer accounts;
          (f) Has access to all customer due diligence information obtained by the conventional bank licensee; and
          (g) Is resident in Bahrain.
          Amended: October 2011
          October 2007

        • FC-4.1.7

          [This Paragraph is left blank].

          Added: July 2012

        • FC-4.1.8

          In addition, conventional bank licensees must ensure that their MLRO is able to:

          (a) Monitor the day-to-day operation of its policies and procedures relevant to this Module; and
          (b) Respond promptly to any reasonable request for information made by the Anti-Money Laundering Unit or the CBB.
          October 07

        • FC-4.1.9

          If the position of MLRO falls vacant, the conventional bank licensee must appoint a permanent replacement (after obtaining CBB approval), within 120 calendar days of the vacancy occurring. Pending the appointment of a permanent replacement, the licensee must make immediate interim arrangements (including the appointment of an acting MLRO) to ensure continuity in the MLRO function's performance. These interim arrangements must be approved by the CBB.

          October 07

      • FC-4.2 FC-4.2 Responsibilities of the MLRO

        • FC-4.2.1

          The MLRO is responsible for:

          (a) Establishing and maintaining the conventional bank licensee's AML/CFT policies and procedures;
          (b) Ensuring that the licensee complies with the AML Law and any other applicable AML/CFT legislation and regulations;
          (c) Ensuring day-to-day compliance with the licensee's own internal AML/CFT policies and procedures;
          (d) Acting as the conventional bank licensee's main point of contact in respect of handling internal suspicious transaction reports from the licensee's staff (refer to Section FC-5.1) and as the main contact for the Financial Intelligence Directorate, the CBB and other concerned bodies regarding AML/CFT;
          (e) Making external suspicious transactions reports to the Financial Intelligence Directorate and the Compliance Directorate (refer to Section FC-5.2);
          (f) Taking reasonable steps to establish and maintain adequate arrangements for staff awareness and training on AML/CFT matters (whether internal or external), as per Chapter FC-5;
          (g) Producing annual reports on the effectiveness of the licensee's AML / CFT controls, for consideration by senior management, as per Paragraph FC-4.3.3;
          (h) On-going monitoring of what may, in his opinion, constitute high-risk customer accounts; and
          (i) Ensuring that the conventional bank licensee maintains all necessary CDD, transactions, STR and staff training records for the required periods (refer to Section FC-7.1).
          Amended: October 2020
          Amended: October 2019
          Amended: October 2014
          Amended: January 2011
          October 07

      • FC-4.3 FC-4.3 Compliance Monitoring

        • Annual Compliance Review

          • FC-4.3.1

            Conventional bank licensees must take appropriate steps to identify and assess their money laundering and terrorist financing risks (for customers, countries or geographic areas; and products, services, transactions or delivery channels). They must document those assessments in order to be able to demonstrate their basis, keep these assessments up to date, and have appropriate mechanisms to provide risk assessment information to the CBB. The nature and extent of any assessment of money laundering and terrorist financing risks must be appropriate to the nature and size of the business.

            Added: October 2014

          • FC-4.3.1A

            Conventional bank licensees should always understand their money laundering and terrorist financing risks, but the CBB may determine that individual documented risk assessments are not required, if the specific risks inherent to the sector are clearly identified and understood.

            Added: October 2014

          • FC-4.3.1B

            A conventional bank licensee must review the effectiveness of its AML/CFT procedures, systems and controls at least once each calendar year. The review must cover the conventional bank licensee and its branches and subsidiaries both inside and outside the Kingdom of Bahrain. A conventional bank licensee must monitor the implementation of those controls and enhance them if necessary. The scope of the review must include:

            (a) A report, containing the number of internal reports made in accordance with Section FC-5.1, a breakdown of all the results of those internal reports and their outcomes for each segment of the licensee's business, and an analysis of whether controls or training need to be enhanced;
            (b) A report, indicating the number of external reports made in accordance with Section FC-5.2 and, where a conventional bank licensee has made an internal report but not made an external report, noting why no external report was made;
            (c) A sample test of compliance with this Module's customer due diligence requirements; and
            (d) A report as to the quality of the conventional bank licensee's anti-money laundering procedures, systems and controls, and compliance with the AML Law and this Module.
            Amended: January 2022
            Amended: October 2014
            October 07

          • FC-4.3.2

            The reports listed under Paragraph FC-4.3.1B (a) and (b) must be made by the MLRO. The sample testing and report required under Paragraph FC-4.3.1B (c) and (d) must be made by the licensee's external auditor or a consultancy firm approved by the CBB.

            Amended: January 2022
            Amended: January 2019
            Amended: October 2011
            October 2007

          • FC-4.3.2A

            In order for a consultancy firm to be approved by the CBB for the purposes of Paragraph FC-4.3.2, such firm should provide the CBB's Compliance Directorate with:

            (a) A sample AML/CFT report prepared for a financial institution;
            (b) A list of other AML/CFT related work undertaken by the firm;
            (c) A list of other audit/review assignments undertaken, specifying the nature of the work done, date and name of the licensee; and
            (d) An outline of any assignment conducted for or in cooperation with an international audit firm.
            Added: October 2011

          • FC-4.3.2B

            The firm should indicate which personnel (by name) will work on the report (including, where appropriate, which individual will be the team leader) and demonstrate that all such persons have appropriate qualifications in one of the following areas:

            (a) Audit;
            (b) Accounting;
            (c) Law; or
            (d) Banking/Finance.
            Added: October 2011

          • FC-4.3.2C

            Conventional bank licensees must ensure that the personnel conducting the review are qualified, skilled and have adequate experience to conduct such a review. At least two persons working on the report (one of whom should be the team leader) must have:

            (a) A minimum of 5 years professional experience dealing with AML/CFT issues; and
            (b) Formal AML/CFT training.
            Amended: October 2018
            Added: October 2011

          • FC-4.3.2D

            Submission of a curriculum vitae for all personnel to be engaged on the report is encouraged for the purposes of evidencing the above requirements.

            Added: October 2011

          • FC-4.3.2E

            Upon receipt of the above required information, the CBB Compliance Directorate will assess the firm and communicate to it whether it meets the criteria required to be approved by the CBB for this purpose. The CBB may also request any other information it considers necessary in order to conduct the assessment.

            Added: October 2011

          • FC-4.3.3

            The reports listed under Paragraph FC-4.3.1B must be submitted to the licensee's Board, for it to review and commission any required remedial measures, and copied to the licensee's senior management.

            Amended: January 2019
            Amended: October 2014
            October 07

          • FC-4.3.4

            The purpose of the annual compliance review is to assist a licensee's Board and senior management to assess, amongst other things, whether internal and external reports are being made (as required under Chapter FC-5), and whether the overall number of such reports (which may otherwise appear satisfactory) does not conceal inadequate reporting in a particular segment of the licensee's business (or, where relevant, in particular branches or subsidiaries). Conventional bank licensees should use their judgement as to how the reports listed under Paragraph FC-4.3.1B (a) and (b) should be broken down in order to achieve this aim (e.g. by branches, departments, product lines, etc).

            Amended: January 2019
            October 07

          • FC-4.3.5

            Conventional bank licensees must instruct their appointed firm to produce the report referred to in Paragraph FC-4.3.1B (c) and (d). The report must be submitted to the Compliance Directorate at the CBB by the 30th of June of the following year. The findings of this review must be received and acted upon by the licensee.

            Amended: January 2022
            Amended: January 2020
            Amended: January 2019
            Amended: January 2012
            Amended: January 2011
            Amended: April 2008
            October 07

          • FC-4.3.6

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Amended: January 2012
            Amended: January 2011
            October 07

    • FC-5 FC-5 Suspicious Transaction Reporting

      • FC-5.1 FC-5.1 Internal Reporting

        • FC-5.1.1

          Conventional bank licensees must implement procedures to ensure that staff who handle customer business (or are managerially responsible for such staff) make a report promptly to the MLRO if they know or suspect that a customer (or a person on whose behalf a customer may be acting) is engaged in money laundering or terrorism financing, or if the transaction or the customer's conduct otherwise appears unusual or suspicious. These procedures must include arrangements for disciplining any member of staff who fails, without reasonable excuse, to make such a report.

          October 07

        • FC-5.1.2

          Where conventional bank licensees' internal processes provide for staff to consult with their line managers before sending a report to the MLRO, such processes must not be used to prevent reports reaching the MLRO, where staff have stated that they have knowledge or suspicion that a transaction may involve money laundering or terrorist financing.

          October 07

      • FC-5.2 FC-5.2 External Reporting

        • FC-5.2.1

          Conventional bank licensees must take reasonable steps to ensure that all reports made under Section FC-5.1 are considered by the MLRO (or his duly authorised delegate). Having considered the report and any other relevant information the MLRO (or his duly authorised delegate), if he still suspects that a person has been engaged in money laundering or terrorism financing, or the activity concerned is otherwise still regarded as suspicious, must report the fact promptly to the relevant authorities. Where no report is made, the MLRO must document the reasons why.

          October 07

        • FC-5.2.2

          To take reasonable steps, as required under Paragraph FC-5.2.1, conventional bank licensees must:

          (a) Require the MLRO to consider reports made under Section FC-5.1.1 in the light of all relevant information accessible to or reasonably obtainable by the MLRO;
          (b) Permit the MLRO to have access to any information, including know your customer information, in the conventional bank licensee's possession which could be relevant; and
          (c) Ensure that where the MLRO, or his duly authorised delegate, suspects that a person has been engaged in money laundering or terrorist financing, a report is made by the MLRO which is not subject to the consent or approval of any other person.
          October 07

        • FC-5.2.3

          Reports to the relevant authorities made under Paragraph FC-5.2.1 must be sent to the Financial Intelligence Directorate at the Ministry of Interior and the CBB's Compliance Directorate using the Suspicious Transaction Report Online System (Online STR system). STRs in paper format will not be accepted.

          Amended: January 2020
          Amended: October 2019
          Amended: July 2016
          Amended: October 2014
          October 07

        • FC-5.2.4

          Conventional bank licensees must report all suspicious transactions or attempted transactions. This reporting requirement applies regardless of whether the transaction involves tax matters.

          October 07

        • FC-5.2.5

          Conventional bank licensees must retain all relevant details of STRs submitted to the relevant authorities for at least five years.

          Amended: October 2014
          October 07

        • FC-5.2.6

          In accordance with the AML Law, conventional bank licensees, their Directors, officers and employees:

          (a) Must not warn or inform ('tipping off') their customers, the beneficial owner or other subjects of the STR when information relating to them is being reported to the relevant authorities; and
          (b) In cases where conventional bank licensees form a suspicion that transactions relate to money laundering or terrorist financing, they must take into account the risk of tipping-off when performing the CDD process. If the conventional bank licensee reasonably believes that performing the CDD process will tip-off the customer or potential customer, it may choose not to pursue that process, and must file an STR.
          Amended: January 2018
          October 07

      • FC-5.3 FC-5.3 Contacting the Relevant Authorities

        • FC-5.3.1

          Reports made by the MLRO or his duly authorised delegate under Section FC-5.2 must be sent electronically using the Suspicious Transaction Reporting Online System (Online STR system).

          Amended: October 2014
          October 07

        • FC-5.3.2

          The relevant authorities are:

          Financial Intelligence Directorate (FID)
          Ministry of Interior
          P.O. Box 26698
          Manama, Kingdom of Bahrain
          Telephone: + 973 17 749397
          Fax: + 973 17 715502
          E-mail: bahrainfid@moipolice.bh

          Director of Compliance Directorate
          Central Bank of Bahrain
          P.O. Box 27
          Manama, Kingdom of Bahrain
          Telephone: 17 547107
          Fax: 17 535673
          E-mail: Compliance@cbb.gov.bh

          Amended: October 2019
          Added: October 2014

    • FC-6 FC-6 Staff Training and Recruitment

      • FC-6.1 FC-6.1 General Requirements

        • FC-6.1.1

          A conventional bank licensee must take reasonable steps to provide periodic training and information to ensure that staff who handle customer transactions, or are managerially responsible for such transactions, are made aware of:

          (a) Their responsibilities under the AML Law, this Module, and any other relevant AML / CFT laws and regulations;
          (b) The identity and responsibilities of the MLRO and his deputy;
          (c) The potential consequences, both individual and corporate, of any breach of the AML Law, this Module and any other relevant AML / CFT laws or regulations;
          (d) The conventional bank licensee's current AML/CFT policies and procedures;
          (e) Money laundering and terrorist financing typologies and trends;
          (f) The type of customer activity or transaction that may justify an internal STR;
          (g) The conventional bank licensee's procedures for making internal STRs; and
          (h) Customer due diligence measures with respect to establishing business relations with customers.
          October 07

        • FC-6.1.2

          The information referred to in Paragraph FC-6.1.1 must be brought to the attention of relevant new employees of conventional bank licensees, and must remain available for reference by staff during their period of employment.

          October 07

        • FC-6.1.3

          Relevant new employees must be given AML/CFT training within three months of joining a conventional bank licensee.

          October 07

        • FC-6.1.4

          Conventional bank licensees must ensure that their AML/CFT training for relevant staff remains up-to-date, and is appropriate given the licensee's activities and customer base.

          October 07

        • FC-6.1.5

          The CBB would normally expect AML/CFT training to be provided to relevant staff at least once a year.

          October 07

        • FC-6.1.6

          Conventional bank licensees must develop adequate screening procedures to ensure high standards when hiring employees. These procedures must include controls to prevent criminals or their associates from being employed by conventional bank licensees.

          Amended: October 2014
          October 07

        • FC-6.1.6A

          [This Paragraph was deleted in January 2022].

          Deleted: January 2022
          Added: January 2021

    • FC-7 FC-7 Record-Keeping

      • FC-7.1 FC-7.1 General Requirements

        • CDD and Transaction Records

          • FC-7.1.1

            Conventional bank licensees must comply with the record-keeping requirements contained in the AML Law. Conventional bank licensees must therefore retain adequate records (including accounting and identification records), for the following minimum periods:

            (a) For customers, in relation to evidence of identity and business relationship records (such as application forms, account files and business correspondence, including the results of any analysis undertaken (e.g. enquiries to establish the background and purpose of complex, unusual large transactions)), for at least five years after the customer relationship has ceased; and
            (b) For transactions, in relation to documents (including customer instructions in the form of letters, faxes or emails) enabling a reconstitution of the transaction concerned, for at least five years after the transaction was completed.
            Amended: October 2014
            October 07

        • Compliance Records

          • FC-7.1.2

            Conventional bank licensees must retain copies of the reports produced for their annual compliance review, as specified in Paragraph FC-4.3.1B, for at least five years. Conventional bank licensees must also maintain for 5 years reports made to, or by, the MLRO made in accordance with Sections FC-5.1 and FC-5.2, and records showing how these reports were dealt with and what action, if any, was taken as a consequence of those reports.

            Amended: January 2019
            Amended: October 2014
            October 07

        • Training Records

          • FC-7.1.3

            Conventional bank licensees must maintain for at least five years, records showing the dates when AML/CFT training was given, the nature of the training, and the names of the staff that received the training.

            October 07

        • Access

          • FC-7.1.4

            All records required to be kept under this Section must be made available for prompt and swift access by the relevant authorities or other authorised persons.

            October 07

          • FC-7.1.5

            Conventional bank licensees are also reminded of the requirements contained in Chapter OM-7 (Books and Records).

            October 07

    • FC-8 FC-8 NCCT Measures and Terrorist Financing

      • FC-8.1 FC-8.1 Special Measures for Non-Cooperative Countries or Territories ('NCCTs')

        • FC-8.1.1

          Conventional bank licensees must give special attention to any dealings they may have with entities or persons domiciled in countries or territories which are:

          (a) Identified by the FATF as being 'non-cooperative'; or
          (b) Notified to conventional bank licensees from time to time by the CBB.
          October 07

        • FC-8.1.2

          Whenever transactions with such parties have no apparent economic or visible lawful purpose, their background and purpose must be re-examined and the findings documented. If suspicions remain about the transaction, these must be reported to the relevant authorities in accordance with Section FC-5.2.

          October 07

        • FC-8.1.3

          Conventional bank licensees must apply enhanced due diligence measures to business relationships and transactions with natural and legal persons, and financial institutions, from countries where such measures are called for by the FATF. The type of enhanced due diligence measures applied must be effective and proportionate to the risks.

          Added: October 2014

        • FC-8.1.4

          With regard to jurisdictions identified as NCCTs or those which in the opinion of the CBB, do not have adequate AML/CFT systems, the CBB reserves the right to:

          (a) Refuse the establishment of subsidiaries or branches or representative offices of financial institutions from such jurisdictions;
          (b) Limit business relationships or financial transactions with such jurisdictions or persons in those jurisdictions;
          (c) Prohibit financial institutions from relying on third parties located in such jurisdictions to conduct elements of the CDD process;
          (d) Require financial institutions to review and amend, or if necessary terminate, correspondent relationships with financial institutions in such jurisdictions;
          (e) Require increased supervisory examination and/or external audit requirements for branches and subsidiaries of financial institutions based in such jurisdictions; or
          (f) Require increased external audit requirements for financial groups with respect to any of their branches and subsidiaries located in such jurisdictions.
          Amended: January 2018
          Added: October 2014

      • FC-8.2 FC-8.2 Terrorist Financing

        • FC-8.2.1AA

          Conventional bank licensees must implement and comply with United Nations Security Council resolutions relating to the prevention and suppression of terrorism and terrorist financing. Conventional bank licensees must freeze, without delay, the funds or other assets of, and to ensure that no funds or other assets are made available, directly or indirectly, to or for the benefit of, any person or entity either (i) designated by, or under the authority of, the United Nations Security Council under Chapter VII of the Charter of the United Nations, including in accordance with resolution 1267(1999) and its successor resolutions as well as Resolution 2178(2014) or (ii) designated as pursuant to Resolution 1373(2001).

          Amended: October 2019
          Added: April 2017

        • FC-8.2.1

          Conventional bank licensees must comply in full with any rules or regulations issued by the CBB in connection with the provisions of the UN Security Council Anti-terrorism Resolution No. 1373 of 2001 ('UNSCR 1373'), including the rules in this Chapter.

          October 07

        • FC-8.2.2

          [This Paragraph was deleted in January 2018].

          Deleted: January 2018
          October 07

        • FC-8.2.3

          A copy of UNSCR 1373 is included in Part B of Volume 1 (Conventional Banks), under 'Supplementary Information'.

          October 07

        • FC-8.2.4

          Conventional bank licensees must report to the CBB details of:

          (a) Funds or other financial assets or economic resources held with them which may be the subject of Article 1, Paragraphs c) and d) of UNSCR 1373;
          (b) All claims, whether actual or contingent, which the conventional bank licensee has on persons and entities which may be the subject of Article 1, Paragraphs c) and d) of UNSCR 1373; and
          (c) All assets frozen or actions taken in compliance with the prohibition requirements of the relevant UNSCRs, including attempted transactions.
          Amended: January 2023
          October 07

        • FC-8.2.5

          For the purposes of Paragraph FC-8.2.4, 'funds or other financial resources' includes (but is not limited to) shares in any undertaking owned or controlled by the persons and entities referred to in Article 1, Paragraph c) and d) of UNSCR 1373, and any associated dividends received by the licensee.

          October 07

        • FC-8.2.6

          All reports or notifications under this Section must be made to the CBB's Compliance Directorate.

          October 07

        • FC-8.2.7

          See Section FC-5.3 for the Compliance Directorate's contact details.

          October 07

      • FC-8.3 FC-8.3 Designated Persons and Entities

        • FC-8.3.1

          Without prejudice to the general duty of all conventional bank licensees to exercise the utmost care when dealing with persons or entities who might come under Article 1, Paragraphs (c) and (d) of UNSCR 1373, conventional bank licensees must not deal with any persons or entities designated by the CBB as potentially linked to terrorist activity.

          Amended: October 2014
          October 07

        • FC-8.3.2

          The CBB from time to time issues to licensees lists of designated persons and entities believed linked to terrorism. Licensees are required to verify that they have no dealings with these designated persons and entities, and report back their findings to the CBB. Names designated by CBB include persons and entities designated by the United Nations, under UN Security Council Resolution 1267 ('UNSCR 1267').

          October 07

        • FC-8.3.3

          Conventional bank licensees must report to the relevant authorities, using the procedures contained in Section FC-5.2, details of any accounts or other dealings with designated persons and entities, and comply with any subsequent directions issued by the relevant authorities.

          October 07

    • FC-9 FC-9 Enforcement Measures

      • FC-9.1 FC-9.1 Regulatory Penalties

        • FC-9.1.1

          Without prejudice to any other penalty imposed by the CBB Law, the Decree Law No. 4 or the Penal Code of the Kingdom of Bahrain, failure by a licensee to comply with this Module or any direction given hereunder shall result in the levying by the CBB, without need of a court order and at the CBB's discretion, of a fine of up to BD 20,000.

          October 07

        • FC-9.1.2

          Module EN provides further information on the assessment of financial penalties and the criteria taken into account prior to imposing such fines (reference to Paragraph EN-5.1.4). Other enforcement measures may also be applied by CBB in response to a failure by a licensee to comply with this Module; these other measures are also set out in Module EN.

          October 07

        • FC-9.1.3

          The CBB will endeavour to assist conventional bank licensees to interpret and apply the rules and guidance in this Module. Conventional bank licensees may seek clarification on any issue by contacting the Compliance Directorate (see Section FC-5.3 for contact details).

          October 07

        • FC-9.1.4

          Without prejudice to the CBB's general powers under the law, the CBB may amend, clarify or issue further directions on any provision of this Module from time to time, by notice to its licensees.

          October 07

    • FC-10 FC-10 AML / CFT Guidance and Best Practice

      • FC-10.1 FC-10.1 Guidance Provided by International Bodies

        • FATF: Recommendations

          • FC-10.1.1

            The FATF Recommendations (see www.fatf-gafi.org) together with their associated interpretative notes and best practices papers issued by the Financial Action Task Force (FATF) provide the basic framework for combating money laundering activities and the financing of terrorism. FATF Recommendations 2, 8–12, 14–21, 26–27, 32–35, 37 and 40 and the AML/CFT Methodology are specifically relevant to the banking sector.

            Amended: October 2014
            October 07

          • FC-10.1.2

            The relevant authorities in Bahrain believe that the principles established by these Recommendations should be followed by licensees in all material respects, as representing best practice and prudence in this area.

            Amended: October 2014
            October 07

        • Basel Committee: Statement on Money Laundering and Customer Due Diligence for Banks

          • FC-10.1.3

            In December 1988, the Basel Committee on Banking Supervision issued a 'Statement of Principles' followed by the Customer Due Diligence for Banks paper in October 2001 (with attachment dated February 2003 – see www.bis.org/publ/) with which internationally active banks of member states are expected to comply. These papers cover identifying customers, avoiding suspicious transactions, and co-operating with law enforcement agencies.

            October 07

          • FC-10.1.4

            The CBB supports the above papers and the desirability of all conventional bank licensees adhering to their requirements and guidance.

            October 07

  • TC TC Training and Competency

    • TC-A TC-A Introduction

      • TC-A.1 TC-A.1 Purpose

        • Executive Summary

          • TC-A.1.1

            This Module presents requirements that have to be met by conventional bank licensees with respect to training and competency of individuals undertaking controlled functions (as defined in Paragraph LR-1A.1.2)

            October 2013

          • TC-A.1.2

            Module TC provides Rules and Guidance to conventional bank licensees to ensure satisfactory levels of competence, in terms of an individual's knowledge, skills, experience and professional qualifications. Conventional bank licensees, are required to demonstrate that individuals undertaking controlled functions are sufficiently competent, and are able to undertake their respective roles and responsibilities.

            October 2013

          • TC-A.1.3

            The Rules build upon Principles 3 and 9 of the Principles of Business (see Module PB (Principles of Business)). Principle 3 (Due Skill, Care and Diligence) requires conventional bank licensees and approved persons to observe high standards of integrity and fair dealing, and to be honest and straightforward in its dealings with clients. Principle 9 (Adequate Resources) requires conventional bank licensees to maintain adequate human, financial and other resources sufficient to run its business in an orderly manner.

            October 2013

          • TC-A.1.4

            Condition 4 of the Central Bank of Bahrain's ('CBB') Licensing Conditions (Chapter LR-2.4) and Chapter LR-1A (Approved Persons) of Module LR impose further requirements. To satisfy Condition 4 of the CBB's Licensing Conditions, a conventional bank licensee's staff, taken together, must collectively provide a sufficient range of skills and experience to manage the affairs of the licensee in a sound and prudent manner (LR-2.4). This condition specifies that conventional bank licensees must ensure their employees meet any training and competency requirements specified by the CBB. Chapter LR-1A (Approved Persons) of Module LR sets forth the 'fit and proper' requirements in relation to competence, experience and expertise required by approved persons; this Chapter specifies various factors that the CBB takes into account when reaching such a decision.

            October 2013

        • Legal Basis

          • TC-A.1.5

            This Module contains the CBB's Directive (as amended from time to time) relating to training and competency and is issued under the powers available to the CBB under Articles 38 and 65(b) of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all conventional bank licensees (including their approved persons).

            October 2013

          • TC-A.1.6

            For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

            October 2013

      • TC-A.2 TC-A.2 Module History

        • Evolution of the Module

          • TC-A.2.1

            This Module was first issued in October 2013. Any material changes that are subsequently made to this Module are annotated with the calendar quarter date in which the change is made; Chapter UG-3 provides further details on Rulebook maintenance and version control.

            October 2013

          • TC-A.2.2

            A list of recent changes made to this Module is provided below:

            Module Ref. Change Date Description of Changes
            Appendix TC-1 01/2014 Added Chartered Financial Analyst as possible qualification for heads of other functions.
            TC-B.1.4 07/2014 Clarified scope of application.
            Appendix TC-1 10/2015 Added securities market regulation certification as other relevant certification for heads of other functions.
            TC-2.3.3 04/2017 Amended Paragraph on exception to the grandfathering Rule.
                 

    • TC-B TC-B Scope of Application

      • TC-B.1 TC-B.1 Scope

        • TC-B.1.1

          This Module applies to all CBB conventional bank licensees authorised in the Kingdom. It covers the training and competency requirements for staff occupying controlled functions (See Chapter TC-1).

          October 2013

        • TC-B.1.2

          Module TC, unless otherwise stated, applies in full to both retail and wholesale conventional bank licensees licensed in Bahrain. In the case of an overseas conventional bank licensee, the application of this Module is restricted to its Bahrain operations.

          October 2013

        • TC-B.1.3

          Persons authorised by the CBB as approved persons prior to the issuance of Module TC need not reapply for authorisation.

          October 2013

        • TC-B.1.4

          The requirements of this Module apply to approved persons holding controlled functions, including board members, in connection with the conventional bank licensee's regulated banking services, or under a contract of service.

          Amended: July 2014
          October 2013

        • TC-B.1.5

          In the case of outsourcing arrangements, the conventional bank licensee should refer to the competency requirements, outlined in Appendix TC-1 for controlled functions, for assessing the suitability of the outsourcing provider.

          October 2013

        • TC-B.1.6

          Conventional bank licensees must satisfy the CBB that individuals performing a controlled function for it or on its behalf are suitable and competent to carry on that controlled function.

          October 2013

        • TC-B.1.7

          In implementing this Module, conventional bank licensees must ensure that individuals recruited to perform controlled functions:

          (a) Hold suitable qualifications and experience appropriate to the nature of the business;
          (b) Remain competent for the work they do; and
          (c) Are appropriately supervised.
          October 2013

    • TC-1 TC-1 Requirements for Controlled Functions

      • TC-1.1 TC-1.1 Controlled Functions

        • TC-1.1.1

          Individuals occupying controlled functions (refer to Paragraphs LR-1A.1.5 to 1A.1.16) in a conventional bank licensee must be qualified and suitably experienced for their specific roles and responsibilities. The controlled functions are those of:

          (a) Board Member;
          (b) Chief Executive or General Manager and their Deputies;
          (c) Chief Financial Officer and/or Financial Controller;
          (d) Head of Risk Management;
          (e) Head of Internal Audit;
          (f) Head of Shari'a Review;
          (g) Compliance Officer;
          (h) Money Laundering Reporting Officer;
          (i) Deputy Money Laundering Reporting Officer; and
          (j) Heads of other Functions.
          October 2013

        • TC-1.1.2

          A conventional bank licensee must take reasonable steps to ensure that individuals holding controlled functions are sufficiently knowledgeable about their respective fields of work to be able to guide and supervise operations that fall under their responsibilities.

          October 2013

        • TC-1.1.3

          Competence must be assessed on the basis of experience and relevant qualifications described in Appendix TC-1 as a minimum. However, the CBB reserves the right to impose a higher level of qualifications as it deems necessary.

          October 2013

        • Board Member

          • TC-1.1.4

            Board members collectively are responsible for the business performance and strategy of the conventional bank licensee, as outlined in more details in Section HC-1.2.

            October 2013

          • TC-1.1.5

            When taken as a whole, the board of directors of a conventional bank licensee must be able to demonstrate that it has the necessary skills and expertise, as outlined in Paragraph HC-1.2.10.

            October 2013

        • Chief Executive or General Manager

          • TC-1.1.6

            The chief executive or general manager and their deputies (as appropriate) are responsible for the executive management and performance of the conventional bank licensee within the framework or delegated authorities set by the Board. The scope of authority of the CEO and deputies is outlined in more detail in Subparagraph HC-6.3.2 (a).

            October 2013

        • Chief Financial Officer/ Head of Financial Control

          • TC-1.1.7

            The chief financial officer/head of financial control is responsible for directing the bank's financial function, including ensuring that the relevant accounting treatment is applied to all of the activities of the bank in a timely manner. The scope of authority of the CFO/ Head of Financial Control is outlined in more detail in Subparagraph HC-6.3.2(b).

            October 2013

        • Head of Risk Management

          • TC-1.1.8

            Heads of risk management are responsible for the management and control of all risk exposures arising from the activities of the conventional bank licensee.

            October 2013

        • Head of Internal Audit

          • TC-1.1.9

            Heads of internal audit are responsible for providing independent and objective review on the adequacy and effectiveness of the holistic internal control environment within the conventional bank licensee. The duties of the head of internal audit are outlined in more detail in Subparagraph HC-6.3.2 (d).

            October 2013

        • Head of Shari'a Review

          • TC-1.1.10

            The head of Shari'a review in a conventional bank licensee, dealing with Islamic products and services, is responsible for the examination of the extent of a conventional bank licensee's compliance, in all its activities, with the Shari'a. This examination includes contracts, agreements, policies, products, transactions memorandum and articles of association, financial statements, reports (especially internal audit and central bank inspection), circulars, etc. The objective of the Shari'a review is to ensure that the activities carried out by a conventional bank licensee do not contravene the Shari'a.

            October 2013

        • Compliance Officer

          • TC-1.1.11

            In accordance with Paragraph LR-1A.1.12, an employee of appropriate standing must be designated by the conventional bank licensee for the position of compliance officer. The duties of the compliance officer, include:

            (a) Having responsibility for oversight of the conventional bank licensee's compliance with the requirements of the CBB and other applicable laws and regulations;
            (b) Raising awareness and providing training for the conventional bank licensee's staff on compliance issues; and
            (c) Reporting to the conventional bank licensee's Board in respect of that responsibility.
            October 2013

        • Money Laundering Reporting Officer (MLRO) or Deputy Money Laundering Reporting Officer (DMLRO)

          • TC-1.1.12

            The attributes and responsibilities of the MLRO/DMLRO are described more fully in Paragraphs FC-4.1.6 and FC-4.2.1.

            October 2013

        • Heads of other Functions

          • TC-1.1.13

            Heads of other functions, where risk acquisition or control is involved, are responsible for tracking specific functional performance goals in addition to identifying, managing, and reporting critical organisational issues upstream. Certain functions require dealing directly with clients while others do not. Both categories of functions, however, require specific qualifications and experience to meet the objectives as well as compliance requirements of the conventional bank licensee.

            October 2013

          • TC-1.1.14

            For purposes of Paragraph TC-1.1.13, conventional bank licensees should contact the CBB should they require further clarification on whether a specific position falls under the definition of "Heads of other Functions".

            October 2013

      • TC-1.2 TC-1.2 Continuous Professional Development Training ("CPD")

        • CPD

          • TC-1.2.1

            All individuals holding controlled functions in a conventional bank licensee must undergo a minimum of 15 hours of CPD per annum.

            October 2013

          • TC-1.2.2

            A conventional bank licensee must ensure that an approved person undertaking a controlled function undergoes appropriate annual review and assessment of performance.

            October 2013

          • TC-1.2.3

            The level of supervision should be proportionate to the level of competence demonstrated by the approved person. Supervision will include, as appropriate:

            (a) Reviewing and assessing work on a regular basis; and
            (b) Coaching and assessing performance against the competencies necessary for the role.
            October 2013

          • TC-1.2.4

            Supervisors of approved persons should have technical knowledge and relevant managerial skills.

            October 2013

        • Record Keeping

          • TC-1.2.5

            A conventional bank licensee should, for a minimum period of five years, retain records of:

            (a) The annual training plan for each controlled function;
            (b) Materials used to conduct in-house training courses;
            (c) List of participants attending such in-house training courses; and
            (d) Results of evaluations conducted at the end of such training courses.
            October 2013

    • TC-2 TC-2 General Requirements

      • TC-2.1 TC-2.1 Recruitment and Assessing Competence

        • Recruitment and Appointment

          • TC-2.1.1

            If a conventional bank licensee recruits or promotes an individual to undertake a controlled function, it must first file Form 3 (Approved Persons) with the CBB and obtain the express written approval of the CBB for that person to occupy the desired position. In its application, the conventional bank licensee must demonstrate to the CBB that full consideration has been given to the qualifications and core competencies for controlled functions in Appendix TC-1. (See Article 65(b) of the CBB Law and Paragraph LR-2.3.1).

            October 2013

          • TC-2.1.2

            Conventional bank licensees should refer to Module LR (Licensing Requirements) providing detailed requirements on the appointment of individuals occupying controlled functions (approved persons).

            October 2013

          • TC-2.1.3

            A conventional bank licensee proposing to recruit an individual has to satisfy itself, of his/her relevant qualifications and experience. The conventional bank licensee should:

            (a) Take into account the knowledge and skills required for the role, in addition to the nature and the level of complexity of the controlled function; and
            (b) Take reasonable steps to obtain sufficient information about the individual's background, experience, training and qualifications.
            October 2013

        • Record Keeping

          • TC-2.1.4

            A conventional bank licensee must make and retain records of its recruitment procedures for a minimum period of five years. Such procedures should be designed to adequately take into account proof of the candidates' knowledge and skills and their previous activities and training.

            October 2013

          • TC-2.1.5

            In addition to recruitment procedures in Paragraph TC-2.1.4, the conventional bank licensee must retain the recruitment records of approved persons for a minimum period of five years following termination of their services or employment with the bank. Such records must include, but are not limited to, the following:

            (a) Results of the initial screening;
            (b) Results of any employment tests;
            (c) Results and details of any interviews conducted;
            (d) Background and references checks; and
            (e) Details of any professional qualifications.
            October 2013

        • Assessing Competence

          • TC-2.1.6

            Conventional bank licensees must not allow an individual to undertake or supervise controlled functions unless that individual has been assessed by the conventional bank licensee as competent in accordance with this Section.

            October 2013

          • TC-2.1.7

            In determining an individual's competence, conventional bank licensees may assess if the person is fit and proper in accordance with Chapter LR-1A.

            October 2013

          • TC-2.1.8

            Conventional bank licensees must assess individuals as competent when they have demonstrated the ability to apply the knowledge and skills required to perform a specific controlled function.

            October 2013

          • TC-2.1.9

            The assessment of competence will be dependent on the nature and the level of complexity of the controlled function. Such assessment of competence of new personnel may take into account the fact that an individual has been previously assessed as competent in a similar controlled function with another conventional bank licensee.

            October 2013

          • TC-2.1.10

            If a conventional bank licensee assesses an individual as competent in accordance with Paragraph TC-2.1.8 to perform a specific controlled function, it does not necessarily mean that the individual is competent to undertake other controlled functions.

            October 2013

          • TC-2.1.11

            A conventional bank licensee should use methods of assessment that are appropriate to the controlled function and to the individual's role.

            October 2013

        • Record Keeping

          • TC-2.1.12

            A conventional bank licensee must, for a minimum period of five years, make and retain updated records of:

            (a) The criteria applied in assessing the ongoing and continuing competence; and
            (b) How and when the competence decision was arrived at.
            October 2013

          • TC-2.1.13

            For purposes of Paragraph TC-2.1.12, the record keeping requirements apply to both current employees as well as to employees following termination of their services or employment with the bank, for a minimum period of five years.

            October 2013

      • TC-2.2 TC-2.2 Training and Maintaining Competence

        • TC-2.2.1

          A conventional bank licensee must annually determine the training needs of individuals undertaking controlled functions. It must develop a training plan to address these needs and ensure that training is planned, appropriately structured and evaluated.

          October 2013

        • TC-2.2.2

          The assessment and training plan described in Paragraph TC-2.2.1 should be aimed at ensuring that the relevant approved person maintains competence in the controlled function. An individual can develop skills and gain experience in a variety of ways. These could include on-the-job learning, individual study, and other methods. In almost every situation, and for most individuals, it is likely that competence will be developed most effectively by a mixture of training methods.

          October 2013

        • TC-2.2.3

          The training plan of conventional bank licensees must include a programme for continuous professional development training ('CPD') for their approved persons.

          October 2013

        • TC-2.2.4

          Approved persons may choose to fulfil their CPD requirements by attending courses, workshops, conferences and seminars at local or foreign training institutions.

          October 2013

        • TC-2.2.5

          The annual training required under Paragraph TC-2.2.1 must also include the quarterly updates, if any, to the CBB Volume 1 (Conventional Banks) Rulebook, in areas relevant to each controlled function.

          October 2013

        • TC-2.2.6

          Conventional bank licensees should maintain appropriate training records for each individual. Licensees should note how the relevant training relates to and supports the individual's role. Training records may be reviewed during supervisory visits to assess the conventional bank licensee's systems and to review how the conventional bank licensee ensures that its staff are competent and remain competent for their roles.

          October 2013

        • Maintaining Competence

          • TC-2.2.7

            A conventional bank licensee must make appropriate arrangements to ensure that approved persons maintain competence.

            October 2013

          • TC-2.2.8

            A conventional bank licensee should ensure that maintaining competence for an approved person takes into account:

            (a) Application of technical knowledge;
            (b) Application and development of skills; and
            (c) Any market changes and changes to products, legislation and regulation.
            October 2013

          • TC-2.2.9

            A conventional bank licensee may utilise the CPD schemes of relevant professional bodies to demonstrate compliance with Paragraph TC-2.2.1. In-house training, seminars, conferences, further qualifications, product presentations, computer-based training and one-to-one tuition may also be considered to demonstrate compliance with Paragraph TC-2.2.1.

            October 2013

        • Record Keeping

          • TC-2.2.10

            A conventional bank licensee must, for a minimum period of five years, make and retain records of:

            (a) The criteria applied in assessing continuing competence;
            (b) The annual assessment of competence; and
            (c) Record of CPD hours undertaken by each approved person.
            October 2013

      • TC-2.3 TC-2.3 Transitional Period

        • TC-2.3.1

          The requirements of this Module for conventional bank licensees are effective from the issuance date of this Module.

          October 2013

        • TC-2.3.2

          New applications for approved persons are subject to the requirements of this Module (See Paragraph TC-B.1.4).

          October 2013

        • TC-2.3.3

          Approved persons occupying controlled functions at the time this Module is issued will be grandfathered and not subject to the requirements of this Module, with the exception of CPD requirements in paragraph TC-1.2.1 and paragraphs BR-1.1.3(m) and BR-1.2.3(g). However, should the approved person move to another controlled function, Paragraph TC-2.3.4 will apply.

          Amended: April 2017
          October 2013

        • TC-2.3.4

          In instances, where an approved person in one conventional bank licensee moves to another conventional bank licensee and occupies the same function, the CBB will exercise its discretion on whether to grandfather such approved person from the required qualifications and competencies outlined in Appendix TC-1 into the new conventional bank licensee. The grandfathering criteria used by the CBB will include a comparison of the scope and size of both positions. This will also apply in instances where an approved person in one conventional bank licensee moves from one department to another within the same conventional bank licensee.

          October 2013

    • Appendix TC-1 Qualifications and Core Competencies

      Role Core Competencies How can competence be demonstrated?
      Board Member Board members should have:
      (a) Sufficient experience to demonstrate sound business decision-making; and
      (b) A good understanding of the industry and its regulatory environment.
      Competence is demonstrated by:
      (a)
      (i) Holding a Bachelor's Degree; and
      (ii) A minimum experience of 7 years in business and/or government/quasi government of which at least 4 years at a senior management level; OR
      (b) A minimum experience of 10 years in business.
      Chief Executive or General Manager and their Deputies The Chief Executive or General Manager and their Deputies should have:
      (a) A clear understanding of the role and responsibilities associated with this position;
      (b) A good understanding of banking business and the wider industry and its regulatory environment;
      (c) Relevant experience and qualifications associated with such executive responsibilities; and
      (d) The necessary professional and leadership capabilities which qualify him for this position.
      This person should have a minimum experience of 15 years in the banking sector of which at least 7 years at a senior management level in a bank. He/she should hold a relevant academic/professional qualification, preferably MBA, Masters in finance/accounting/economics or masters in any other subject, or preferably other qualification related to banking, accounting or finance.
      Chief Financial Officer/ Head of Financial Control The Chief Financial Officer/ Head of Financial Control should have:
      (a) A clear understanding of the role and responsibilities associated with the position;
      (b) A good understanding of banking business and the wider industry and its regulatory environment;
      (c) The relevant experience and qualifications to fulfill his responsibilities; and
      (d) A good knowledge and understanding of international accounting standards and how they are applied in a business context, including IFRS, and where appropriate AAOIFI.
      The Chief Financial Officer/ Head of Financial Control should have a minimum of 10 years of practical experience in a bank and of which at least 7 years in a finance function of a bank. Experience of external audit on banks will also be counted as part of the minimum experience requirements. He/she should:
      (a) Hold a relevant academic/professional qualification, preferably MBA, Masters in finance/accounting/economics or masters in any other subject, or preferably other qualification related to banking, accounting or finance; and
      (b) Have relevant certification(s) specific to this role. Such certifications may include but are not limited to:
      (i) The Association of Chartered Certified Accountants (ACCA); or
      (ii) Certified Public Accountant (CPA); or
      (iii) Similar designation with a valid current practicing certificate.
      Chief Risk Officer/ Head of Risk Management The Chief Risk Officer/Head of Risk Management should have:
      (a) An appropriate level of experience and standing to demonstrate suitable independence from other functions within the bank;
      (b) A clear understanding of the role and responsibilities associated with the position;
      (c) A good understanding of banking business and the wider industry and its regulatory environment; and
      (d) The relevant experience and qualifications to fulfill his responsibilities.
      The Chief Risk Officer/Head of Risk Management should have a minimum of 7 years of practical experience in a bank and of which at least 5 years in a risk management position. He/she should:
      (a) Hold a degree from a university at bachelor level or higher or a relevant professional qualification; and
      (b) Have relevant certification(s) specific to this role. Such certifications may include but are not limited to:
      (i) Institute of Risk Management qualifications (IRM); or
      (ii) Financial Risk Manager (FRM); or
      (iii) Professional Risk Manager (PRM); or
      (iv) Other relevant qualifications.
      Head of Internal Audit The Head of Internal Audit should have:
      (a) An appropriate level of experience and standing to demonstrate suitable independence from other functions within the bank;
      (b) A clear understanding of the role and responsibilities associated with the Internal Audit function;
      (c) A good understanding of banking business and the wider industry and its regulatory environment;
      (d) The relevant accounting and auditing experience and qualifications to fulfill his responsibilities; and
      (e) A demonstrable knowledge and understanding of the Standards for the Professional Practice of Internal Audit.
      The Head of Internal audit should have a minimum experience of 7 years in a bank of which at least 5 years of that experience should have been in an internal audit role. He/she should:
      (a) Hold a university degree preferably in accounting or banking and finance or finance or a relevant professional qualification; and
      (b) Have relevant certification(s) specific to this role. Such certifications may include but are not limited to Chartered Internal Auditor (CIA) by the Institute of Internal Auditors.
      Head of Shari'a Review A Head of Shari'a Review should:
      (a) Have appropriate level of knowledge in Islamic Finance and Shari'a principles;
      (b) Have a good understanding of the banking industry and possess good knowledge of economics and finance; and
      (c) Understand how to interpret financial statements.
      The Head of Shari'a Review should have a minimum of 5 years relevant experience in a bank or financial institution dealing with Islamic products and services. He/she should:
      (a)Hold a bachelor's degree in Shari'a, which includes study in Usul Fiqh (the origin of Islamic law) and/or Fiqh Muamalat (Islamic jurisprudence) or;
      (b) Hold a university degree in banking and finance together with a qualification in Shari'a review.
      Compliance Officer A Compliance Officer should have:
      (a) An appropriate level of experience and standing to demonstrate suitable independence from other functions within the bank; and
      (b) A thorough understanding of the industry and its applicable regulatory requirements.
      The Compliance Officer should have a minimum of 5 years relevant experience in a bank, financial institution or financial regulator He/she should:
      (a) Hold a degree from a university at bachelor level or higher or a relevant professional qualification in compliance; and
      (b) Have relevant certification(s) specific to this role. Such certifications may include but are not limited to:
      (i) International Diploma in Compliance offered by the International Compliance Association; and/or
      (ii) International Advanced Certificate in Compliance and Financial Crime offered by the International Compliance Association; and/or
      (iii) Any other relevant professional qualification deemed suitable by the CBB. These may include qualifications in areas related to the license.
      Money Laundering Reporting Officer (MLRO)/ Deputy Money Laundering Reporting Officer (DMLRO) The MLRO and DMLRO should:
      (a) Understand the business of the bank and how the Anti Money Laundering framework applies to it;
      (b) Demonstrate independence from bank staff who deal directly with customer; and
      (c) Have a thorough knowledge of the financial industry and be familiar with relevant FATF and applicable domestic regulatory requirements.
      An MLRO should have a minimum experience of 5 years in the banking industry of which at least 3 years of experience in anti-money laundering or anti-money laundering related role. The DMLRO should have a minimum of 2 years experience in the banking industry of which at least 1 year experience in an anti-money laundering or anti- money laundering related role. The MLRO/ DMLRO should:
      (a) Hold a degree from a university at bachelor level or higher or a relevant professional qualification; and
      (b) Have relevant certification(s) specific to this role. Such certifications may include but are not limited to:
      (i) Certified Anti-Money Laundering Specialist Examination (ACAMS) ; and/ or
      (ii) Diploma in Anti-Money Laundering offered by the International Compliance Association; and/ or
      (iii) International Diploma in Financial Crime Prevention offered by International Compliance Association; and/or
      (iv) International Advanced Certificate in Compliance and Financial Crime offered by the International Compliance Association.
      Heads of Other Functions Heads of Other Functions should have:
      (a) A clear understanding of the role and responsibilities associated with the function;
      (b) A good understanding of banking business and the wider industry and its regulatory environment; and
      (c) The relevant experience and qualifications to fulfill his responsibilities.
      A senior manager responsible for a specialist function should have a minimum experience of 7 years in the banking/financial industry of which at least 5 years of experience in the same function that he/she will be heading. He/she should:
      (a) Hold a relevant academic/professional qualification, preferably MBA, Masters in finance/accounting/economics or masters in any other subject, and preferably other qualification related to banking/accounting; and
      (b) Have other relevant certification(s) specific to this role. Such certifications may, depending on the function being fulfilled, include but are not limited to:
      (i) Chartered Financial Analyst (CFA);
      (ii) Certificate in Securities and Financial Derivatives;
      (iii) Certificate in Investment Management;
      (iv) Professional Certification in Accounting;
      (v) Equivalent certificates or qualifications;
      (vi) Advanced Diploma in Banking/ Islamic Finance or Financial Advisory Program from the BIBF or other institutions; and/or
      (vii) Securities Market Regulation Certification.
      Amended: October 2015
      Amended: January 2014
      October 2013

  • ICCAP ICCAP Internal Capital Adequacy Assessment Process

    • IC-A IC-A Introduction

      • IC-A.1 IC-A.1 Purpose

        • Executive Summary

          • IC-A.1.1

            The Internal Capital Adequacy Assessment Process ('ICAAP') Module sets out the CBB's requirements relating to banks' obligations under Pillar 2 with respect to ICAAP for assessing their overall capital adequacy in relation to their risk profile It seeks to encourage banks to develop and use better risk management techniques in identifying, monitoring and managing their risks, and to ensure that a licensee has a rigorous process in place for determining the adequacy of its capital to support all risks to which it is exposed.

            July 2018

          • IC-A.1.2

            This Module must be read in conjunction with other parts of the Rulebook, mainly:

            (a) Principles of Business;
            (b) High-level Controls;
            (c) Credit Risk;
            (d) Market Risk;
            (e) Operational Risk;
            (f) Liquidity Risk;
            (g) Reputational Risk;
            (h) Interest Rate Risk in the Banking Book ('IRRBB');
            (i) Capital Adequacy; and
            (j) Stress Testing.
            July 2018

        • Legal Basis

          • IC-A.1.3

            This Module contains the Central Bank of Bahrain's ('CBB') Directive (as amended from time-to-time) relating to ICAAP and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is an important component of the CBB's Supervisory Review Process and is applicable to all Bahraini conventional bank licensees (including their approved persons).

            July 2018

          • IC-A.1.4

            For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

            July 2018

      • IC-A.2 IC-A.2 Module History

        • Evolution of the Module

          • IC-A.2.1

            This Module is issued in July 2018 as part of Volume One of the CBB Rulebook. All requirements in this Module are effective from the date of issuance. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.

            July 2018

          • IC-A.2.2

            The most recent changes made to this Module are detailed in the table below:

            Summary of Changes

            Module Ref. Change Date Description of Changes
            IC-1.5.14 07/2021 Added a new Paragraph on submission of the recovery plan annually.
            IC-1.2.2 01/2022 Amended Paragraph.
            IC-1.5.10 01/2022 Amended Paragraph.
            IC-1.6.1 01/2022 Amended Paragraph.
            IC-1.6.1 04/2022 Amended reference to HC module.

    • IC-1.1 IC-1.1 Overview

      • IC-1.1.1

        A thorough and comprehensive ICAAP is a vital component of a strong risk management framework. The ICAAP should assist in determining the optimum level of capital that is needed to adequately support the nature and level of the bank's risk profile. Nevertheless, if the required economic capital determined under the requirements of this Module falls below risk based regulatory capital determined under Module CA, the latter shall be maintained.

        July 2018

      • IC-1.1.2

        While the CBB recognises that increased capital is not a substitute for proper controls and risk management processes, higher regulatory capital requirements may be required to buffer banks against the higher risk of unexpected losses resulting from inadequate controls or risk management weaknesses.

        July 2018

      • IC-1.1.3

        The CBB may intervene at an early stage, to prevent capital levels of banks from falling below the appropriate levels required to support the risk characteristics of the bank, and to require swift remedial action by the bank if the appropriate level of capital is not maintained or restored by the bank.

        July 2018

      • IC-1.1.4

        Further to the requirements in CA-A.1.5 of Module CA the CBB may set a target capital adequacy ratio ('CAR') for each bank, subject to its specific risk profile rating as determined, based on the CBB's supervisory risk assessment methodology.

        July 2018

    • IC-1.2 IC-1.2 General Requirements

      • ICAAP Framework

        • IC-1.2.1

          Bahraini conventional bank licensees must develop an ICAAP Framework commensurate with the nature, size, complexity and scale of the bank's activities that includes, but is not limited to:

          (a) An appropriate ICAAP policy, procedures and limits for risk management;
          (b) A description of the process and governance arrangements, including the roles and responsibilities for the Board and senior management, with respect to the design and implementation of the ICAAP Framework;
          (c) The bank's risk appetite statement and capital adequacy objectives;
          (d) Comprehensive and timely identification, measurement, mitigation, controlling, monitoring and reporting of risks;
          (e) A process to relate the bank's capital to its risk profile and for allocation of appropriate capital charges for material risks;
          (f) A process to reconcile, where relevant, the historical amounts used to prudential and financial reporting sources; and
          (g) A process of internal controls and independent review.
          July 2018

        • IC-1.2.2

          The ICAAP Framework, and amendments on it, must be submitted to the CBB.

          Amended: January 2022
          Added: July 2018

      • ICAAP Report /Document

        • IC-1.2.3

          Bahraini conventional bank licensees must develop an ICAAP Report and maintain capital levels that are commensurate with their risk profiles and control environments.

          July 2018

        • IC-1.2.4

          The ICAAP Report must be prepared on an annual basis and submitted to the CBB on 31st May of each year.

          July 2018

        • IC-1.2.5

          Bahraini conventional bank licensees must ensure that the outcome of the ICAAP is is forward looking (i.e. considers a minimum of 3-years projections) and not a static capital target. Banks must ensure that the ICAAP covers the following:

          (a) All material risks and potential vulnerability to its business and operational environment;
          (b) Capital requirements, benign and adverse forward-looking environment; and considers capital buffers during benign conditions to help meet any surge in capital demand under adverse conditions;
          (c) A business plan and evaluattion of short-term and long-term capital needs;
          (d) Rigorous stress-testing and scenario analysis that identifies possible events or changes in market conditions that could adversely impact the bank; and
          (e) Results of stress tests and analyses are incorporated, where applicable, into the capital adequacy assessment.
          July 2018

    • IC-1.3 IC-1.3 Board and Senior Management Oversight

      • IC-1.3.1

        The ultimate responsibility for ensuring that there is a robust ICAAP and a sound risk management framework; setting capital targets that are commensurate with the banks' risk profile and control environment; and ensuring that banks set aside adequate capital to support the risks beyond the regulatory minimum requirements, rests with the Board and senior management of the licensees.

        July 2018

      • IC-1.3.2

        Responsibilities of the Board include:

        (a) Ensuring adequate capital management policies are in place; the Board must also review and approve these policies on an annual basis;
        (b) Understanding the material risks that are impacting the business, and also having an awareness of emerging risks and vulnerabilities;
        (c) Reviewing and approving the capital plan and corresponding capital actions;
        (d) Defining the risk appetite/risk tolerance of the bank;
        (e) Ensuring that the bank has a sound risk management framework in place;
        (f) Ensuring that the accountability and lines of authority are clearly delineated and effectively communicated throughout the organization;
        (g) Ensuring that the bank implements adequate infrastructure and controls to measure, monitor and mitigate risk effectively; and
        (h) Ensuring that the bank has adequate capital proportionate to its risk profile under normal and adverse conditions.
        July 2018

      • IC-1.3.3

        Responsibilities of the senior management include:

        (a) Ensuring that bank personnel involved in ICAAP activities have the adequate skills, including complex financial risk management skills, and that employees are adequately enabled through training.
        (b) Ensuring that they have adequate understanding of the material risks that are impacting the business, as well as an awareness of emerging risks and vulnerabilities;
        (c) Ensuring effective implementation of relevant policies, procedures, systems and controls;
        (d) Communicating the internal controls and written policies and procedures throughout the bank; and
        (e) Monitoring risk exposures in accordance with the risk appetite and limits approved by the Board.
        (f) Ensuring that the Board receives adequate information pertaining to risk management and capital management, under both normal and stressed business conditions; and
        (g) Monitoring and reporting of status against ICAAP to the Board.
        July 2018

      • IC-1.3.4

        The roles and responsibilities of Risk Management, Financial Control and Compliance in relation to ICAAP must be clearly documented in the related policies and procedures.

        July 2018

    • IC-1.4 IC-1.4 Comprehensive Assessment of Risk

      • IC-1.4.1

        Bahraini conventional bank licensees must ensure that their identifies and assesses all material risks and addresses the following:

        (a) Credit risk, market risk and operational risk, captured under Pillar;
        (b) Risks that are not taken into account by Pillar 1 (e.g. IRRBB, liquidity risk, reputational risk, strategic risk and concentration risk); and
        (c) External factors outside the direct control of the licensees, including changes in regulations, accounting rules and the economic environment (e.g. business cycle effects).
        July 2018

      • IC-1.4.2

        For each of the material risks identified in the ICAAP, banks must ensure that the risk management framework (in HC-6.6.2) is comprehensively addressed.

        July 2018

      • IC-1.4.3

        Bahraini conventional bank licensees must ensure that their risk management infrastructure allows for aggregation of exposures and risk measures across business lines.

        July 2018

    • IC-1.5 IC-1.5 Capital Planning

      • IC-1.5.1

        Bahraini conventional bank licensees must develop a comprehensive Capital Planning Policy which clearly articulates the guidelines for capital planning, capital usage, capital distribution (i.e. issuing dividends, share buy-back, etc.), determining capital composition and capital-raising mechanisms under different conditions.

        July 2018

      • IC-1.5.2

        Bahraini conventional bank licensees must state their objectives in deciding how much capital to hold. Banks must ensure that the capital objectives go beyond the regulatory minimum to support risks and to take into account the following considerations:

        (a) Level of creditworthiness of the bank to be achieved in markets, that is higher than that indicated by the minimum regulatory capital requirements;
        (b) Fluctuations in capital adequacy ratios, as a result of changes in type and volume of activities and risk exposures in the normal course of business;
        (c) Cost of capital-raising, especially in situations where capital injections need to be carried out quickly, or at a time when market conditions are unfavourable;
        (d) Potential breach of the minimum regulatory capital requirements and regulatory actions in such an event;
        (e) Risks arising from the features of the jurisdictions and markets in which the bank operates; and
        (f) Limitations in risk assessment infrastructure and methodologies.
        July 2018

      • IC-1.5.3

        Bahraini conventional bank licensees must develop their ICAAP on a consolidated and solo basis. Banks must ensure that their consolidated capital is adequate to:

        (a) Support the volume and risk characteristics of all parent and subsidiary activities; and
        (b) Provides a sufficient cushion to absorb potential losses arising from such activities.
        July 2018

      • IC-1.5.4

        Bahraini conventional bank licensees must ensure that their consolidated ICAAP addresses the following:

        (a) That the total capital estimated as appropriate for the group has been allocated to each group member, according to their respective risk profiles; and
        (b) That the group risks they face (including reputation risk arising from the failure of another group member, and the risks they face due to exposure to, or dependence on, other group members) are fully evaluated.
        July 2018

      • Capital Adequacy Objectives

        • IC-1.5.5

          The CBB may impose specific capital charge, and / or limits, on all material risk exposures, if warranted. This may include risks that the CBB considers not have been adequately transferred, or mitigated, through transactions entered into by the Bank (e.g. securitization transactions)

          July 2018

        • IC-1.5.6

          In stating their capital adequacy, banks must:

          (a) Use formal economic capital models for setting capital objectives and targets and assessing its capital adequacy. The CBB will determine which banks may be exempted from establishing formal economic capital model on a case to case basis;
          (b) Assess whether their long-run capital objectives differ significantly from their short-run capital objectives. As it may take time for a bank to raise new capital, the bank must make allowances for unexpected events, including putting contingency plans in place for raising additional capital;
          (c) State the time horizon for achieving their capital adequacy objectives, and set out in broad terms the capital planning process and the responsibilities for that process. The capital plan should recognise that accommodating additional capital needs requires significant lead time, and take into account the potential difficulties of raising additional capital during downturns or other times of stress. It must also set out how the bank will comply with regulatory capital requirements, any relevant limits related to capital, and a general contingency plan for dealing with divergences and unexpected events;
          (d) Develop an internal strategy for maintaining capital levels which must not only reflect the desired level of risk coverage, but also incorporate factors such as portfolio growth expectations, future sources and uses of funds, and dividend policy. There may be other considerations that the banks consider relevant or important in determining how much capital it must hold (e.g. external rating goals, market image, strategic goals etc.). If these other considerations are included in the ICAAP, the bank must show how the considerations have influenced its decisions concerning the amount of capital to be held; and
          (e) Ensure that capital objectives and targets are reviewed and approved by the Board, on an annual basis at least, to ensure their appropriateness.
          July 2018

        • IC-1.5.7

          Bahraini conventional bank licensees must ensure that adequate capital is held against all material risks not just at a point in time, but over time, to account for changes in their strategic direction, evolving economic conditions and volatility in the financial environment.

          July 2018

      • Risk Modelling

        • IC-1.5.8

          Bahraini conventional bank licensees using risk-modelling techniques to assess capital adequacy must comprehensively identify their capital needs on the basis of bothquantifiable and non-quantifiable risks. Banks must not rely on quantitative methods alone to assess capital adequacy. Non-quantifiable risks, if material, must also be included using qualitative assessment and management judgment.

          July 2018

      • Design of ICAAP

        • IC-1.5.9

          Bahraini conventional bank licensees must present in their ICAAP report and how risks relate to capital levels under both normal and stressed conditions.

          July 2018

      • Recovery Plan

        • IC-1.5.10

          Bahraini conventional bank licensees must develop, commensurate with the nature, size, complexity and scale of its activities, a recovery plan in line with Chapter 2 of Module DS. Recovery plans must be approved and reviewed regularly by the Board. The recovery plan must include information and analysis to reflect the appropriate coverage and granularity of the recovery plan, as well as key elements including:

          (a) Governance arrangements and escalation process following a triggering event;
          (b) Quantitative and qualitative triggers and early warning indicators; and
          (c) Recovery options based on the appropriate number of market-wide (systemic) stress scenarios and bank-specific (idiosyncratic) stress scenarios to assess which recovery options would be effective in a range of stress situations.
          Amended: January 2022
          Added: July 2018

        • IC-1.5.11

          Bahraini conventional bank licensees must develop and maintain a recovery plan trigger framework (which must be embedded within the bank's risk management framework), to prompt recovery action in a timely manner.

          July 2018

        • IC-1.5.12

          Recovery triggers must be well-defined and tailored to the full range of risks faced by banks. Notwithstanding other triggers that might be considered, the capital ratio trigger must not be less than 13%. The threshold level for triggers must be calibrated with impact on the bank's capital and set out clearly in the bank's recovery plan.

          July 2018

        • IC-1.5.13

          Bahraini conventional bank licensees must establish an adequate monitoring process to support the operation of the trigger framework in their recovery plan.

          July 2018

        • IC-1.5.14

          Bahraini conventional bank licensees must submit to the CBB annually their recovery plans by the 31st of August.

          Added: July 2021

    • IC-1.6 IC-1.6 Independent Review

      • IC-1.6.1

        Bahraini conventional bank licensees must ensure that the independent review undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34, addresses all the requirements within Module IC.

        Amended: April 2022
        Amended: January 2022
        Added: July 2018

  • ST ST Stress Testing

    • ST-A ST-A Introduction

      • ST-A.1 ST-A.1 Purpose

        • Executive Summary

          • ST-A.1.1

            This Module sets out the Central Bank of Bahrain's ('CBB's') directives and guidance to conventional bank licensees operating in Bahrain on the key requirements of an effective stress testing programme, and describes the CBB's approach to assessing the adequacy of bank stress testing practices. The contents of this Module apply to all conventional banks, except where noted in individual Chapters.

            July 2018

          • ST-A.1.2

            This Module should be read in conjunction with other parts of the Rulebook, mainly:

            (a) Principles of Business;
            (b) High-level Controls;
            (c) Risk Management (credit risk, market risk, operational risk, reputational risk, liquidity risk and interest rate risk in banking book);
            (d) Internal Capital Adequacy Assessment Process (ICAAP); and
            (e) Capital Adequacy.
            July 2018

        • Legal Basis

          • ST-A.1.3

            This Module contains the CBB's Directive (as amended from time-to-time) relating to Stress Testing and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all conventional bank licensees (including their approved persons).

            July 2018

          • ST-A.1.4

            The requirements for stress-testing covered in this Module for the purpose of capital adequacy, ICAAP, recovery planning and reverse stress testing apply to Bahraini conventional bank licensees only.

            Amended: October 2019
            July 2018

          • ST-A.1.4A

            Branches of foreign bank licensees must apply the requirements included in this Module for risks that are material and to the extent appropriate. If branches of foreign bank licensees do not have established policies, procedures, processes and systems at a branch level, they must satisfy the CBB that there are equivalent arrangements at their head office or regional office.

            Added: October 2019

          • ST-A.1.5

            For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

            July 2018

      • ST-A.2 ST-A.2 Module History

        • Evolution of the Module

          • ST-A.2.1

            This Module is issued in July 2018 as part of Volume One of the CBB Rulebook. The requirements in this Module become effective from the date of issuance. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made; Chapter UG-3 provides further details on Rulebook maintenance and version control.

            July 2018

          • ST-A.2.2

            The changes made to this Module are detailed in the table below:

            Summary of Changes

            Module Ref. Change Date Description of Changes
            ST-A.1.4 10/2019 Amended Paragraph on branches of foreign banks.
            ST-A.1.4A 10/2019 Added a new Paragraph on branches of foreign banks.
            ST-1.8.1 01/2022 Deleted Paragraph.
            ST-1.8.2 01/2022 Amended Paragraph.
                 

    • ST-1 ST-1 General Guidance on Stress Testing

      • ST-1.1 ST-1.1 Overview

        • ST-1.1.1

          This Chapter provides guidance and directives for stress testing and sets out the CBB's expectations and requirements with regards to the governance, coverage of risks, design and implementation of banks' stress testing programmes. The document provides input for supervisory assessment to ensure comprehensive and sound stress testing practice at banks.

          July 2018

        • ST-1.1.2

          Stress testing is an essential risk management tool used to assess a bank's potential vulnerabilities to stressed business conditions. Stress testing involves the use of various techniques to assess a bank's existing and potential vulnerability (typically in terms of its profitability, liquidity and capital adequacy) to 'stressed' business and economic conditions and plays an important role in the management of risk by banks. Effective stress testing enables a bank to quantify adverse unexpected outcomes related to a variety of risks and facilitate the decision to put in place risk mitigation plans to safeguard its safety and soundness. This includes providing a sufficient amount of financial resources (including capital and liquidity) and implementing other risk mitigation strategies that are required to withstand losses arising from a particular stressed scenario.

          July 2018

        • ST-1.1.3

          Stress testing can be used for multiple purposes within the bank. While this Directive is focused on the integrated firm-wide stress testing which serves to identify weaknesses and vulnerabilities in a bank's risk profile and in turn evaluate its capital adequacy and liquidity position under adverse scenarios stress testing should also be conducted for recovery planning and ICAAP. However, the underlying methodologies for scenario development and stress testing should be consistent regardless of whether they are used for firm-wide stress testing, ICAAP or recovery planning.

          July 2018

      • ST-1.2 ST-1.2 Developing an Appropriate Stress Testing Framework

        • General Requirements

          • ST-1.2.1

            Conventional bank licensees must establish a rigorous and forward-looking (i.e. considers a minimum of 3-years projections) stress testing programme that is commensurate with the nature, size and complexity of its business operations, markets it operates in and its risk profile.

            July 2018

          • ST-1.2.2

            The coverage of the stress testing programme must be comprehensive and include on- and off-balance sheet exposures, commitments, guarantees and contingent liabilities. Conventional bank licensees must factor in existing material risks and emerging risks relevant to its business and operating environment.

            July 2018

          • ST-1.2.3

            Stress testing must form an integral part of a Bahraini conventional bank licensee's internal capital adequacy assessment and risk management process. Banks must be able to demonstrate the robustness of the stress testing methodologies used, the quality and comprehensiveness of the data underpinning the stress testing, involvement of relevant stakeholders across Board, senior management, business line, risk and finance control and oversight functions in the design and implementation of the stress test programme, and the use of stress test results by risk management.

            July 2018

          • ST-1.2.4

            Stress testing must also feed into the conventional bank licensee's strategic and business plan.

            July 2018

        • The Board of Directors and Senior Management Oversight

          • ST-1.2.5

            The Board and senior management must ensure that a strong risk culture and governance policy underpins the effective use of stress testing.

            July 2018

          • ST-1.2.6

            Responsibilities of the Board include:

            (a) Approving the policies and procedures governing the stress testing programme, and ensuring sufficient resources and expertise to effectively implement the programme;
            (b) Ensuring that the design of the stress testing programme is consistent with the bank's risk appetite and is appropriate to the nature, scale, complexity of its risk-taking activities and overall business strategy;
            (c) Ensuring that views and inputs from relevant functions and departments are considered in the stress testing programme;
            (d) Providing constructive challenge on the results of stress tests, scenarios, key assumptions and methodologies used in the stress tests;
            (e) Reviewing the appropriateness of management actions proposed by senior management to mitigate potential vulnerabilities, taking into consideration the factors set out in Section ST-1.6;
            (f) Approve management actions; and
            (g) Commissioning regular stress testing programme in accordance with Section ST-1.7.
            July 2018

        • Senior Management

          • ST-1.2.7

            Responsibilities of the senior management must include:

            (a) Ensuring implementation and monitoring of the stress testing programme;
            (b) Developing stress testing policies and procedures in accordance with Section ST-1.4;
            (c) Participating in the review and identification of appropriate stressed scenarios;
            (d) Ensuring that scenarios are coherent with the risk profile of the bank's business and the market it operates in;
            (e) Ensuring that stress testing methodology is proportional to the scale and complexity of the bank;
            (f) Providing the Board with key information which has a bearing on stress testing exercise. This includes information on assumptions, extent of judgment used and limitations of the stress tests including the quantitative models used;
            (g) Communicating the stress test results in a clear, concise and comprehensive manner for the Board to consider the impact on the bank's strategy, performance and financial condition;
            (h) Developing and recommending appropriate management action plans to the Board to address potential vulnerabilities identified during the stress test exercise; and
            (i) Ensuring there is timely and effective implementation of Board-approved management action plans.
            July 2018

          • ST-1.2.8

            For branches of foreign bank licensees, where no local board of directors exists, all references in this Module to the board of directors should be interpreted as the authorised person(s) at the Head Office/ Regional Office.

            July 2018

      • ST-1.3 ST-1.3 Uses of Stress Testing

        • ST-1.3.1

          In order to ensure effectiveness of stress testing, conventional bank licensees should leverage it for the following purposes:

          (a) Provide a forward-looking assessment of risk exposures under stressed conditions, enabling banks to develop appropriate risk-mitigating strategies (e.g. restructuring positions) and contingency plans across a range of stressed conditions;
          (b) Improve the bank's understanding of its own risk profile and facilitate the monitoring of changes in this profile over time;
          (c) Inform the Board and senior management on the setting of the bank's risk appetite or tolerance and the determination of whether its risk exposures are commensurate with the stated risk appetite or tolerance;
          (d) Supplement the use of statistical risk measures (e.g. value-at-risk or economic capital models) which are based mainly on historical data and assumptions, and contribute to the modelling of the risks associated with new products or activities where there is a lack of sufficient historical data. Stress-testing helps quantify "tail" risk (i.e. the risk of losses under extreme market conditions) and re-assessment of modelling assumptions (e.g. those in relation to volatility and correlation);
          (e) Evaluate the bank's existing and potential vulnerabilities on a firm-wide basis (e.g. emerging risk concentrations) and its capacity to withstand stressed situations in terms of profitability, liquidity and capital adequacy;
          (f) Improve the bank's strategic annual business plan, capital plan, liquidity plan and funding plan; and
          (g) Support internal and external communication regarding the bank's risk appetite or tolerance, risk exposures and risk-mitigating strategies.
          July 2018

      • ST-1.4 ST-1.4 Policies, Procedures and Documentation

        • ST-1.4.1

          Conventional bank licensees must establish comprehensive policies and procedures governing its stress testing programme which address the following:

          (a) Principal objectives of the stress testing programme;
          (b) Governance including the roles and responsibilities of the Board, senior management, relevant business heads, Risk Management, Operations, Financial Control, Treasury, Compliance and Internal Audit;
          (c) Articulate the risk drivers (external and internal) in testing scenarios;
          (d) Pre-defined frequency for periodic stress testing. In case of ad hoc stress testing, establish criteria or trigger points.
          (e) Methodologies used for stress testing of each risk category and development of relevant scenarios;
          (f) Range of triggers and remedial management actions envisaged vis-à-vis different adverse events;
          (g) Frequency of review and update of the stress testing programme to reflect changing market conditions;
          (h) Reporting procedures; and
          (i) Guidelines on use of stress testing for broader risk management.
          July 2018

        • ST-1.4.2

          Where a third-party model is used in stress testing, conventional bank licensees must demonstrate a thorough understanding of:

          (a) Methodology underpinning the external model;
          (b) The third party's approach to validating the model;
          (c) Approach to implementing the model;
          (d) Rationale behind any adjustments made to the external model's input data sets and output; and
          (e) Limitations of the external model.
          July 2018

      • ST-1.5 ST-1.5 Stress Testing Approaches and Methodologies

        • General Requirements

          • ST-1.5.1

            Conventional bank licensees must adopt an integrated approach to stress testing and conduct stress tests on a firm-wide basis and on a consolidated basis where applicable, providing a spectrum oi perspectives at product-, business- and entity-specific levels. Where the bank is part of a larger banking group, its stress tests must also take into account the potential spillover effects and inter-dependence among members of the group.

            July 2018

          • ST-1.5.2

            Stress tests must be regularly conducted, at least on a biannual basis. Tests must consider the nature of the risks involved and the purpose of the stress tests. Stress scenarios must be coherently developed so that risks that are inherently linked (e.g. market risk and credit risk) can be assessed together across portfolios and across time. The bank may refer to Section ST-2.2 for any available guidance on stress testing for specific risks.

            July 2018

          • ST-1.5.3

            The conventional bank licensee may also conduct ad hoc stress tests on specific areas whenever this is warranted. The situations which warrant ad hoc stress testing may include market volatility, changes to the risk profile of large counterparties, deteriorating economic conditions domestically or globally, political events, new product development or new market entry, significant changes in business operations and changes in applicable laws and regulations.

            July 2018

          • ST-1.5.4

            The scope of a stress test exercise must reflect the significant activities undertaken by the conventional bank licensee and consider all material risks affecting the bank. The assessment of material risks must include the following major risk categories or activities:

            (a) Credit risk;
            (b) Market risk;
            (c) Interest rate risk in the banking book;
            (d) Liquidity risk, including funding liquidity risk;
            (e) Operational risk; and
            (f) Other material risks.
            July 2018

        • Methodologies and Techniques

          • ST-1.5.5

            Conventional bank licensees must use a range of quantitative and qualitative stress testing techniques and perspectives, depending on the complexity of risk and adequacy of data.

            July 2018

          • ST-1.5.6

            A quantitative measurement approach must provide the foundation of the stress testing framework. In measuring risks, a conventional bank licensee must establish quantitative approaches that appropriately reflect methodologies and standards that are well accepted in the industry. Quantification of risks and losses must be estimated based on credible data. However, quantitative techniques must be adequately enhanced with qualitative techniques and expert judgment to overcome limitations in data and systems. Meaningful qualitative techniques must be developed for stress testing risk factors that are not easily quantifiable.

            July 2018

          • ST-1.5.7

            Conventional bank licensees must ensure that the data used for stress testing is representative of, and bears similar risk characteristics to, the specific products or risk profile of the bank. In cases where there are data limitations, proxy estimates can be used. However, banks must apply a margin of conservatism to proxy estimates.

            July 2018

          • ST-1.5.8

            Conventional bank licensees must use, based on its risk profile, a suitable range of stress testing methodologies to ensure that its stress testing programme is comprehensive. In conducting scenario analysis, banks must assume a dynamic balance sheet rather than a static balance sheet. Banks must project growth (or decline) in balance sheet size under the chosen stressed conditions.

            July 2018

          • ST-1.5.9

            A sensitivity analysis estimates the impact of a single risk factor or a small number of closely-related risk factors (e.g. interest rates, FX rates, real estate price, equity price etc.) on asset value, asset quality, earnings, capital or liquidity ratios. In most cases, sensitivity tests involve changing inputs or parameters without relating those changes to an underlying event or real-world outcome. While it is helpful to draw on extreme values from historical periods of stress, sensitivity tests should also include hypothetical extreme values to ensure that a wide range of possibilities are included.

            July 2018

          • ST-1.5.10

            A scenario analysis simulates the impact of a combination of risk factors on the bank's profitability, capital adequacy and liquidity. The adverse movements of risk factors is usually driven by macroeconomic or political events, financial market movements, deterioration in industry fundamentals or a bank-specific event. These stress scenarios can be based on historical or hypothetical events (see Section ST-2.3).

            July 2018

          • ST-1.5.11

            Stress tests should also account for interactions between credit, funding and asset market conditions in a stressed scenario. The following interactions may be considered:

            (a) Credit deterioration of obligors leading to a reduction in cash inflows;
            (b) Price shocks for specific asset categories (for example, fire sales and significant mark-to-market losses) resulting in the drying up of liquidity for such assets;
            (c) Reduction of eligible high quality liquid assets ('HQLA') due to issuer downgrades;
            (d) Increase in bank's liquidity needs as a consequence of higher drawdown of committed credit lines (for example, higher crystallisation of undrawn credit lines);
            (e) Additional posting of collateral or margin due to a downgrade of the bank's credit rating or adverse price movements; and
            (f) Restricted access to secured or unsecured funding markets due to a deterioration in the bank's financial strength and credit rating.
            July 2018

        • Reverse Stress Testing

          • ST-1.5.12

            Apart from assessing and being prepared to respond to stressed conditions, Bahraini conventional bank licensees must also be aware of the scenarios that can render its business non-viable, due to severe financial or reputational damage. Banks must, therefore, implement a reverse stress testing program to identify the scenarios or events that can threaten the viability or solvency of the bank.

            July 2018

          • ST-1.5.13

            Reverse stress tests start from a known stress testing outcome, such as a breach of regulatory capital ratios, illiquidity, insolvency, or the cancellation of banking licence, and then work backwards to identify the events that could lead to such an outcome for the bank.

            July 2018

          • ST-1.5.14

            Reverse stress testing must serve as a starting point for determining the scenarios for recovery planning. Given that stress testing helps in understanding the quantum and the direction of impact of various scenarios on the Bahraini conventional bank licensee's critical risk metrics, the process of defining the recovery triggers must also be informed by stress testing

            July 2018

        • Expert Judgment

          • ST-1.5.15

            Conventional bank licensees must ensure qualitative judgment and perspective from relevant experts such as risk controllers, economists, business managers and traders within the bank are incorporated into the stress testing programme to help supplement the mechanical analysis performed by models, assess the impact of extreme events which are difficult to model statistically because, by definition, they occur very rarely and analyse and respond to fast-changing market conditions.

            July 2018

          • ST-1.5.16

            The designated unit responsible for managing and coordinating the stress testing programme should facilitate internal dialogue and debate among the relevant experts and take into account their opinions, as appropriate, in the design, implementation and use of the stress tests.

            July 2018

        • Alignment with Recovery Planning Program

          • ST-1.5.17

            Bahraini conventional bank licensees must test their recovery plan against three types of scenario at a minimum:

            (a) Idiosyncratic scenario;
            (b) Market-wide scenario; and
            (c) Scenario with a combination of both components.
            July 2018

          • ST-1.5.18

            Bahraini conventional bank licensees must adopt more than one scenario within each of the three scenario types.

            July 2018

      • ST-1.6 ST-1.6 Stress Testing Results and Management Actions

        • ST-1.6.1

          Bahraini conventional bank licensees must evaluate the impact of tests against accounting profit and loss, impairment provisions, risk weighted assets ('RWA'), regulatory capital, liquidity and funding gaps.

          July 2018

        • ST-1.6.2

          Bahraini conventional bank licensees may also use other measures to gauge the impact of stress tests depending on the purpose of the stress test, as well as the risks and portfolios being analysed including:

          (a) Asset values;
          (b) Economic or risk-adjusted profit and loss; and
          (c) Economic capital requirements.
          July 2018

        • ST-1.6.3

          In response to the stress tests results, conventional bank licensees must formulate realistic management actions considering:

          (a) Type of actions and specific circumstances, including external conditions, under which the management actions are unlikely to be feasible. This includes a consideration of factors listed in Paragraph ST-1.6.6;
          (b) Whether the actions would be consistent with the risk appetite or tolerance level set by the Board;
          (c) Whether the bank has adequate financial resources and operational capabilities to undertake such management actions; and
          (d) Constraints by supervisory or regulatory requirements, or market restrictions.
          July 2018

        • ST-1.6.4

          Management actions should be based on careful analysis and deliberation by the Board and senior management. The range of management actions may vary depending on the magnitude of impact and likelihood of stressed scenarios. Actions pursued should be proportionate to the severity of the impact of the stress tests and may include:

          (a) Reviewing the risk appetite or limits and business strategies;
          (b) Restructuring, liquidating, unwinding or hedging exposures;
          (c) Seeking additional collateral, buying credit protection or reducing risk exposures to specific sectors, countries and regions;
          (d) Tightening underwriting standards;
          (e) Adjusting the asset and liability composition;
          (f) Building additional capital or liquidity buffers;
          (g) Implementing recovery or contingency plans; and (h) Recourse to central bank funding facilities.
          July 2018

        • ST-1.6.5

          Management actions must be approved by the Board and senior management and clearly documented. Senior management must ensure effective monitoring mechanisms are in place to promptly activate management actions based on established triggers. Clear roles and responsibilities must be assigned to ensure prompt escalation to the Board and senior management upon the occurrence of any trigger event. Reviews must be periodically conducted to ensure that such management actions are executed in a timely and orderly manner.

          July 2018

        • ST-1.6.6

          The following are examples of factors that may be considered in formulating the management actions during stressed conditions:

          (a) Time required for full implementation, considering expected time for the management action to take effect, such as improvement of asset quality due to tightening of underwriting standards;
          (b) Legal restrictions and impediments that may affect financial resources to be relied upon, such as cross border transfers of capital to entities within the group;
          (c) Elevated cost associated with additional borrowings and risk of undersubscription when issuing debt or raising capital;
          (d) Limited access to funding markets and reduced market liquidity for assets to be disposed of as well as increased volatility which may further depress the price of these assets;
          (e) Loss of revenue and market share arising from any proposed reduction in lending activities;
          (f) Reputational risk and potential negative market reaction caused by ceasing discretionary coupons or exercising convertibility provisions of capital instruments; and
          (g) The potential response of other banks and market participants to a given scenario and the consequential impact on asset and funding markets.
          July 2018

      • ST-1.7 ST-1.7 Interpretation and Communication of Stress Testing Results

        • ST-1.7.1

          Stress testing provides a more comprehensive view of risks and vulnerabilities that a Conventional bank licensee is exposed to. To ensure that the stakeholders within the bank and the CBB can interpret the results accurately, the bank should provide supporting information which includes scenario assumptions, model methodologies, model assumptions and limitations.

          July 2018

        • ST-1.7.2

          Stress testing estimates the exposure to a specified stress event or scenario, but does not give the probability of such an event or scenario occurring. Moreover, stress testing is influenced by the judgment and experience of the experts designing the stress tests. The effectiveness of stress testing therefore, depends, in particular, on whether the bank has chosen the 'right' scenarios for stress testing, interpreted the results properly and taken the necessary steps to address the results.

          July 2018

        • ST-1.7.3

          Conventional bank licensees must be aware of the limitations when interpreting the results of stress tests.

          July 2018

        • ST-1.7.4

          Conventional bank licensees must submit the stress test results to the CBB biannually on 31st May and 30th November. The submission must include:

          (a) Description of the risks, exposures and entities covered;
          (b) Description of the scenarios and the rationale for it;
          (c) Prevailing and projected macro-economic conditions, as well as justifications for assumptions used;
          (d) Description of the methodologies used, including justifications for any material changes to the previous methodologies adopted;
          (e) Impact on the profitability, capital adequacy and liquidity, as well as on all material risk indicators; both absolute amounts and key financial ratios must be reported;
          (f) Description of management actions that have been considered and an assessment of their reasonableness;
          (g) Assessment on areas of vulnerability and the associated risk factors. The assessment must be at a sufficient level of granularity to provide a meaningful understanding of the vulnerable areas (for instance, business line, geographical sectors, economic sectors or sub-sectors, market segments, borrower groups) and the causes of stressed losses;
          (h) Extract of minutes of the Board and/or any other related sub-committee meetings on the deliberation on the stress tests and reverse stress test results; and
          (i) Assessment and results of independent reviews, where such a review has been conducted.
          July 2018

        • ST-1.7.5

          The reporting of stress test results by conventional bank licensees must, at minimum, cover a 3-year horizon based on the following scenarios:

          (a) One market-wide (systemic) stress scenarios;
          (b) One bank-specific (idiosyncratic) stress scenarios; and
          (c) A combination of systemic and idiosyncratic stress scenarios.
          July 2018

        • ST-1.7.6

          In order to arrive at a comprehensive assessment of a conventional bank licensee's stress testing programme, the CBB will, where necessary, engage in discussion with the Board or senior management on the programme, particularly in respect of the following:

          (a) Their views on major macroeconomic and financial market vulnerabilities and relevant threats specific to the bank's operation and business model; and
          (b) Their justifications for various aspects of the stress testing programme and the methodology employed, such as the key assumptions driving the stress-testing results, the scope and severity of the firm-wide scenarios used, and how the stress-testing results are, in practice, being used.
          July 2018

        • ST-1.7.7

          The CBB may also require the conventional bank licensees to conduct additional sensitivity analysis in respect of specific business lines, portfolios or positions which pose significant risk to the bank. Furthermore, the banks may be required to evaluate scenarios under which their viability is compromised (e.g. reverse stress testing scenarios), or to assess the plausibility of events that lead to significant strategic or reputational risk, particularly for significant business lines or products.

          July 2018

        • ST-1.7.8

          Conventional bank licensees must provide a detailed plan of corrective actions and follow-up on its implementation, in the event that the CBB assessment reveals material shortcomings in the bank's stress testing programme (or that the results generated from the programme are not adequately attended to or acted upon).

          July 2018

      • ST-1.8 ST-1.8 Independent Review

        • ST-1.8.1

          [This Paragraph was deleted in January 2022].

          Deleted: January 2022
          Added: July 2018

        • ST-1.8.2

          The independent reviews of the stress testing framework undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34, must cover the following:

          (a) Effectiveness of the stress testing programme in meeting its intended purposes, and the requirements of this Module;
          (b) Adequacy of management oversight and approval process;
          (c) Adequacy of documentation for the programme;
          (d) Comprehensiveness of risk exposures captured by the programme, and the methodologies, scenarios and assumptions used;
          (e) Verification of the quality of data sources used to run the stress tests (e.g. in terms of accuracy, consistency, timeliness, completeness and reliability);
          (f) Implementation of the programme, as well as subsequent authorization for, and implementation of, significant changes or development work (e.g. to take account of changes in bank's business strategies, risk characteristics or external environment);
          (g) Integration of stress testing into risk management and decision-making processes at appropriate management levels, including capital and liquidity planning;
          (h) Integrity of management information and reporting systems for the stress tests; and
          (i) Validation of stress testing results, such as through backtesting historical scenarios (e.g. the 2008/09 Global Financial Crisis and the 1997 Asian Financial Crisis) and their impact on a bank's portfolio, or benchmarking with other stress tests conducted within and outside the bank.
          Amended: January 2022
          Added: July 2018

    • ST-2 ST-2 Major Risks and Stress Scenarios

      • ST-2.1 ST-2.1 Risks and Stress Scenarios

        • ST-2.1.1

          This chapter outlines various risk factors and stress scenarios which the conventional bank licensees should take into account in their stress testing programme.

          July 2018

        • ST-2.1.2

          Conventional bank licensees must identify stress scenarios and risk factors which are aligned to the nature and complexity of the business and markets they operate in. They must ensure that important risk factors or relationships between these factors are not omitted from the stress testing analysis. The risk factors identified will form the basis for developing stress scenarios. Banks must ensure that they have the capacity to conduct integrated stress tests by using a combination of the stress scenarios most relevant to their risk profiles and activities, covering the major types of risk to which they are exposed.

          July 2018

      • ST-2.2 ST-2.2 Risk Factors

        • ST-2.2.1

          A key step in the stress testing process is the identification of major risk factors that should be stressed. In drawing up the list of risk factors, conventional bank licensees must understand the risk characteristics of their exposures and analyse the relevant risk factors, as well as the correlation (and potential for change in correlation) between these factors.

          July 2018

        • ST-2.2.2

          Highlighted below are some examples of risk factors that may be relevant to the conventional bank licensees:

          (a) Credit risk characterised by an increase in default probabilities (e.g. the rise in delinquencies and charge-offs); a decline in recovery rates or in the value of supporting collateral; a rating migration of counterparties, issuers or credit protection providers; and worsening of credit spreads. Banks should be aware of the major drivers of repayment ability (such as economic downturns and significant market shocks) that will affect all classes of counterparties or credits;
          (b) Concentration risk in terms of the large chunks of exposures to individual counterparties, products/-instruments, industries, market sectors, countries or regions which are driven by the same risk factors. Banks should also assess the contagion effects and possible linkages (and the potential changes in such interrelationships, both over time and in times of stress) which may lead to a disproportionate increase in risk exposure;
          (c) Interest rate risk arising from parallel shifts or twists in the yield curve and the increase in basis risk (i.e. changes in relationships between key market rates);
          (d) Market or price risk arising from adverse changes in the price or fair value of assets (e.g. currencies, equities, commodities or other financial instruments and their derivative positions) and their impact on relevant portfolios and markets;
          (e) Liquidity risk as a result of the tightening of credit lines, tightening of secured or unsecured funding markets, market liquidity for certain asset classes, the triggering of obligations to provide additional collateral or margin under credit support agreements or unexpected increase in drawdown of credit lines and deposits;
          (f) Operational risk (including legal risk) caused by various factors, such as internal or external fraud, system failure and security risks (e.g. in respect of transactional e-banking services), and litigation cases that may lead to material monetary loss or reputational impact on the bank concerned, if the outcome is not in its favour;
          (g) Strategic risk resulting from events or changes in the environment that could adversely alter the original assumptions made in the strategic plan and any potential threats to a bank's business, both financially and non-financially;
          (h) Reputational risk stress testing in terms of identifying scenarios (may be due to misconduct, financial crime, market view about the stability of the bank) which will have a negative reputational impact and, in turn, result in increased credit risk (e.g. run on the bank), liquidity risk (tightened access to funding markets) or market risk (drop in equity value).
          (i) Product-specific risks, such as prepayment risk for mortgages, or securitized portfolios. Other potential risks may also arise from abnormal market movements and their impact on contingent credit exposures (e.g. derivatives) and complex products (e.g. structured products with embedded multiple risks);
          (j) System-wide interactions and feedback effects that reflect the impact of likely behavioural responses of other market participants and their counterparties on the broader market in times of stress, and how that impact will feed back to the bank's own positions;
          (k) Macroeconomic factors (e.g. gross domestic product ('GDP') growth, change in property prices, unemployment rate and inflation or deflation rate) and their impact on other risk factors; and
          (l) Political and economic factors pertaining to industries, regions and markets.
          July 2018

      • ST-2.3 ST-2.3 Stress Scenarios

        • Credit and Counterparty Credit Risk

          • ST-2.3.1

            The following are examples of stress scenarios relatingto credit risk and counterparty credit risk:

            (a) Domestic economic downturn — this estimates the impact on a bank's asset quality, impairment provisions, profitability and capital adequacy of adverse changes in selected macroeconomic variables (e.g. GDP growth, unemployment rate, interest rates, bankruptcy rates and asset prices etc.) that are relevant to the bank's exposures;
            (b) Economic downturn in major economies affecting Bahrain (e.g. U.S., Saudi Arabia, UAE etc.) — this estimates the impact on a bank's counterparty exposures (e.g. corporate loans, holdings in securities, interbank exposures etc.) as a result of economic downturn in major economies that have significant financial/commercial/trading links with Bahrain;
            (c) Decline in the real estate market — this estimates the impact of a decline in property prices on collateral coverage, default risk and provisioning needs for loans secured by properties;
            (d) Decline in the value and market liquidity of financial collateral — this estimates the impact of a decline in the valuation and market liquidity of financial collateral, which reduces the quality and quantity of the collateral, leading to lower collateral coverage and recovery rates and higher provisioning needs and capital charges;
            (e) Increases in non-performing loans ('NPL') and provisioning levels — this assesses the resilience of a bank's loan portfolios in terms of the impact of such increases on its profitability and capital adequacy. In designing the scenario, the bank may apply different percentages of increase in classified loans and provisioning levels to its loan portfolios;
            (f) Rating migration of counterparties — a test based on the internal or external credit ratings of bank's credit exposures, by migrating a certain percentage of the credit exposures of a specific rating grade (by one or more notches) to a lower rating grade, and assessing the resultant impact on a bank's profitability and capital adequacy. The capital impact may include the effects of increases in credit losses and provisioning needs, as well as the application of higher risk-weights due to rating downgrades in the calculation of regulatory capital; and
            (g) Default of major counterparties — this estimates the impact of default of a bank's major counterparties, including corporate, sovereign and bank counterparties, on its profitability, as well as liquidity and capital adequacy. The test can be extended to cover aggregate exposures to major industries, market sectors, countries and regions (e.g. by assuming that a significant number of defaults occur within such aggregate exposures).
            July 2018

          • ST-2.3.2

            For the purpose of stressed expected loss, default probabiltiies should be point in time estimates. For a three year stress testing time horizon the bank should estimate the metric for 12th, 24th and the 36th month from the reporting date. This PDs should be cumulative.

            July 2018

        • Interest Rate Risk in Banking Book

          • ST-2.3.3

            The following are examples of stress scenarios relating to interest rate risk in the banking book:

            (a) 'gap risk' arises from the term structure of banking book instruments, and describes the risk arising from the timing of instruments' rate changes. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve (parallel risk) or differentially by period (non-parallel risk);
            (b) 'basis risk' describes the impact of relative changes in interest rates for financial instruments that have similar tenors but are priced using different interest rate indices; and
            (c) 'option risk' arises from option derivative positions or from optional elements embedded in the bank's assets, liabilities and off-balance sheet items, where the bank or its customer can alter the level and timing of their cash flows. Option risk can be further characterized into automatic option risk and behavioral option risk.
            July 2018

        • Liquidity Risks

          • ST-2.3.4

            The following are examples of stress scenarios relating to liquidity risk:

            (a) Tightening of credit lines — the potential impact of liquidity stress on the solvency position arising from a higher cost of funding due to tightening of wholesale and deposit/funding markets, and loss in the value of marketable securities due to market illiquidity;
            (b) Funding concentration — this assesses the liquidity risk of significant business activities and concentration to a particular source of funding, such as large depositors/funding providers, investment account holders, wholesale market funding or holdings of a particular asset class; and
            (c) Withdrawal risk of investment account holders ('IAH') /deposit outflows — this assesses the liquidity risk arising from honouring redemptions by investment account holders of unrestricted investment accounts at the level of individual funds in case of Islamic windows.
            July 2018

        • Market Risks

          • ST-2.3.5

            The following are examples of stress scenarios relating to market risk:

            (a) Increased volatility in key financial markets assesses the effects of increased volatility and adverse movements of market risk factors (i.e. interest rates, foreign exchange rates and equity or commodity prices) on a bank's market risk exposures;
            (b) Effect of key monetary decisions by the CBB, which might impact stock prices, FX rates and interest rates;
            (c) Effect on the bank arising from a rating downgrade of sovereign, leading to widening of credit spreads and a fall in equity prices; and
            (d) Structural changes to the economy of the main countries in which the bank operates.
            July 2018

        • Other Risks

          • ST-2.3.6

            The following are examples of stress scenarios relating to other risks:

            (a) Decline in net interest income — this estimates the impact on the bank's net interest income due to negative loan growth or squeezes in pricing caused by competition for new business or market share;
            (b) Risk concentrations — this estimates the impact from changes in market conditions which could give rise to risk concentrations. Banks may identify and assess the impact of heightened correlations or hidden inter-dependencies within and across risk types/risk factors, and possible second-round effects under severe market shocks that may lead to an increase in bank's exposures; and
            (c) Operational risk events — this assesses the effects, on a bank's capital requirement for operational risk, or its ability to maintain critical operations and earning capabilities, of external events (e.g. external fraud, vendor failure, utility outage and service disruption) or internal events (e.g. internal fraud, business disruption or system failures, telecommunication problems and loss of key personnel).
            July 2018

  • DSIBs DSIBs Domestic Systemically Important Banks

    • DS-A DS-A Introduction

      • DS-A.1 DS-A.1 Purpose

        • Executive Summary

          • DS-A.1.1

            The Domestic Systemically Important Banks (D-SIBs) Module sets out the Central Bank of Bahrain's ('CBB's) framework applicable to Bahraini conventional bank licensees identified as D-SIBs. This module provides guidance on the CBB's assessment methodology for identifying D-SIBs, and the Higher Loss Absorbency ('HLA') capital requirements to which such banks will be subject. The Module also sets out the supervisory measures and requirements to be applied by banks identified as being systemically important. This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law') (Decree No. 64 of 2006).

            July 2018

          • DS-A.1.2

            DS-A.1.2 This Module shall be read in conjunction with other parts of the Rulebook, mainly:

            (a) Principles of Business;
            (b) High-level Controls;
            (c) Capital Adequacy;
            (d) Stress Testing; and
            (e) Internal Capital Adequacy Assessment Process ('ICAAP').
            July 2018

        • Legal Basis

          • DS-A.1.3

            This Module contains the CBB's Directive relating to D-SIBs and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to all Bahraini conventional bank licensees.

            July 2018

          • DS-A.1.4

            For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

            July 2018

      • DS-A.2 DS-A.2 Module History

        • Evolution of the Module

          • DS-A.2.1

            This Module is first issued in July 2018 as part of Volume One of the CBB Rulebook. The requirements in this Module are effective from the date of issuance. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.

            July 2018

          • DS-A.2.1

            The most recent changes made to this Module are detailed in the table below:

            Summary of Changes

            Module Ref. Change Date Description of Changes
            DS-2.1.2 07/2021 Amended Paragraph on RRPs submission annually.
            DS-3.1.1 01/2022 Deleted Paragraph.
            DS-3.1.2 01/2022 Amended Paragraph.

    • DS-1 DS-1 Recovery and Resolution Planning

      • DS-1.1 DS-1.1 Overview

        • DS-1.1.1

          The objective of the D-SIBs framework is to identify banks that could cause significant disruption to the domestic financial system and economic activity locally in the event of distress or failure. To address the negative externalities posed by such banks, regulatory and supervisory measures will be undertaken with the aim of:

          (a) Reducing the probability of failure of D-SIBs, by increasing their going-concern loss absorbency through additional capital requirements, requiring early recovery planning and increasing the intensity of their supervision; and
          (b) Reducing the extent or impact of any failure, by improving the resolvability of these banks.
          July 2018

      • DS-1.2 DS-1.2 General Requirements

        • DS-1.2.1

          Bahraini conventional bank licensees designated as D-SIBs must hold designated HLA expressed as Common Equity Tier 1 ('CET1') capital at 1.5 percent of the total Risk-Weighted Assets ('RWA'), as calculated for the purposes of capital adequacy.

          July 2018

        • DS-1.2.2

          The HLA requirement must be fully met by the CET1 capital. This is to ensure that the capital held for HLA purposes must be available to absorb losses on a going-concern basis and, as such, enhance the resilience of the relevant D-SIB.

          July 2018

        • DS-1.2.3

          Bahraini conventional bank licensees designated as D-SIBs will be subject to an annual inspection by the CBB and two prudential meetings per year.

          July 2018

        • DS-1.2.4

          The HLA requirement and the Pillar 2 capital add-on address the external and internal risks associated with banks from different, but complementary perspectives.

          July 2018

        • Disclosure Requirement for D-SIBs

          • DS-1.2.5

            Bahraini conventional bank licensees designated as D-SIBs must disclose their D-SIB HLA requirement in their capital disclosures for the purpose of disclosures of the composition of the bank's capital base.

            July 2018

        • Recovery and Resolution Plans

          • DS-1.2.6

            Bahraini conventional bank licensees designated as D-SIBs must develop and maintain Recovery and Resolution Plans (RRPs) specific to their circumstances and reflect the nature, complexity, interconnectedness, level of substitutability and size of the bank in question. The RRPs must be approved by the CBB.

            July 2018

      • DS-1.3 DS-1.3 D-SIBs Assessment Framework

        • DS-1.3.1

          The D-SIBs Assessment Framework aims to assess the degree to which banks are systemically important to the local financial system and domestic economy. Accordingly, the assessment focuses on the impact of a bank's failure within the financial system.

          July 2018

        • DS-1.3.2

          D-SIBs are identified using a two-step approach. The first step is to draw up a preliminary indicative list of D-SIBs based on the quantitative scores calculated using a set of factors/indicators. The second step involves the exercise of supervisory judgment that may serve as a complement to the quantitative assessment process, i.e. to refine the preliminary indicative list by either (i) removing banks from the list; or (ii) including other banks onto the list.

          July 2018

        • DS-1.3.3

          The D-SIBs assessment is based on the following four factors:

          (a) Size
          i. Size is a key measure of systemic importance. The larger the bank, the more widespread the effect of a sudden withdrawal of its services and, therefore, the greater the chance that its distress or failure would cause disruption to the financial markets and systems in which it operates, and to the broader functioning of the economy. The size factor broadly measures the volume of a D-SIB's banking activities within the local banking system and economy and, therefore, provides a good measure of the potential systemic impact in case a bank should fail.
          ii. The quantitative indicator used in the D-SIBs framework to measure a bank's size is its total assets, as disclosed in the balance sheet.
          (b) Interconnectedness
          i. This measure captures the extent of a bank's interconnections with other financial institutions, which could give rise to externalities affecting the financial system and domestic economy.
          ii. The quantitative indicators used to capture interconnectedness are interbank activities (represented by intra-financial system assets, and intra-financial system liabilities) and securities outstanding.
          iii. Intra-financial system assets comprise lending to financial institutions (including undrawn committed lines), holding of securities issued by other financial institutions, gross positive current exposure of Securities Financing Transactions and exposure value of those Over the Counter ('OTC') derivatives which have positive current market value. Intra-financial system liabilities comprise deposits by other financial institutions (including undrawn committed lines), gross negative current exposure of Securities Financing Transactions and exposure value of those OTC derivatives which have negative current market value. The total marketable securities issued by the bank comprise debt securities, commercial paper, certificate of deposit and equity issued by the bank. The total marketable securities issued by the bank with the data on maturity structure of these securities will give an indication of the reliance of the bank on wholesale funding markets.
          (c) Substitutability
          i. The concept underlying substitutability as a factor for assessing systemic importance, is the recognition that the greater the role of a bank in a particular business line, or in acting as a service provider in relation to market infrastructure, the more difficult it will be to swiftly replace that bank and the extent of the products and services it offers, and, therefore, the more significant the risk of disruption in the event that the bank becomes distressed.
          ii. The quantitative indicators used to capture substitutability are assets under custody (i.e. the value of assets that a bank holds as a custodian), payment activity (i.e. the value of a bank's payments sent through all of the main payments systems of which it is a member) and values of underwritten transactions in debt and equity markets (i.e. the annual value of debt and equity instruments underwritten by the bank). This is based on the logic that the higher the market share of a bank, the more difficult it will be to substitute the extent and level of service it provides.
          (d) Complexity
          i. The degree of complexity of a bank is generally expected to be proportionately related to the systemic impact of the bank's distress, as the less complex a bank is, the more 'resolvable' it will likely be, and, in turn, the more likely the impact of its failure could be contained.
          ii. The quantitative indicators used to capture complexity are the notional value of OTC derivatives (i.e. the ratio of the notional amount outstanding for the bank), Level 3 assets and ratio of the total value of the bank's holding of securities for trading and available for sale category.
          July 2018

        • Qualitative Indicators

          • DS-1.3.4

            The CBB will apply a supervisory judgmental overlay to the quantitative assessment process recognising that some of the most effective indicators for assessing systemic importance tend not to be of a quantitative nature and, as such, not captured by a quantitative indicator-based measurement approach.

            July 2018

          • DS-1.3.5

            The CBB's indicative list of qualitative indicators that will typically be considered are:

            (a) Anticipated business expansion/contraction;
            (b) Anticipated mergers and acquisitions;
            (c) Analysis of exposures to a particular banking group;
            (d) Settlement institution for any payment or clearing system;
            (e) Extent of retail banking network;
            (f) Number of local and overseas branches;
            (g) Analysis of non-banking business exposure and income;
            (h) Analysis of non-plain vanilla products /portfolios held;
            (i) Analysis of off-balance sheet exposures;
            (j) Complexity of the group structure; and
            (k) Reputational risk.
            July 2018

        • Assessment Approach

          • DS-1.3.6

            A weight is assigned to each of the 'size', 'interconnectedness', 'substitutability' and 'complexity' factors. The CBB applies 25 percent equally to all factors towards the final aggregate score.

            Category (and weighting) Individual indicator Indicator weighting
            Size Total assets 25%
            Interconnectedness Intra-financial system assets 8.33%
            Intra-financial system liabilities 8.33%
            Securities outstanding 8.33%
            Substitutability Assets under custody 8.33%
            Payments activity 8.33%
            Underwritten transactions in debt and equity markets 8.33%
            Complexity OTC derivative notional value 8.33%
            Level 3 assets 8.33%
            Trading and available-for-sale securities 8.33%
            July 2018

          • DS-1.3.7

            Bahraini conventional bank licensees that have a minimal amount of exposure to clients in Bahrain, and a low percentage of their deposits base are from clients in Bahrain, will be excluded from the D-SIB assessment.

            July 2018

          • DS-1.3.8

            The CBB shall conduct the D-SIB assessment every two years and shall inform the banks, the relevant thresholds or cut off, and shall provide the DSIBs the guidance for implementation.

            July 2018

    • DS-2: DS-2: Recovery and Resolution Plans

      • DS-2.1 DS-2.1 Recovery and Resolution Plans

        • DS-2.1.1

          Recovery and Resolution Plans (RRPs) developed by DSIBs must be specific to their circumstances reflecting the nature, complexity, interconnectedness, level of substitutability and size of the bank in question. RRPs must include:

          (a) High-level substantive summary of the key recovery and resolution strategies and an operational plan for implementation;
          (b) Strategic analysis that underlies the recovery and resolution strategies;
          (c) Conditions for intervention, describing necessary and sufficient prerequisites for triggering the implementation of recovery or resolution actions;
          (d) Concrete and practical options for recovery and resolution measures;
          (e) Preparatory actions to ensure that the measures can be implemented effectively and in a timely manner;
          (f) Details of any potential material impediments (legal, strategic or technical) to an effective and timely execution of the plans; and
          (g) Responsibilities for executing preparatory actions, triggering the implementation of the plans and the actual measures.
          July 2018

        • DS-2.1.2

          Bahraini conventional bank licensees must engage in an annual simulation and scenario exercise to assess whether the RRPs are feasible and credible. The Board must approve any changes to RRPs resulting from such exercise. The results of such annual exercise and the RRPs must be submitted to the CBB annually by the 31st of August.

          Amended: July 2021
          July 2018

        • DS-2.1.3

          Underlying assumptions of the RRPs and stress scenarios must be sufficiently severe, but plausible. Both "solo" specific and "consolidated" stress scenarios, as appropriate, must be considered taking into account the potential impact of cross-border contagion in crisis scenarios, as well as simultaneous stress situations in several significant markets. RRPs must not make the assumption that the CBB or government support can be relied upon to recover the bank.

          July 2018

        • DS-2.1.4

          Bahraini conventional bank licensees must develop a robust governance structure and sufficient resources to support the recovery and resolution planning process. This includes clear responsibilities of business units, senior management up to, and including, board members. A senior level executive must be made responsible for the overall RRPs. This person must be responsible for ensuring that the bank is, and remains in compliance with the requirements of the RRPs and for ensuring that recovery and resolution planning is integrated into the bank's overall governance processes.

          July 2018

        • DS-2.1.5

          Bahraini conventional bank licensees must have systems in place that are able to generate on a timely basis, the information required to support the recovery and resolution planning process to enable both the bank and the CBB to carry out recovery and resolution planning effectively, and, where necessary, implement the RRPs.

          July 2018

        • DS-2.1.6

          RRPs should serve as guidance to banks and the CBB in a recovery or resolution scenario. The CBB may implement a different strategy should the bank need to be resolved.

          July 2018

        • Recovery Plan

          • DS-2.1.7

            The Recovery Plan must identify possible recovery measures, recovery options and the necessary steps and time needed to implement such measures, as well as assess the associated risks. An effective Recovery Plan must at least consider the following:

            (a) Governance arrangements and escalation process following a trigger event;
            (b) Recovery triggers must be well-defined and tailored to the full range of risks faced by the bank. The threshold level for triggers must be calibrated with impact on the bank's economic capital and set out clearly in the bank's recovery plan;
            (c) Actions or responses that should occur when triggers are breached; there should be an expectation that breach of a trigger causes a predetermined escalation and information process up to Board and Senior Management level;
            (d) A detailed explanation and analysis, illustrating how the triggers were calibrated, as well as highlighting the effectiveness of the triggers;
            (e) Incorporating qualitative triggers in their consideration of whether a recovery response is necessary and, if so, what kind of response would be appropriate;
            (f) Incorporating the triggers for recovery planning into the bank's overall risk management framework. Recovery triggers must be aligned with (but not limited to) existing triggers for liquidity or capital contingency plans, early warning indicators and the bank's risk appetite;
            (g) Triggers for recovery planning must be complemented by early warning indicators that alert the bank to emerging signs of stress, but that do not yet give rise to a triggering event;
            (h) Use at least one market-wide (systemic) stress scenarios and one bank-specific (idiosyncratic) stress scenarios, as well as a combination of systemic and idiosyncratic stress scenarios, to assess the robustness of their Recovery Plans and to assess which recovery options would be effective in a range of stress situations; and
            (i) Allocation of losses to shareholders, and unsecured and uninsured creditors in a manner that respects the hierarchy of claims.
            July 2018

          • DS-2.1.8

            Bahraini conventional bank licensees must notify the CBB when high levels of stress are experienced and/or recovery plan triggers are breached. Banks must also notify the CBB on the Recovery Plan actions or responses that would be taken by the Bank when the plan is activated.

            July 2018

          • DS-2.1.9

            Bahraini conventional bank licensees must use quantitative and, if relevant, qualitative triggers in their recovery plans. The quantitative triggers focused on firm-specific liquidity and capital measures are critical. The quantitative triggers may include different elements such as:

            (a) withdrawal of deposits and other funding;
            (b) revenue performance (or components of these);
            (c) ratings downgrades;
            (d) credit risk limits;
            (e) equity ratios;
            (f) renewal of wholesale financing;
            (g) increased collateral requirements;
            (h) interest rate environment; and
            (i) senior debt spreads.
            July 2018

          • DS-2.1.10

            Bahraini conventional bank licensees must use three stress scenarios at a minimum, i.e. systemic, idiosyncratic and a combination of both for the purpose of recovery planning.

            July 2018

          • DS-2.1.11

            The following elements are illustrative in nature for stress scenarios to be considered in Recovery planning:

            a) significant deposit withdrawal or runoff;
            b) collapse of global financial markets;
            c) significant capital and liquidity impacts;
            d) severe losses through a rogue trader;
            e) rating downgrades;
            f) US Dollar or a Euro crisis;
            g) GDP growth rates; h) loss of goodwill;
            i) exodus of talent;
            j) currency or commodity prices volatility;
            k) increased collateral requirements;
            l) bank failures;
            m) fraud; and
            n) reputational crisis.
            July 2018

          • DS-2.1.12

            Bahraini conventional bank licensees must consider a variety of feasible recovery options that could play a critical role towards improving resilience and viability ultimately. Such options may include for instance the following illustrative options:

            (a) Issuance of capital instruments at short notice;
            (b) Seeking additional liquidity from existing or new sources;
            (c) Sale or disposal of a part of the business and assets;
            (d) Restricting new business activities;
            (e) Lowering dividend pay outs; and
            (f) Restructuring.
            July 2018

        • Resolution Plan

          • DS-2.1.13

            Bahraini conventional bank licensees must establish Resolution Plans intended to facilitate smooth resolution making it feasible without severe market disruption. It must include a substantive resolution strategy approved by the Board and agreed with the CBB, and an operational plan for its implementation. It must identify, in particular:

            (a) Financial and economic functions for which continuity during the resolution process is critical and suitable resolution options to preserve those functions, or wind them down in an orderly manner;
            (b) Data requirements on the bank's business operations, structures, and systemically important functions;
            (c) Potential legal, strategic or technical barriers to effective resolution and actions to mitigate those barriers; and
            (d) Actions to protect insured depositors and ensure the rapid return of segregated client assets.
            July 2018

          • DS-2.1.14

            Bahraini conventional bank licensees must consider the following important elements in their analysis leading to the development of the resolution plan:

            (a) The corporate and group structure
            (b) Relevant entities and the identification of material entities;
            (c) Balance sheet profile including on and off balance sheet;
            (d) Funding, liquidity and capital needs;
            (e) Business model of the parent and material entities;
            (f) Core business lines;
            (g) Operational, financial, legal and structural dependencies;
            (h) External dependencies;
            (i) Financial functions mapping each material entity and business lines;
            (j) Resolution strategies and options.
            July 2018

          • DS-2.1.15

            For the purpose of DS-2.1.13(a), banks shall consider in their recovery and resolution planning processes the identification and the development of suitable resolution options for 'critical functions' and 'critical shared services. The resolution strategy and operational plan should encompass appropriate actions which help maintain continuity of these functions while avoiding unnecessary loss of value and minimising, where possible, the costs of resolution.

            July 2018

          • DS-2.1.16

            Critical functions are activities performed for third parties not affiliated to the bank, the failure of which would lead to a disruption of services that are vital for the functioning of the real economy and for financial stability due to the bank/banking group's size or market share, interconnectedness, complexity and cross-border activities.

            July 2018

          • DS-2.1.17

            The designation of a function as critical does not imply that the function and all related liabilities will be protected in a resolution. Rather, the designation is meant to assist the CBB and relevant authorities in developing resolution strategies that minimise systemic disruption and preserve value. It is important to note that the institution specific lists of critical functions will be an important input in the resolution planning process and the resolvability assessments.

            July 2018

          • DS-2.1.18

            The criticality of a function can be assessed in a three-step process: —

            a) Impact assessment: It will include understanding the nature and extent of the activity and assessing the impact of the failure of the function on the market and infrastructure, on customers, on other market participants and finally the interdependences of the market;
            b) Evaluating the market for that function: This will encompass understanding how quickly the market is able to substitute the service providers of the failed function. Such an assessment will include supply side analysis of service providers covering market concentration;
            c) Firm-specific test: The analysis will determine whether the bank's failure would have a material impact on third parties, on the potential for contagion and on the general confidence of market participants which will be based on understanding of the overall market share of the firm for that specific function etc.
            July 2018

          • DS-2.1.19

            These critical functions are assessed in the following five broad categories with distinct economic objectives and characteristics: (a) Deposit Taking, (b) lending and loan servicing; (c) payments, clearing custody and settlement, (d) lending and borrowing to and from financial institutions; and (e') Capital markets and investment activities.

            July 2018

          • DS-2.1.20

            Critical shared services are activities performed within the bank or by another unit within the group or outsourced to third parties and their failure would lead to the inability to perform critical functions and, therefore, to the disruption of functions vital for the functioning of the real economy or for financial stability.

            July 2018

          • DS-2.1.21

            Critical shared services are related to the critical functions a bank performs. They provide the internal and essential infrastructure the bank needs to continue operating. Their designation should therefore follow from the identification of the critical functions. The prioritising of the critical shared services, starts with answering the following questions first:

            a) How severe are the consequences of the failure of a particular service on one or more critical functions?
            b) How quickly will the failure of a particular shared service lead to a collapse of one or more critical functions?
            July 2018

          • DS-2.1.22

            For the purposes of this analysis, there should be a clear understanding of the following aspects of the shared services at legal entity level:

            i. the provider and the recipient of the services;
            ii. the nature of the services being provided;
            iii. the financial terms on which those services are offered;
            iv. the existence of service level agreements and the validity of such agreements in the event of failure; and
            v. the impact of default on the ability of the bank to maintain these services.
            vi. the substitutability of the services being provided (see above).
            July 2018

          • DS-2.1.23

            Bahraini conventional bank licensees must ensure that key Service Level Agreements (SLAs) can be maintained in crisis situations and in resolution, and that the underlying contracts include provisions that prevent termination triggered by recovery or resolution events, and facilitate transfer of the contract to a bridge institution or a third party acquirer.

            July 2018

          • DS-2.1.24

            Nothing in this Module will preclude CBB from devising other resolution strategies, options or plans recognised under the CBB Law should it believe it is necessary under the circumstances.

            July 2018

    • DS-3: DS-3: Independent Review

      • DS-3.1 DS-3.1 Independent Review

        • DS-3.1.1

          [This Paragraph has been deleted in January 2022].

          Deleted: January 2022
          Added: July 2018

        • DS-3.1.2

          The independent reviews of recovery and resolution planning framework undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34, must cover the following:

          (a) Adequacy of management oversight and approval of the RRPs;
          (b) Adequacy of documentation supporting the RRPs;
          (c) Integration of ICAAP and stress testing into RRP process;
          (d) Sufficiency of the trigger framework and the process for implementing and monitoring them;
          (e) Escalation process and the integrity of the planned actions against the triggers;
          (f) Authorisation for, and implementation of, significant changes to the RRPs;
          (g) Alignment of the RRPs to the bank's business strategies, group and organisational structure;
          (h) Due consideration of the legal and external environment;
          (i) Verification of the quality of data sources used to run the stress tests (e.g. in terms of accuracy, consistency, timeliness, completeness and reliability).
          Amended: January 2022
          Added: July 2018

  • RR RR Reputational Risk Management

    • RR-A RR-A Introduction

      • RR-A.1 RR-A.1 Purpose

        • Executive Summary

          • RR-A.1.1

            The Reputational Risk Management Module sets out the Central Bank of Bahrain's ('CBB's') rules and guidance to conventional bank licensees operating in Bahrain on establishing parameters and control procedures to monitor and mitigate reputational risks. The content of this Module applies to all conventional bank licensees, except where noted in individual Chapters.

            July 2018

          • RR-A.1.2

            This Module should be read in conjunction with other parts of the Rulebook, mainly:

            (a) Principles of Business;
            (b) High-level Controls;
            (c) Credit Risk;
            (d) Market Risk;
            (e) Operational Risk;
            (f) Liquidity Risk;
            (g) Interest Rate Risk in the Banking Book ('IRRBB');
            (h) Internal Capital Adequacy Assessment Process ('ICAAP'); and (i) Stress Testing.
            July 2018

        • Legal Basis

          • RR-A.1.3

            This Module contains the CBB's Directive (as amended from time-to-time) relating to reputational risk management and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all conventional bank licensees (including their approved persons).

            July 2018

          • RR-A.1.4

            Requirements of Section 3.3—Management of Step-in Risk are applicable to Bahraini conventional bank licensees only.

            July 2018

          • RR-A.1.5

            For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

            July 2018

      • RR-A.2 RR-A.2 Module History

        • Evolution of the Module

          • RR-A.2.1

            This Module is issued in July 2018 as part of Volume One of the CBB Rulebook. The requirements in this Module are effective from the date of issuance. Any material changes that are subsequently made to this Module are annotated with the calendar quarter date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.

            July 2018

          • RR-A.2.2

            The most recent changes made to this Module are detailed in the table below:

            Summary of Changes

            Module Ref. Change Date Description of Changes
                 
            July 2018

    • RR-1 RR-1 Reputational Risk

      • RR-1.1 RR-1.1 Introduction and Scope

        • RR-1.1.1

          This Chapter provides CBB's requirements and guidance with respect to an effective reputational risk management and sets out the approach for conventional bank licensees to manage reputational risk.

          July 2018

        • RR-1.1.2

          Reputational risk can be defined as the risk arising from negative perception on the part of customers, counterparties, shareholders, investors, debt-holders, market analysts, other relevant parties or regulators that can adversely affect a bank's ability to maintain existing, or establish new, business relationships and continued access to sources of funding (e.g. through the interbank or securitisation markets). Reputational risk is multidimensional and reflects the perception of other market participants. Furthermore, it exists throughout the organisation and exposure to reputational risk is essentially a function of the adequacy of the bank's internal risk management processes, as well as the manner and efficiency with which management responds to external influences on bank-related transactions.

          July 2018

        • RR-1.1.3

          Reputational risk also may affect a bank's liabilities, since market confidence and a bank's ability to fund its business are closely related to its reputation. For instance, to avoid damaging its reputation, a bank may call its liabilities even though this might negatively affect its liquidity profile. This is particularly true for liabilities that are components of regulatory capital, such as hybrid/subordinated debt. In such cases, a bank's capital position is likely to suffer.

          July 2018

        • RR-1.1.4

          Once a bank identifies potential exposures arising from reputational concerns, it should measure the amount of support it might have to provide (including implicit support of securitisations) or losses it might experience under adverse market conditions. In particular, in order to avoid reputational damages and to maintain market confidence, a bank should develop methodologies to measure as precisely as possible the effect of reputational risk in terms of other risk types (e.g. credit, liquidity, market or operational risk) to which it may be exposed. This could be accomplished by including reputational risk scenarios in regular stress tests. For instance, non contractual off-balance sheet exposures could be included in the stress tests to determine the effect on a bank's credit, market and liquidity risk profiles. Methodologies also could include comparing the actual amount of exposure carried on the balance sheet versus the maximum exposure amount held off-balance sheet, that is, the potential amount to which the bank could be exposed.

          July 2018

        • RR-1.1.5

          A conventional bank licensee should pay particular attention to the effects of reputational risk on its overall liquidity position, taking into account both possible increases in the asset side of the balance sheet and possible restrictions on funding, should the loss of reputation result in various counterparties' loss of confidence. (See Liquidity Risk Management Module.)

          July 2018

        • RR-1.1.6

          Conventional bank licensees must establish an effective process for managing reputational risk that is appropriate for the size and complexity of their operations.

          July 2018

        • RR-1.1.7

          This Module focuses mainly on:

          (a) The approach to identifying and managing reputational risk;
          (b) Drawing attention to various sources of reputational risk;
          (c) Providing guidance on the key elements of reputational risk management; and
          (d) Promoting adoption of a formalized and structured approach to managing reputational risk.
          July 2018

    • RR-2 RR-2 Sources of Reputational Risk

      • RR-2.1 RR-2.1 Key Drivers

        • RR-2.1.1

          It is vital for banks to understand how different sources of reputational risk can impact their business operations, to set up appropriate systems and controls which can be used to manage these risks. It should be noted that many of the reputational drivers are inter-related, representing common factors applicable to banks, and relate to how well a bank has managed its business and controlled its material risks.

          July 2018

        • RR-2.1.2

          The key drivers of reputational risk that could assist banks in identifying and categorising the major sources of reputational risk applicable to them, amongst others, are outlined below:

          (a) Corporate governance—good corporate governance is vital to a bank's reputation. The leadership of the Board and senior management will directly affect stakeholders' perception of the bank;
          (b) Board and management integrity—the personal ethics and behaviour of directors and senior management are important determinants of stakeholder confidence;
          (c) Staff competence/support—staff competence and support is essential for business success. Any deficiencies in employment and staff management practices could lead to various problems, which include high staff turnover, insufficient staffing, poor service quality, staff incompetence/misconduct, customer complaints and employee disputes. Some of these issues may result in damaging headlines and adverse publicity;
          (d) Corporate culture—it is crucial for banks to promote a corporate culture where the adoption of ethical and responsible behaviour, that can protect and enhance their reputation, is encouraged. Inadequate corporate culture may result in a loss of confidence;
          (e) Risk management and control environment—a sound risk management and control environment is essential for banks to safeguard their assets and capital, and to mitigate reputational risk. Banks should seek independent assurance that existing risk management and control systems are appropriate via internal audits, and take remedial actions for any deterioration in risk management and control standards;
          (f) Financial soundness/business viability—a bank's reputation is likely to suffer if its financial soundness, or business viability, is questioned. To safeguard and strengthen their reputation, banks should build-up stakeholder trust in their financial reporting systems, manage stakeholder expectations by providing relevant factual information to facilitate their assessment of the banks' financial performance and future prospects;
          (g) Business conduct and practices—banks are required to run their businesses in a responsible, honest and prudent manner. Business practices which deviate from this basic standard could erode stakeholder confidence and damage their reputation, and any resultant breach of laws and regulations may lead to investigations, disciplinary action and criminal charges. In dealing with customers and other counterparties, banks should be guided by, and adhere to, all relevant ethical standards and codes of conduct;
          (h) Stakeholder satisfaction—a banks' ability to satisfy stakeholder needs and expectations on a continuing basis is of utmost importance in sustaining their business in a highly competitive banking environment. Failure to do so, may result in loss of stakeholder confidence, falling business, adverse publicity or, in some cases, legal sanctions;
          (i) Legal/regulatory compliance—banks should adequately appraise legal and regulatory risks, and put in place robust systems to ensure compliance, including enhancing staff awareness of compliance issues and identifying areas of potential threat and vulnerability. Breaching the law or any relevant regulatory standards and guidelines can lead to serious consequences, including regulatory investigations, costly and high profile litigation, public censure, civil and criminal sanctions, harmful publicity, claims for damages, or even the loss of authorization. There may be significant damage to a bank's reputation even if the bank is ultimately acquitted of any illegal conduct;
          (j) Contagion risk/rumours—banks operating as part of a group will be susceptible to reputational events affecting their parent bank, non-bank holding company, or other members of the group (e.g. subsidiaries and affiliates). Such contagion effects on a banks' reputation may also result from other problematic relationships, such as any close association with major customers, counterparties or service providers that are revealed to be engaged in unethical, unlawful or corrupt activities. Rumours may have a damaging impact on the bank's reputation and the level of public confidence. Therefore, adequate contingency procedures should be developed by banks;
          (k) Crisis management—a bank's inadequate response to a crisis, or even a minor incident, that attracts media attention could arouse stakeholder concerns about management competence, thereby jeopardising the bank's reputation. On the other hand, effective crisis management arrangements (including communications with stakeholders and the media) could quickly allay stakeholder fears, restore their confidence and even enhance reputation. Therefore, banks should ensure that they are ready to deal with possible crises (which may be unprecedented and totally unexpected), with detailed and well-rehearsed crisis management plans in place. Close attention should also be paid to managing media communications;
          (l) Transparency/accountability—a banks' ability to be responsive to and satisfy stakeholders' information needs (e.g. by disclosing information in respect of material issues of interest to stakeholders in a transparent, honest and prompt manner) has become a key determinant of business competence. Such information will help stakeholders in understanding a banks' values, strategies, performance and future prospects. Stakeholder confidence, as well as the banks' credibility and reputation, will be weakened if information disclosed is found to be misleading, inaccurate or incomplete. There should be adequate accountability for the integrity of information disclosures, which should be backed by robust management monitoring and reporting systems;
          (m) Branding and cross-selling—this refers to the potential harm to a bank's reputation when an entity has clients in common with the bank and also carries the bank's brand (e.g. corporate name, logo/symbol). Different brand strategies create different risk profiles. Banks should consider the degree to which cross-selling is part of their overall strategy, as a greater degree of cross-selling increases reputational risk. This is particularly the case if a bank or banking group has stand-alone deposit-taking institution(s), broker-dealer(s) and asset management unit(s) that cross-sell products;
          (n) Outsourcing—a bank's reputation could also be damaged by sub-standard service quality, improper acts, or lax controls of some key service providers (e.g. outsourced telephone banking operations, IT support, debt collection services etc.). Banks should closely monitor the performance of the outsourcing providers and the on-going impact of the agreement on their risk profile, systems and controls framework; and
          (o) Shari'a non-compliance risk—Shari'a non-compliance is a unique operational risk in Islamic finance products resulting from non-compliance of the bank with the rules and principles of Shari'a in its products and services. It is crucial to set up key risk indicators for identifying the Shari'a non-compliance risk inherent in different kinds of Shari'a-compliant contracts, and to outline a set of variables that help to estimate the likelihood and severity of Shari'a non-compliance risk. It is possible for banks to become insolvent because of the reputational risk that is triggered by the Shari'a non-compliance risk. It is important to consider Shari'a non-compliance risk as one of the main risks that banks should take into account as part of their enterprise-level risk evaluation. Banks should be aware of the implications of Shari'a non-compliance risk for the overall enterprise when Shari'a requirements and rulings are not effectively communicated, translated into internal policy, or observed by banks across different businesses and functional units; and
          (p) Step-in risk—refers to the level of risk that is associated with a bank's decision to provide financial support to an unconsolidated entity that is facing stress, in the absence of, or in excess of, any contractual obligations to provide such support. The main reason for step-in risk is to avoid the reputational risk that a bank might suffer if it did not support an entity facing a stress situation. The financial crisis provided evidence that a bank might have incentives beyond contractual obligation or equity ties to 'step in' to support unconsolidated entities to which it is connected (refer to Section RR-3.3).
          July 2018

    • RR-3 RR-3 Reputational Risk Management

      • RR-3.1 RR-3.1 Reputational Risk Management Framework

        • RR-3.1.1

          Conventional bank licensees must adopt an approach to reputational risk management that fits the banks' profile of activities and level of sophistication, and that enables the risks affecting reputation to be consistently and comprehensively identified, assessed, controlled, monitored and reported.

          July 2018

        • RR-3.1.2

          The key elements of reputational risk management are good corporate governance, the existence of highly skilled, sincere and honest resources, effective reputational risk management processes; and adequate management of reputational events.

          July 2018

        • Good Corporate Governance

          • RR-3.1.3

            Good corporate governance forms the foundation of effective reputational risk management and provides a framework for:

            (a) Guiding banks' conduct and actions in achieving their vision, values, goals and strategies, as well as meeting stakeholder requirements and expectations; and
            (b) Ensuring robust oversight of their conduct and actions.
            July 2018

          • RR-3.1.4

            Good corporate governance can be achieved by implementing a governance infrastructure and adopting governance practices in compliance with Module HC (High-level Controls).

            July 2018

          • RR-3.1.5

            The Board must be responsible for overseeing the overall reputational risk management processes.

            July 2018

          • RR-3.1.6

            A sound governance infrastructure should have the following general attributes:

            (a) Having the right people, with the right balance of skills and experience on the Board, with suitable checks in place to ensure that no single individual can influence Board decisions;
            (b) Including a robust framework for succession planning to ensure that the business can continue to function effectively, even when there is a major management or staff turnover; and
            (c) Enabling business and management performance to be closely overseen by independent directors.
            July 2018

          • RR-3.1.7

            Conventional bank licensees should adopt a governance approach that sets out clear governance objectives and expectations on reputational risk management, as well as the authorities and responsibilities of all parties engaged in the risk management process.

            July 2018

          • RR-3.1.8

            The following elements must be included in the banks' governance practice framework:

            (a) Setting a clear and unambiguous vision, values, goals and strategies, and ensuring that they are transparent;
            (b) Developing appropriate policy, codes of conduct, guidelines and procedures to support the implementation of the bank's vision, values, goals and strategies;
            (c) Creating an open and empowering corporate culture to encourage responsible and ethical behaviour, and to support the achievement of business objectives and effective risk management;
            (d) Building up a strong, stable management team that are honest, competent, responsible, accountable and responsive to stakeholders;
            (e) Raising the risk awareness of employees and providing employees with adequate training;
            (f) Setting up effective systems and controls to manage and control all material risks (including reputational risks) faced by the bank and to monitor compliance with all applicable laws, regulatory standards, best practices and internal guidelines; and
            (g) Having adequate policy and procedures in place to ensure that all disclosures to stakeholders are clear, accurate, complete, relevant, consistent and timely, and guided by the principles of ethics, integrity and transparency.
            July 2018

        • Effective Reputational Risk Management Process

          • RR-3.1.9

            Conventional bank licensees must have adequate arrangements, strategies, policy, processes and mechanisms in place to manage reputational risk. An effective reputational risk management process must include:

            (a) Policy, definition of roles, codes of conduct, guidelines and procedures which guide staff behaviour and conduct, and set boundaries for staff actions, in particular the boundaries for unacceptable practices;
            (b) Consideration of the potential impact of its strategy and business plans and, more generally, of its behaviour on its reputation;
            (c) Addressing reputational risk in a precautionary manner, for example by setting limits or requiring approval for allocating capital to specific countries, sectors or persons and/or whether its contingency plans address the need to deal proactively with reputational issues in the event of a crisis;
            (d) Risk identification, assessment and control which provides a systematic process for identifying and assessing the risks affecting reputation, including the setting of appropriate response actions to control the risks;
            (e) Risk monitoring and reporting which ensures that the progress of carrying out agreed response plans is adequately monitored, any changes to the status of the risks concerned is regularly reviewed, and early warning systems are in place for identifying emerging threats, to ensure that prompt corrective actions are taken to address those threats;
            (f) Communications and disclosures which enable meaningful, transparent and timely information to be provided to stakeholders to better their understanding of the bank's performance and future prospects, and to retain their confidence; and
            (g) Independent reviews and audits which give assurance that the risks affecting reputation have been adequately understood and properly controlled throughout the bank.
            July 2018

        • Adequate Management of Reputational Events

          • RR-3.1.10

            Reputational events may still occur despite stringent risk control measures. As such, banks must develop a systematic and comprehensive approach for managing reputational events. This will allow bank management to be prepared to take proper measures to restore the institution's reputation and minimize any damage caused. The effectiveness of this approach would help reduce the chance of having to deal with a full-blown crisis.

            July 2018

          • RR-3.1.11

            The conventional bank licensee's approach to manage reputational events must include:

            (a) Crisis management adoption of the key elements of effective crisis management, which includes a crisis management manual, crisis management structure, invocation of crisis management, crisis management process, internal and external communications, and pre-planning for crisis management;
            (b) Adoption of an embedded risk mitigation approach that refers to shaping products, business transactions, special investments, outsourcing arrangements, new product process, restructurings etc., which will assist in mitigating some of the potential concerns of key stakeholders by design;
            (c) Post-event reviews—the Board and senior management must conduct a post-event review to identify any lessons learnt, or problems and weaknesses revealed, from the event in order to take appropriate actions to improve the bank's approach for managing reputational risk; and
            (d) Early warning systems—a banks' implementation of early warning systems will enable them to plan actions in advance for addressing potential threats that are likely to develop into reputational events. Early recognition of impending reputational problems also means that valuable time has been won to facilitate pre-planning for future action.
            July 2018

          • RR-3.1.12

            The early warning systems must also involve developing and monitoring:

            (a) Performance indicators and other indicators reflecting stakeholder confidence, which can provide an estimate of the bank's reputation and keep track of the progress in managing associated risks; and
            (b) Early warning indicators (e.g. a sudden increase in customer complaints, breaches of internal controls, operational errors, system outages, fraudulent incidents and any significant deterioration in other performance indicators) and other triggers or thresholds for management actions, or provide signals to invoke response or contingency plans.
            July 2018

      • RR-3.2 RR-3.2 Assessment of Reputational Risk

        • RR-3.2.1

          Conventional bank licensees must conduct a regular assessment of the reputational risk to which they are exposed, leveraging their understanding of governance, business model, products and the environment in which they operate.

          July 2018

        • RR-3.2.2

          Conventional bank licensees must consider both internal and external factors or events that might give rise to reputational concerns (refer to Section RR-2.1). Banks must consider the following qualitative indicators, amongst others, in their assessment of reputational risk:

          (a) The number of sanctions from official bodies during the year;
          (b) Media campaigns and consumer-association initiatives that contribute to a deterioration in the public perception and reputation of the institution;
          (c) The number of and changes in customer complaints;
          (d) Malpractices and irregularities;
          (e) Negative events affecting the institution's peers;
          (f) Dealing with sectors that are not well perceived by the public (e.g. weapons industry, embargoed countries etc.) or people and countries on sanctions lists; and
          (g) Other 'market' indicators, for example, rating downgrades or changes in the share price throughout the year.
          July 2018

        • RR-3.2.3

          Conventional bank licensees must assess the significance of its reputational risk and how it is connected with other risks (i.e. credit, market, operational, liquidity and interest rate risks) by leveraging other risk assessments to identify any possible secondary effects in either direction (from reputation to other risks and vice versa).

          July 2018

        • Stress Testing

          • RR-3.2.4

            Conventional bank licensees must enhance their stress testing methodologies to capture the effect of reputational risk. Banks must also conduct stress testing or scenario analysis to assess any secondary effects of reputational risk (e.g. liquidity, funding costs, etc.).

            July 2018

          • RR-3.2.5

            The stress testing technique is useful for identifying events or changes that pose threats to banks, and can help develop different sets of circumstances which could potentially cause a crisis. Banks can make use of this technique to assess the likelihood of the risk materialising and the potential impact of the risk on their business and reputation under different stress scenarios (refer to Module ST on Stress Testing for guidance).

            July 2018

          • RR-3.2.6

            Conventional bank licensees should be guided by the following supplementary guidance on use of stress testing for reputational risk:

            (a) Banks employing stress testing techniques for assessing reputational risk should seek to incorporate stress scenarios for reputational risk into their institution-wide stress testing procedures and assess the impact of reputational risk on other major risks (e.g. business or liquidity risk);
            (b) In developing stress scenarios for reputational risk, banks should identify the major sources of reputational risk to which they are potentially exposed, key stakeholders that will most likely increase reputational risks in stress scenarios or an appropriate range of circumstances and events. Banks should also consider how those sources, circumstances and events may adversely affect their business prospects and financial position (including earnings, capital and liquidity), as well as generate other second round effects;
            (c) Banks may face reputational risk in other aspects, such as those arising from material weaknesses in their internal risk management processes (e.g. resulting in substantial fraudulent losses) or management's failure to respond swiftly and effectively to external threats or influences (e.g. resulting in poor strategic decisions). Banks should exercise their best judgment and apply stress scenarios and parameters that suit their own circumstances and risk profile;
            (d) Once the potential exposures arising from reputational concerns are identified, banks should estimate the amount of support (capital or liquidity) they may have to provide, as well as estimate potential loss under adverse market conditions. Banks should also assess the impact of reputational risk on other risks to which they may be exposed. This could be accomplished by including reputational risk scenarios in regular stress tests;
            (e) Banks should assess whether there is any longer term impact on their business and operations due to reputational risk (e.g. loss of market share, customer base or business revenue). Banks should also pay particular attention to the effects of reputational risk on their overall liquidity position, taking into account both possible changes in the asset side of the balance sheet and possible restrictions on funding, should the damage in reputation result in a general loss of confidence on the part of their counterparties and customers; and
            (f) Senior management should actively participate in conducting stress testing and scenario analyses for reputational risk (including the development of stress scenarios and assumptions), and review the stress testing results.
            July 2018

      • RR-3.3 RR-3.3 Management of Step-in Risk

        • Bahraini Conventional bank licensees' Policy and Procedures for Identifying and Managing Step-in Risk

          • RR-3.3.1

            Bahraini Conventional bank licensees must establish and maintain, as part of their risk management framework, policy and procedures that describe the processes used to identify entities that are unconsolidated for regulatory purposes and the associated step-in risks. The policy and procedures must:

            (a) Clearly describe the identification criteria that banks use to identify the step-in risk;
            (b) Not be prescriptive or geared towards any particular type of entity. Given the case-by-case nature of the evaluation, the guidelines are envisaged as flexible enough to capture all entities that are unconsolidated for regulatory purposes and which pose significant step-in risk;
            (c) Clearly describe the specific provisions of the laws or regulations and list the types of entity covered by those laws or regulations;
            (d) Describe the internal function responsible for identifying, monitoring, assessing, mitigating and managing the potential step-in risk;
            (e) Clearly describe the bank's own definition and criteria of 'materiality', as used to exclude immaterial entities in the bank's step-in risk assessment, and their rationale;
            (f) Document the process to obtain the necessary information to conduct the regular self-assessments;
            (g) Be reviewed regularly, and whenever there is any material change in the types of entity or in the risk profile of entities; and
            (h) Require the 'Step-in Risk Self-assessment' to be included in the internal risk management processes, subject to independent controls.
            July 2018

        • Regular Step-in Risk Identification and Assessment

          • RR-3.3.2

            Bahraini Conventional bank licensees must regularly identify all entities giving rise to step-in risk. For all these entities, they must estimate the potential impact on their liquidity and capital that step-in risk could entail. The bank must use the estimation method it believes to be most appropriate. Banks must describe the method used to estimate the financial impact of step-in risk in each case.

            July 2018

        • Step-in Risk Reporting

          • RR-3.3.3

            Bahraini Conventional bank licensees must annually report the results of their self-assessment of step-in risk to the CBB on 30th September of each year. The report must contain the following information:

            (a) Per groups of similar entities, the number and types of entity that were initially identified;
            (b) The entities must be grouped under three categories: entities deemed immaterial (for which no step-in risk assessment process conducted); entities which are material, but for which step-in risk is insignificant; and entities which are material and for which step-in risk is significant; and
            (c) The nature of the step-in risk and the action taken by the bank to limit, mitigate or recognise this risk, must be reported for entities which are material and for which step-in risk is significant.
            July 2018

  • LM LM Liquidity Risk Management

    • LM-A LM-A Introduction

      • LM-A.1 LM-A.1 Purpose

        • Executive Summary

          • LM-A.1.1

            This Module sets out the CBB's requirements with regards to management of liquidity risk by banks.

            August 2018

          • LM-A.1.2

            Liquidity is the ability of a bank to fund increases in assets and meet obligations as they fall due, without incurring unacceptable losses. Virtually every financial transaction or commitment has implications for a bank's liquidity. Effective liquidity risk management helps ensure a bank's ability to meet cash flow obligations. Liquidity risk management is of paramount importance because a liquidity shortfall at a single institution can have system-wide repercussions.

            August 2018

          • LM-A.1.3

            This Module outlines a set of principles covering the following topics:

            (a) Governance of liquidity risk management;
            (b) Liquidity risk identification, measurement, monitoring and control;
            (c) Foreign currency liquidity management;
            (d) Funding diversification and market access;
            (e) Maintenance of liquidity cushion;
            (f) Intragroup liquidity management;
            (g) Intraday liquidity risk management;
            (h) Collateral management;
            (i) Stress testing and scenario analysis; and
            (j) Contingency Funding Plan.
            August 2018

        • Legal Basis

          • LM-A.1.4

            This Module contains the Central Bank of Bahrain's ('CBB's') Directive (as amended from time-to-time) on the liquidity risk management requirements for conventional banks, and is issued under the powers available to the CBB under Article 38 of the CBB and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all conventional banks.

            August 2018

          • LM-A.1.5

            For an explanation of the CBB's rule-making powers and different regulatory instruments, see UG module (Section UG-1.1).

            August 2018

          • LM-A.1.6

            The requirements included in chapters LM-1 to LM-11 must be fully met by 30th June 2019, and the requirements in Chapter LM-12 must fully be met by 31st December 2019.

            August 2018

          • LM-A.1.7

            Branches of foreign bank licensees must apply the requirements under Chapters LM-1 to LM-10 of this Module to the extent appropriate. If branches of foreign bank licensees do not have established policies, procedures, processes and systems at a branch level, they must satisfy the CBB that there are equivalent arrangements at their head office or regional office.

            Added: October 2019

      • LM-A.2 LM-A.2 Module History

        • LM-A.2.1

          This Module was issued in August 2018 as part of Volume One of the CBB Rulebook. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.

          August 2018

        • LM-A.2.2

          The changes made to this Module are detailed in the table below:

          Summary of Changes

          Module Ref. Change Date Description of Changes
          LM-11.1.9 07/2019 Added reference to BR regarding LCR reporting.
          LM-A.1.7 10/2019 Added a new Paragraph on branches of foreign banks.
          LM-12.4 – Table 1 01/2020 Amended table on components of ASF Category.
          LM-12.5.1 – LM-12.5.3 01/2020 Amended Section on General Disclosure Requirements.
          LM-1.3.7 01/2022 Deleted Paragraph.
          LM-1.3.8 01/2022 Amended Paragraph.
          LM-1.3.9 01/2022 Deleted Paragraph.

    • LM-1 LM-1 Governance of Liquidity Risk Management

      • LM-1.1 LM-1.1 Liquidity Risk Management Framework

        • LM-1.1.1

          Banks must establish a robust liquidity risk management framework, which includes an asset and liability management committee (ALCO). The framework must describe the role of ALCO and its relationship with the risk management function, and articulate the delineation of powers, responsibilities and reporting lines for different departments and levels of management, so that the liquidity risk management strategy, policies and procedures are implemented effectively.

          August 2018

        • LM-1.1.2

          A bank's liquidity risk management structure must be commensurate with the nature, scale and complexity of the bank's business activities.

          August 2018

      • LM-1.2 LM-1.2 Responsibilities of Board of Directors

        • LM-1.2.1

          The Board must be ultimately responsible for determining the types and magnitude of liquidity risk that the bank can tolerate according to the liquidity risk management strategy, and for ensuring that there is an appropriate organisation structure for managing liquidity risk.

          August 2018

        • Liquidity Risk Tolerance

          • LM-1.2.2

            The Board of Directors must articulate the bank's liquidity risk appetite and tolerance that is appropriate for its business strategy and ensure that it is communicated to all levels of management.

            August 2018

          • LM-1.2.3

            The risk tolerance level must be adequately documented and articulated, preferably with a combination of qualitative and quantitative factors1 .


            1 For example, the specification of a minimum survival period under a range of sufficiently severe, but plausible, stress scenarios. Other quantitative measures may, for example, relate to controls over areas such as liquid asset holdings, maturity or currency mismatches, concentration of funding and contingent liquidity obligations, and other limits on liquidity indicators used for controlling different aspects of liquidity risk.

            August 2018

          • LM-1.2.4

            The risk tolerance must be set in a way that:

            (a) Defines clearly the level of liquidity risk that the bank is willing to assume, under normal and stressed conditions2 ;
            (b) Can be easily communicated, understood and monitored by relevant personnel of the bank involved in the liquidity risk management process; and
            (c) Reflects the bank's assessment of the sources of liquidity risk it faces, as well as the trade-off between risks and profits.

            2 For example, a bank may quantify its liquidity risk tolerance in terms of the level of unmitigated funding liquidity risk the bank decides to take under normal and stressed business conditions.

            August 2018

          • LM-1.2.5

            Banks must also constantly monitor its risk profile for adherence to the risk appetite and tolerance, ensuring that any significant changes in market circumstances or the validity of assumptions used are accounted for.

            August 2018

        • Liquidity Risk Management Structure Oversight

          • LM-1.2.6

            The Board of Directors must ensure that any authority that is delegated to the bank's ALCO to carry out some of its responsibilities for liquidity risk management is adequately executed. However, such delegation of authority does not absolve the Board and its members from their risk management responsibilities and the need to oversee the work of any such committee(s) exercising delegated authority.

            August 2018

          • LM-1.2.7

            For the ALCO, or any similar committee, to perform a liquidity risk governance function on behalf of the Board effectively, its membership should be extended to comprise personnel from the treasury function, the risk management function, the financial control function and other principal business areas that affect the bank's liquidity risk profile. It should also be supported by competent risk managers with a dedicated responsibility for liquidity risk management.

            August 2018

          • LM-1.2.8

            In the case of a local banking group with overseas operations (whether in the form of a branch or subsidiary), the Board must determine the appropriate liquidity risk management framework for overseeing all such overseas operations, taking into account the differences in their liquidity risk characteristics and the transferability of funds between them in the light of any potential legal, regulatory or operational restrictions.

            August 2018

          • LM-1.2.9

            In the case of foreign bank branches in Bahrain, the head office of the bank may, where appropriate, delegate certain tasks for liquidity risk management to the local branch management, provided that adequate oversight is exercised by the bank's Board (or a delegated risk governance function at the head office or regional level) in approving the branch policies and monitoring the branch's compliance with such policies.

            August 2018

          • LM-1.2.10

            The Board of Directors is also responsible for:

            (a) Ensuring the competence of senior management and appropriate personnel in measuring, monitoring and controlling liquidity risk in terms of expertise, systems and resources, and in taking appropriate and prompt remedial actions to address concerns when necessary;
            (b) Reviewing and approving, on an annual basis at least, the liquidity risk strategy and other significant liquidity risk management policies and procedures (e.g. contingency funding planning and liquidity stress testing framework), and ensuring that senior management translates the Board's decisions into clear guidance and operating processes (e.g. in the form of controls) for effective implementation;
            (c) Reviewing regular reports and stress testing results on the bank's liquidity positions and becoming fully aware of the bank's performance and overall liquidity risk profile; and
            (d) Understanding, supported by senior management of the bank, how other risks (e.g. credit, market, operational and reputation risks) interact with liquidity risk and affect the overall Liquidity Risk Management Strategy, ensuring that the interaction of these risks is considered and taken into account by the relevant Board-level committees and Risk Management function within the bank.
            August 2018

      • LM-1.3 LM-1.3 Responsibilities of Senior Management

        • Liquidity Risk Management, Strategies and Procedures

          • LM-1.3.1

            Senior management must be responsible for developing and implementing the bank's liquidity risk management strategy, policies and procedures, properly documented in the form of a policy statement, in accordance with the risk tolerance established by the Board. The policy statement must be approved by the Board.

            August 2018

          • LM-1.3.2

            A bank must develop its liquidity policy statement taking into account of the nature of its business activities and liquidity needs under both normal and stressed conditions. A bank's liquidity policy statement must cover, at a minimum, the following key aspects:

            (a) Liquidity risk appetite and tolerance established by the Board;
            (b) Liquidity risk management strategy, including the goals and objectives underlying the strategy; the composition and maturity of assets and liabilities; the level of diversity and stability of funding targeted by the bank; the approach to managing liquidity in different currencies, across borders, and across business lines, products and legal entities, where applicable, taking into consideration the home and host regulatory requirements in the jurisdictions in which the bank operates; the approach to intraday liquidity management; the assumptions on the liquidity and marketability of assets;
            (c) Liquidity risk management responsibilities, with clearly defined lines of authority, responsibilities and reporting structure;
            (d) Liquidity risk management systems and tools for measuring, monitoring, controlling and reporting liquidity risk, including the setting of various liquidity limits and ratios; the framework for conducting cash-flow projections and liquidity stress testing, including the techniques, scenarios and assumptions used; and the management reporting system for liquidity risk; and
            (e) Contingency funding plan, which must describe the approaches and strategies for dealing with various types of liquidity stress.
            August 2018

        • Allocation of Liquidity Costs, Benefits and Risks

          • LM-1.3.3

            Senior management must appropriately incorporate liquidity costs, benefits and risks in the internal pricing, performance measurement and new product approval processes, thereby aligning the risk-taking incentives of individual business lines with the liquidity risk tolerance established by the Board.

            August 2018

          • LM-1.3.4

            Senior management must ensure that the liquidity pricing framework involves the charging of a liquidity premium to activities that consume liquidity (e.g. granting new advances) and the assignment of a liquidity value to those that generate liquidity (e.g. obtaining new deposits), based on a predetermined mechanism for attributing liquidity costs, benefits and risks to these activities. The following considerations, at a minimum, must be factored into the framework:

            (a) The framework must reflect the level of liquidity risk inherent in a business activity;
            (b) The framework must cover all significant business activities, including those involving the creation of contingent exposures which may not immediately have a direct balance sheet impact;
            (c) The framework must incorporate the measurement and allocation process factors related to the anticipated holding periods of assets and liabilities, their market liquidity risk characteristics and any other relevant factors, including the benefits from having access to relatively stable sources of funding, such as some types of retail deposits;
            (d) The framework must take account of both contractual maturity, as well as behavioural patterns in estimating the length of tenor of any relevant asset or liability item for the determination of the liquidity value or premium to be allocated;
            (e) The framework must provide an explicit and transparent process, at the line management level for quantifying and attributing liquidity costs, benefits and risks; and
            (f) The framework must include consideration on how liquidity would be affected under stressed conditions.
            August 2018

          • LM-1.3.5

            Senior management must review periodically the liquidity pricing framework, taking into account changes in business and financial market conditions.

            August 2018

          • LM-1.3.6

            Senior management is also responsible for:

            (a) Communicating the liquidity risk management strategy, key policies and procedures, liquidity pricing framework and liquidity risk management structure to all relevant business units and personnel throughout the organisation, that conduct activities with an impact on liquidity;
            (b) Ensuring that there are close communication links between treasury, liquidity risk managers and other business and risk managers having access to critical information that affects liquidity;
            (c) Ensuring that liquidity risk managers have sufficient authority and independence from risk-taking units to discharge their function effectively;
            (d) Ensuring that adequate internal controls are executed by independent personnel with the necessary skills and competence to safeguard the integrity of the bank's liquidity risk management process;
            (e) Closely monitoring the current trends and potential market developments that may require timely changes or updates to the liquidity risk management strategy, systems and internal controls to address any significant challenges;
            (f) Defining the specific process for handling exceptions to policies and limits, including the procedures for escalation, reporting and consideration of follow-up actions;
            (g) Ensuring the effectiveness of stress tests and contingency funding plans, as well as the appropriateness of the liquidity cushion maintained; and
            (h) Informing the Board of any new and emerging liquidity concerns, through regular and ad hoc submission of risk management reports and risk analysis, in a timely manner.
            August 2018

        • Independent Reviews

          • LM-1.3.7

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: August 2018

          • LM-1.3.8

            The independent reviews of the liquidity risk management framework undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34, must cover the following:

            (a) The adequacy of internal systems and procedures for identifying, measuring, monitoring and mitigating liquidity risk;
            (b) The appropriateness of various internal limits on liquidity metrics for controlling liquidity risk;
            (c) The suitability of the underlying scenarios and assumptions for conducting cash flow analysis;
            (d) The integrity and usefulness of management information reports on liquidity risk; and
            (e) The adherence to established liquidity risk strategy, policies and procedures.
            Amended: January 2022
            Added: August 2018

          • LM-1.3.9

            [This Paragraph was deleted in January 2022].

            Deleted: January 2022
            Added: August 2018

    • LM-2 LM-2 Liquidity Risk Identification, Measurement, Monitoring and Control

      • LM-2.1 LM-2.1 Liquidity Metrics and Measurement Tools

        • LM-2.1.1

          A bank should have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process should include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons.

          August 2018

        • LM-2.1.2

          Banks must use a range of liquidity metrics for identifying, measuring and analysing liquidity risk. These metrics must enable the management to understand its day-to-day liquidity positions and structural liquidity mismatches, as well as its resilience under stressed conditions. In particular, these metrics must perform the functions of:

          (a) Ensuring compliance with statutory liquidity requirements;
          (b) Projecting the bank's future cash flows and identifying potential funding gaps and mismatches under both normal and stressed conditions over different time horizons;
          (c) Evaluating potential liquidity risks inherent in the bank's balance sheet structure and business activities, including the liquidity risks that may arise from any embedded options and other contingent exposures or events;
          (d) Assessing the bank's capability to generate funding, as well as its vulnerability to, or concentration on, any major source of funding;
          (e) Identifying the bank's vulnerabilities to foreign currency movements; and
          (f) Identifying market related information.
          August 2018

        • LM-2.1.3

          The above must take into account all assets, liabilities, off — balance sheet ('OBS') positions and activities of the bank, across business lines, legal entities and overseas operations in a timely and effective manner.

          August 2018

        • LM-2.1.4

          Banks must use metrics and tools that are appropriate for their business mix, complexity and risk profile. In addition to liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'), the following liquidity indicators must be monitored:

          (a) Maturity mismatch analysis, based on contractual maturities, as well as behavioural assumptions of cash inflows and outflows. Such metrics provide insight into the extent to which a bank engages in maturity transformation and identify potential funding needs that may need to be bridged;
          (b) Information on the level of concentration of funding from major counterparties (including retail and wholesale fund providers);
          (c) Major funding instruments (e.g. by issuing various types of securities);
          (d) Information on the size, composition and characteristics of unencumbered assets included in a bank's liquidity cushion for assessing the bank's potential capacity to obtain liquidity, through sale or secured borrowing, at short notice from private markets or CBB in times of stress; and
          (e) LCR in individual currencies.
          August 2018

        • LM-2.1.5

          In addition to the above, banks should adopt other metrics, as considered prudent or necessary to supplement their liquidity risk management, such as:

          (a) Medium-term funding ratio3, stable or core deposit ratio, or any similar ratio that reflects the stability of a bank's funding;
          (b) Loan-to-deposit ratio, or any similar ratio that reflects the extent to which a major category of asset is funded by a major category of funding4; and
          (c) Metrics tracking intragroup lending and borrowing.

          3 A medium-term funding ratio is a ratio of liabilities to assets, both with a contractual maturity of, say, more than 1 year. This ratio focuses on the medium-term liquidity profile of a bank and is intended to highlight the extent to which medium-term assets are being financed by the roll-over of short-term liabilities.

          4 A bank, depending on its business profile, may decide to adopt different breakdowns of the loan-to-deposit ratio such as, by way of example, loan-to-retail customers/retail customer deposits; loan to corporate customers/corporate customer deposits; loan/retail (or corporate) customer deposits. To complement the analysis provided by these indicators, the bank may consider assessing other funding risk indicators such as customer deposits/total liabilities or deposits from credit institutions/total liabilities to provide a notion of the bank's funding profile and take a closer look at the share of wholesale funding. Depending on its foreign activities and the related relevance, the bank may decide to assess the share of deposits in non-domestic markets.

          August 2018

        • LM-2.1.6

          Banks must regularly analyse information or trends revealed from liquidity metrics (e.g. a persistent decline in stable deposits) to identify any material liquidity concerns.

          August 2018

      • LM-2.2 LM-2.2 Risk Control Limits

        • LM-2.2.1

          Banks must, where appropriate, set limits for the liquidity metrics they employ in monitoring and controlling their liquidity risk exposures. The limits set must be relevant to a bank's business activities and consistent with its liquidity risk tolerance.

          August 2018

        • LM-2.2.2

          The limits must be used for managing day-to-day liquidity within and across business lines and entities. A typical example is the setting of maturity mismatch limits over different time horizons in order to ensure that a bank can continue to operate in a period of market stress.

          August 2018

        • LM-2.2.3

          Banks must ensure compliance with the established limits, and define the procedures for escalation and reporting of exceptions or breaches which can be early indicators of excessive risk or inadequate liquidity risk management. The limits set, and the corresponding escalation and reporting procedures, must be regularly reviewed.

          August 2018

        • LM-2.2.4

          Banks must consider setting stricter internal limits on intrabank funding denominated in foreign currencies where the convertibility and transferability of such funding is not certain, particularly in stressed situations.

          August 2018

      • LM-2.3 LM-2.3 Early Warning Indicators

        • LM-2.3.1

          To complement liquidity metrics, banks must adopt a set of indicators that are more readily available, either internally or from the market, to help in identifying at an early stage emerging risks in their liquidity risk positions or potential funding needs, so that management review and where necessary, mitigating measures can be undertaken promptly.

          August 2018

        • LM-2.3.2

          Such early warning indicators can be qualitative or quantitative in nature and may include, but are not limited to, the following:

          (a) Rapid asset growth, especially when funded with potentially volatile liabilities;
          (b) Growing concentrations on certain assets or liabilities or funding sources;
          (c) Increasing currency mismatches;
          (d) Increasing overall funding costs;
          (e) Worsening cash-flow or structural liquidity positions as evidenced by widening negative maturity mismatches, especially in the short-term time bands (e.g. up to 1 month);
          (f) A decrease in weighted average maturity of liabilities;
          (g) Repeated incidents of positions approaching or breaching internal or regulatory limits;
          (h) Negative trends or heightened risk, such as rising delinquencies or losses, associated with a particular business, product or activity;
          (i) Significant deterioration in earnings, asset quality, and overall financial condition;
          (j) Negative publicity;
          (k) A credit rating downgrade;
          (l) Stock price declines;
          (m) Widening spreads on credit default swaps or senior and subordinated debt;
          (n) Counterparties beginning to request additional collateral for credit exposures or to resist entering into new transactions to provide unsecured or longer dated funding;
          (o) Reduction in available credit lines from correspondent banks;
          (p) Increasing trends of retail deposit withdrawals;
          (q) Increasing redemptions of certificates of deposit before maturity; and
          (r) Difficulty in accessing longer-term funding or placing short-term liabilities (e.g. commercial paper).
          August 2018

      • LM-2.4 LM-2.4 Management Information Systems

        • LM-2.4.1

          A bank must have reliable management information systems ('MIS') that provide the Board, senior management and other appropriate personnel with timely and forward-looking information on its liquidity positions. The MIS must be appropriate for the purpose of supporting the bank's day-to-day liquidity risk management and continuous monitoring of compliance with established policies, procedures and limits. The MIS reports must be capable of supporting the Board and senior management in identifying emerging concerns on liquidity, as well as in managing liquidity stress events.

          August 2018

        • LM-2.4.2

          A bank's MIS must encompass information in respect of the bank's liquidity cushion, major sources of funding and all significant sources of liquidity risk, including contingent risks and the related triggers and those arising from new activities. Moreover, a bank's MIS must have the ability to calculate risk measures to monitor liquidity positions:

          (a) In all currencies, both individually and on an aggregate basis;
          (b) Under normal business conditions and during stress events, with the ability to deliver more granular and time-sensitive information for the latter;
          (c) For different time horizons (e.g. on an intraday basis, on a day-today basis for shorter time horizons (of, say, 5 to 7 days ahead), and over a series of more distant time periods thereafter); and
          (d) At appropriate intervals (in times of stress, the MIS reports must be capable of being produced at more frequent intervals such as daily, or even intraday if necessary).
          August 2018

        • LM-2.4.3

          To facilitate liquidity risk monitoring, there must be reporting criteria specifying the scope, manner and frequency of reporting liquidity information for various recipients (e.g. daily/weekly & monthly for those responsible for managing liquidity risk, and at each meeting convened by the Board or its relevant delegated committee(s) during normal times, with increased reporting frequency in times of stress) and the parties responsible for preparing the reports.

          August 2018

        • LM-2.4.4

          In particular, the reporting must compare current liquidity exposures to established limits (both for internal liquidity risk management and statutory compliance purposes) to identify any limit breaches. Breaches in liquidity risk limits must be reported to the appropriate level of management. Thresholds and reporting guidelines must be specified for escalation of the reporting of breaches to higher levels of management and the Board.

          August 2018

      • LM-2.5 LM-2.5 Cash-flow Approach to Managing Liquidity Risk

        • LM-2.5.1

          Banks must adopt a cash-flow approach to managing liquidity risk, under which they must have in place a robust framework for projecting comprehensively future cash flows arising from assets, liabilities and OBS items over an appropriate set of time horizons. The framework must be used for:

          (a) monitoring on a daily basis their net funding gaps under normal business conditions; and
          (b) Conducting regular cash-flow analysis based on a range of stress scenarios.
          August 2018

        • LM-2.5.2

          Unless otherwise specified, the cash-flow management requirements in this chapter apply generally to banks under both normal and stressed situations.

          August 2018

        • Scope, Coverage and Frequency of Cash-flow Projection

          • LM-2.5.3

            Cash-flow projections involve the estimation of a bank's cash inflows against its outflows and the liquidity value of its assets to identify the potential for future net funding shortfalls. The projections must be forward-looking and based on reasonable assumptions and techniques, covering liquidity risks stemming from:

            (a) On-balance sheet assets and liabilities;
            (b) OBS positions and derivative transactions (including sources of contingent liquidity demand and related triggering events associated with such positions);
            (c) Special Purpose Vehicles; a bank must have a detailed understanding of its contingent liquidity risk exposure and event triggers arising from any contractual and non-contractual relationships with special purpose vehicles; and
            (d) Core business lines and activities (for example, correspondent, custodian and settlement activities).
            August 2018

          • LM-2.5.4

            Cash-flow projections must address a variety of factors over different time horizons, including:

            (a) Vulnerabilities to changes in liquidity needs and funding capacity on an intraday basis;
            (b) Day-to-day liquidity needs in, say, 5 to 7 days ahead;
            (c) Funding capacity over short and medium-term horizons (e.g. 14 day, 1, 2, 3, 6 and 9 months) of up to 1 year;
            (d) Longer-term liquidity needs over 1, 2, 3, 4 and beyond 5 years; and
            (e) Vulnerabilities to events, activities and strategies that can put a significant strain on a bank's capacity for generating liquidity.
            August 2018

          • LM-2.5.5

            Cash-flow projections must cover positions in Bahraini Dinar (BHD/USD), where appropriate and in all significant currencies in aggregate. Separate cash-flow projections must also be performed for individual foreign currencies in which a bank has significant positions. Please refer to LM-3: Foreign currency liquidity management for the identification of significant positions in other currencies.

            August 2018

        • Net Funding Gaps

          • LM-2.5.6

            In order to meet their obligations as they fall due and thereby stay in business, banks need to ensure:

            (a) Positive cash-flow position is maintained; or
            (b) Sufficient cash can be generated from their assets; or
            (c) Adequate funding sources to cover their funding gaps promptly.
            August 2018

          • LM-2.5.7

            Net funding gaps can be assessed through the construction of a maturity profile, supplemented where relevant with additional analysis of the funding capacity of specific on- or off-balance sheet items.

            August 2018

          • LM-2.5.8

            A bank's maturity profile should encompass adequate time bands so that the bank can monitor its liquidity needs for various time horizons. It is generally expected to have daily time bands in the very short term (say for a period of 5 to 7 days ahead), which may be followed by wider and less granular time bands for other periods.

            August 2018

          • LM-2.5.9

            Banks must set internal limits to control the size of their cumulative net mismatch positions (i.e. where cumulative cash inflows are exceeded by cumulative cash outflows), at least for the shorter-term time bands (e.g. next day, 5 to 7 days ahead, 14 days, 1, 2, 3, 6 and 9 months). Such limits must be in line with the established liquidity risk tolerance, and must take into account the potential impact of adverse market conditions on the bank's funding capacity. Maturity mismatch limits must also be imposed for individual foreign currencies in which a bank has significant positions.

            August 2018

          • LM-2.5.10

            The maturity mismatch limits must be properly documented in the Liquidity Risk Management Policy statement. Banks must regularly review the suitability of such limits.

            August 2018

        • Cash Flow Projection Assumptions and Techniques

          • LM-2.5.11

            While certain cash flows can be projected based on contractual maturities, some may need to be estimated based on certain assumptions. In these circumstances, banks should make realistic assumptions (with a reasonable degree of prudence) to reflect the characteristics of their businesses and products, as well as economic and market conditions. For example, banks may take into account the following factors in setting the assumptions for cash flow projection:

            (a) Expected future growth or contractions in the balance sheet;
            (b) The proportion of maturing assets and liabilities that banks reasonably expect to roll-over or renew;
            (c) The quality and proportion of liquid assets or other marketable securities that can be used as collateral to obtain secured funding;
            (d) The behaviour of assets and liabilities with no clearly specified maturity dates, such as repayment of overdrafts and demand deposits as well as sticky deposits;
            (e) The potential cash flows arising from off-balance sheet activities, e.g., drawdown under loan commitments and contingent liabilities (including all potential draws from contractual or non-contractual commitments);
            (f) The behaviour of cash flows under different service delivery channels (e.g. branches vs e-banking channels);
            (g) The convertibility of foreign currencies;
            (h) The lead time required for the monetization of marketable debt securities; and
            (i) Access to wholesale markets, standby facilities and intragroup funding.
            August 2018

          • LM-2.5.12

            Techniques employed by banks for designing cash flow assumptions must be commensurate with the nature and complexity of their business activities.

            August 2018

          • LM-2.5.13

            In deriving behavioural cash flow assumptions, banks may analyse historical observations on cash flow patterns. While there is no standard methodology for making such assumptions, it is important that the assumptions used are consistent and reasonable and they should be supported by sufficient historical or empirical evidence.

            August 2018

          • LM-2.5.14

            Banks must document in their liquidity risk management policy statement, the underlying assumptions used for estimating cash flow projections and the rationale behind them. The assumptions and their justifications must be approved, and subject to regular review, by the ALCO to take account of available statistical evidence and changing business environment.

            August 2018

    • LM-3 LM-3 Foreign Currency Liquidity Management

      • LM-3.1 LM-3.1 Foreign Currency Liquidity Management

        • LM-3.1.1

          A currency must be considered 'significant' if the aggregate liabilities of the bank (both on and off-balance sheet) denominated in that currency, amount to 5 percent or more of its total liabilities (both on and off-balance sheet).

          August 2018

        • LM-3.1.2

          Banks must formulate, and review regularly, strategies and policies for the management of liquidity risks with respect to BHD/USD, if relevant, and each significant foreign currency respectively, taking into account the potential market conditions and potential constraints in times of stress. If a bank has assets or liabilities denominated in a significant foreign currency, and that currency is not freely convertible, more prudent management of liquidity risk must be adopted, such as more conservative limits on funding gaps in respect of that currency vis-à-vis other currencies, as liquidity may not be easily transferred into or out of that currency, particularly in times of stress.

          August 2018

        • LM-3.1.3

          Banks must assess their foreign currency liquidity funding gaps under both normal and stressed conditions, and control currency mismatches within acceptable levels.

          August 2018

        • LM-3.1.4

          As with the management of its overall maturity mismatch position, a bank must set, and regularly review, internal limits to control the size of cumulative net maturity mismatches arising from assets and liabilities denominated in significant foreign currencies.

          August 2018

        • LM-3.1.5

          Such limits must cover the bank's maturity mismatch position in BHD, if relevant, and each significant foreign currency over various specific time-bands (e.g. next day, 5 to 7 days ahead, 14 days, 1, 2, 3, 6, 9 months and 1, 2, 3, 5 and beyond 5 years).

          August 2018

    • LM-4 LM-4 Funding Diversification and Market Access

      • LM-4.1 LM-4.1 Overview

        • LM-4.1.1

          To ensure a reliable supply of funds, both in normal times and during stressed conditions, banks must, to the most practicable extent, maintain a range of diversified and stable funding sources (including liquid assets held) to meet liquidity needs for various time horizons, supported by their ready access to the relevant markets. Banks must also take appropriate measures to foster relationships with fund providers and strengthen their presence in funding markets.

          August 2018

      • LM-4.2 LM-4.2 Funding Diversification

        • LM-4.2.1

          Banks must establish an effective funding strategy to achieve sufficient diversification, both of their funding sources and in the composition of their liquid assets. A bank's funding strategy must consider correlations between sources of funds and market conditions.

          August 2018

        • LM-4.2.2

          Banks must put in place concentration limits on liquid assets and funding sources, as appropriate, with reference to such characteristics as the type of asset, product, market or instrument; nature of issuer, counterparty or fund provider; maturity; currency; geographical location and economic sector.

          August 2018

        • LM-4.2.3

          Banks must maintain an appropriate mix of liquid assets (including the type and quality of assets, and level of such holdings) as a source of liquidity for day-to-day operational needs (e.g. for settlement and clearing purposes), as well as for meeting emergency funding needs.

          August 2018

        • Other Funding Sources

          • LM-4.2.4

            Banks must assess their exposure to significant funding providers (or depositors) on an ongoing basis. For this purpose, banks must have in place, as part of their MIS, regular reports on the funding received from significant funding providers to facilitate monitoring. Such reports must consolidate all funding that a bank obtains from each significant funding provider (including a group of related funding providers which, when aggregated, amount to a significant funding provider). The historical amount of funds provided by these funding providers, e.g. in terms of the maximum, minimum and average balances over the previous 12 months, must also be monitored. Trigger ratios must be established to identify any funding concentration for management review. In the case of a retail bank, a funding concentration may exist if a significant percentage of its total deposit base is from a limited number of the top-ranking depositors or a single depositor (or group of related depositors). Banks must consider appropriate actions to diversify the deposit base.

            August 2018

          • LM-4.2.5

            Banks must avoid any potential concentration in their reliance on particular funding markets and sources. Banks must take into account the following major factors in assessing the degree of funding concentration:

            (a) The maturity profile and credit-sensitivity of the liabilities;
            (b) The mix of secured funding and unsecured funding;
            (c) The extent of reliance on a single fund provider or a group of related fund providers; particular markets, instruments or products (e.g. interbank borrowing, retail versus wholesale deposits, and repo agreements and swaps); and intragroup funding;
            (d) Geographical location, industry or economic sector of fund providers; and
            (e) The currency of funding sources.
            August 2018

          • LM-4.2.6

            Banks with a large deposit base must, in particular, conduct more granular analysis on the stability of different types of deposits taking into account the relevant contractual and behavioural characteristics of such deposits (e.g. in terms of deposit insurance coverage, currency denomination, nature of depositors, such as retail, wholesale or private banking customers, etc.). They must monitor the trends and levels of their stable deposits regularly.

            August 2018

          • LM-4.2.7

            Banks must identify alternative sources of funding (e.g. intragroup funding, new debt issues, asset sales, etc.) that may be used to generate liquidity in case of need, and review the effectiveness of using such sources in different situations. However, they must be aware that not all fund-raising options are available in all circumstances and some may be available only with a substantial time delay.

            August 2018

      • LM-4.3 LM-4.3 Market Access

        • Market Presence

          • LM-4.3.1

            Banks must maintain an active presence in markets relevant to their funding strategy. This requires an ongoing commitment and investment in adequate and appropriate infrastructures, processes and information systems. To ensure their access to funding markets in a timely manner, banks must periodically utilise the established systems, documentation and arrangements for accessing those markets to confirm whether willing counterparties are readily available.

            August 2018

          • LM-4.3.2

            The ability to obtain funds in the interbank market is an important source of liquidity for banks. Banks should be in a position to estimate their 'normal' borrowing capacity, based on past experience, and aim to limit their wholesale funding needs for both local and foreign currencies.

            August 2018

        • Relationship with Market Providers

          • LM-4.3.3

            Banks must identify and build strong relationships with funding providers. In particular, banks must maintain a solid and close relationship with its 25 largest depositors on an ongoing basis, to ensure that the bank has the ability to obtain funds in case of need (e.g. during events of stress), to prevent and/or limit a bank run-off and to safeguard its major sources of funding. Nevertheless, banks must take a prudent view of how such relationships may be strained in times of stress. In the formulation of stress scenarios and contingency funding plans, banks must take into account possible situations where funding sources, including its 10 largest depositors, may dry up and markets may close, and where market perceptions of a bank's financial position may change.

            August 2018

    • LM-5 LM-5 Maintenance of Liquidity Cushion

      • LM-5.1 LM-5.1 Overview

        • LM-5.1.1

          Banks must maintain an adequate cushion of unencumbered liquid assets that can be readily sold or used as collateral in private markets by a bank to obtain funds to meet the liquidity needs at all times, even in periods of severe idiosyncratic and market stress.

          August 2018

        • LM-5.1.2

          The size of the liquidity cushion should reflect a bank's established risk tolerance, and should be sufficient to meet the bank's liquidity needs in the initial phase of liquidity stress, which is most critical to the bank's survival, taking into account the monetization or borrowing values of the assets included in the cushion under the relevant stressed conditions.

          August 2018

        • LM-5.1.3

          The liquidity cushion should be sized to enable a bank to continue to meet its daily payment and settlement obligations on a timely basis for the period of stress. In doing so, the bank should take into account other available tools and resources to manage intraday liquidity risks.

          August 2018

        • LM-5.1.4

          In addition, the liquidity cushion must at least be sufficient to enable a bank to reach its regulatory LCR.

          August 2018

      • LM-5.2 LM-5.2 Composition of Liquidity Cushion

        • LM-5.2.1

          The liquidity cushion must be largely made up of high quality liquid assets (the most liquid, unencumbered and readily marketable assets such as cash, other high quality government debt securities, etc.) or similar instruments, that can be easily or immediately monetised with little or no loss or discount at all times, irrespective of the bank's own condition.

          August 2018

        • LM-5.2.2

          To cater for any extension or deterioration of any stress situation, a bank may widen the composition of its liquidity cushion by holding other liquid and marketable assets which can be used to cater for the longer end of the stress period (e.g. 1 month or beyond) without resulting in excessive losses or discounts.

          August 2018

        • LM-5.2.3

          A bank must document its policies and criteria for defining the liquid assets to be included in its liquidity cushion and distinguishing their relative levels of quality in terms of their ability to generate liquidity swiftly, with little loss or discount. MIS reports must be in place to facilitate continuous management of a bank's liquidity cushion.

          August 2018

    • LM-6 LM-6 Intragroup Liquidity Management

      • LM-6.1 LM-6.1 Overview

        • LM-6.1.1

          Where a bank is part of a banking group (local or foreign), the bank must be able to monitor and control liquidity risks arising from intragroup transactions (including cross-border transactions where applicable) with other legal entities in the group, taking into account any legal, regulatory, operational or other constraints on the transferability of liquidity and collateral to and from those entities.

          August 2018

        • LM-6.1.2

          In managing intragroup liquidity risks, banks should understand how their liquidity positions may be affected by liquidity problems faced by other group entities.

          August 2018

      • LM-6.2 LM-6.2 Treatment of Intragroup Transactions

        • LM-6.2.1

          Banks must specify in their liquidity risk management strategy the treatment of intragroup liquidity, and assumptions on intragroup dependencies for the purposes of making cash flow projections.

          August 2018

        • LM-6.2.2

          In assessing funding needs (especially under stressed situations), banks should account for any funding or liquidity commitment provided to group entities (e.g. in the form of explicit guarantees or funding lines to be drawn in times of need) and prepare for any withdrawal of funding provided by group entities. Banks should also analyse how the liquidity positions of group entities may affect their own liquidity, either through direct financial impact or through contagion when those entities encounter liquidity strain. Where there is reliance on funding support from group entities, banks should take steps to identify the existence of and take into account any legal, regulatory or other limitations that may restrict their access to liquidity from those entities in case of need.

          August 2018

        • LM-6.2.3

          A bank that has entered into 'back-to-back' transactions5 with its group entities must exclude such transactions from cash flow or liquidity calculations, as such transactions usually involve no actual movement of funds and, as such, cannot effectively improve the bank's liquidity.


          5 These transactions refer to interoffice or intragroup transactions which typically involve two legs, one borrowing long (say, with maturity of more than 1 month) and the other lending short (say, with maturity of 1 month or less). Both legs are for the same or similar amount and at the same or similar rate of interest, and are, in most cases, rolled forward continuously.

          August 2018

      • LM-6.3 LM-6.3 Intragroup Liquidity Limits

        • LM-6.3.1

          Banks must establish internal limits on intragroup liquidity risk to mitigate the risk of contagion from other group entities when those entities are under liquidity stress. Moreover, banks must consider setting stricter internal limits on intragroup funding denominated in foreign currencies where the convertibility and transferability of such funding is not certain, particularly in stressed situations.

          August 2018

      • LM-6.4 LM-6.4 Constraints on Intragroup Liquidity Transfers

        • LM-6.4.1

          Banks should understand potential constraints that may affect intragroup liquidity movements, and specify their assumptions regarding the transferability of funds and collateral in liquidity risk management policies. These assumptions should fully consider regulatory, legal, accounting, credit, tax and internal constraints on the effective movement of liquidity and collateral.

          August 2018

        • LM-6.4.2

          Banks should also consider the operational arrangements needed to transfer funds and collateral across entities and the time required to complete such transfers under these arrangements.

          August 2018

    • LM-7 LM-7 Intraday Liquidity Risk Management

      • LM-7.1 LM-7.1 Overview

        • LM-7.1.1

          Intraday liquidity risk management is an important component of a bank's broader liquidity risk management strategy. Banks must actively manage their intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions, and, as such, contribute to the smooth functioning of payment and settlement systems.

          August 2018

        • LM-7.1.2

          Aside from direct participation in payment and settlement systems, banks may incur intraday liquidity risk through their provision of correspondent and custodian banking services. Where a bank relies on other correspondent or custodian banks to conduct payment and settlement activities, operational or financial disruptions at those banks will also affect the bank's own liquidity position and should have alternate arrangements in place to ensure it is able to meet its obligations.

          August 2018

        • LM-7.1.3

          A primary objective in intraday liquidity risk management is for banks to identify, prioritise and meet time-specific and other critical obligations when they become due, and to settle other, less critical obligations as soon as possible. In satisfying this objective, banks must be aware of, and be able to address, various challenges associated with intraday liquidity risk management.

          August 2018

        • LM-7.1.4

          A key challenge in intraday liquidity risk management lies in the uncertainty in both the amount and timing of a bank's gross cash inflows and outflows during the day, in part because such cash flows may reflect the activities of its customers or counterparties which are beyond the bank's control, especially where the bank provides correspondent or custodian services. Moreover, the timing of the cash flows may be dictated by the rules governing payment and settlement systems (e.g. payment obligations may be due by specific times during the day). Because a bank's daily gross cash outflows can often far exceed the bank's gross cash inflows at different points of time during a day, or its net overnight balances even under normal circumstances, differences in the timing of its inflows and outflows could result in significant intraday liquidity shortfalls. These shortfalls may necessitate the bank borrowing funds on an intraday basis, prioritizing its outflows to meet critical payments, or borrowing additional overnight funds (if certain expected cash inflows are not received before the end of the working day).

          August 2018

      • LM-7.2 LM-7.2 Risk Management Controls

        • LM-7.2.1

          Banks must have effective policies, procedures, systems and controls for managing their intraday liquidity risks in all of the financial markets and currencies in which they have significant payment and settlement activities. Such systems and controls must, among other things, ensure a bank's capacity, to:

          (a) Measure expected daily gross cash inflows and outflows, anticipate the intraday timing of these cash flows where possible, and, as such, forecast the range of potential net funding shortfalls at different time points during the day;
          (b) Monitor intraday liquidity positions against expected activities and available resources (including liquidity balances, remaining intraday credit capacity, and available collateral) and prioritise payments, if necessary; and
          (c) Manage intraday liquidity positions so that there is always sufficient intraday funding to meet the bank's intraday liquidity needs.
          (d) Manage and mobilise collateral as necessary to obtain intraday funds. A bank must have sufficient collateral available to acquire the level of intraday liquidity needed to meet its intraday objectives.
          (e) Manage the timing of its liquidity outflows in line with its intraday objectives. A bank must have the ability to manage the payment outflows of key customers and, if customers are provided with intraday credit that credit procedures must be capable of supporting timely decisions.
          (f) Manage unexpected disruptions to its intraday liquidity flows. A bank's stress testing and contingency funding plans must reflect intraday considerations. A bank also must understand the level and timing of liquidity needs that may arise as a result of the failure-to settle procedures of payment and settlement systems in which it is a direct participant. Robust operational risk management and business continuity arrangements are also critical to the effectiveness of a bank's intraday liquidity management.
          August 2018

        • LM-7.2.2

          Intraday liquidity risk management demands cooperation between the front and back offices, as it typically requires close monitoring of expected payments and direct contacts with customers, where necessary, to quickly verify the reasons for delayed payments. A clear assignment of tasks and responsibilities to personnel involved is, therefore, important, particularly as time-critical decisions need to be made, for instance, to meet the settlement cut-off times.

          August 2018

        • LM-7.2.3

          The tools and resources applied by a bank in managing intraday liquidity risks must be tailored to the bank's business model and role in the financial system. This relates to, for example, whether the bank participates in a payment or settlement system directly or through correspondent or custodian banks, and whether it provides correspondent or custodian services and intraday credit facilities to other banks, firms or systems. If a bank relies heavily on secured funding markets, the bank must have adequate systems and procedures in place to monitor positions in securities settlement systems.

          August 2018

    • LM-8 LM-8 Collateral management

      • LM-8.1 LM-8.1 Overview

        • LM-8.1.1

          The ready availability of assets that banks can use as collateral to obtain funding by means of secured borrowing (e.g. repo) mitigates liquidity risk. Therefore, banks must allocate sufficient resources to ensure efficient and effective management of collateral in their liquidity risk management process.

          August 2018

        • LM-8.1.2

          Collateral management must aim at optimising the allocation of collateral available for different operational needs, across products, business units, locations and currencies. It must be based on a prioritisation of needs and an awareness of the opportunity cost of its use, in both normal and stressed times.

          August 2018

      • LM-8.2 LM-8.2 Management of Collateral Positions

        • LM-8.2.1

          Banks must have the ability to calculate all of their collateral positions, including assets currently deployed for use as collateral relative to amount of collateral required, and unencumbered assets available to be used as collateral.

          August 2018

        • LM-8.2.2

          Bank's level of available collateral must be monitored by legal entity, jurisdiction and currency exposure. Banks must be able to track precisely the legal entity and the physical location (i.e. the custodian or securities settlement system) at which each of the assets is held, and monitor how such assets may be mobilised in a timely manner in case of need.

          August 2018

        • LM-8.2.3

          Banks must have sufficient collateral to meet expected, and accommodate unexpected borrowing needs, as well as potential increases in margin requirements for pledged assets over different timeframes, including intraday, short-term and longer-term structural liquidity requirements, and have adequate systems for monitoring the shifts between intraday, overnight and term collateral usage. In determining the required collateral to be allocated for intraday liquidity needs, banks must consider the potential for significant uncertainty around the timing of payment flows during the day, as well as the potential for operational and liquidity disruptions that could necessitate the pledging or delivery of additional intraday collateral.

          August 2018

        • LM-8.2.4

          Banks must assess the eligibility of each major asset class for pledging as collateral with relevant central banks (for intraday, overnight and term credit or secured borrowing under standing facilities, as the case may be), as well as the acceptability of assets to major counterparties and fund providers in secured funding markets. They must also ensure that there is proper legal documentation for each asset class to be effectively pledged for liquidity.

          August 2018

        • LM-8.2.5

          Banks must diversify their sources of collateral to avoid excessive concentration on any particular funding provider or market, taking into consideration capacity constraints, sensitivity of prices, haircuts and collateral requirements under conditions of institution-specific and market-wide stress, and the availability of funds from private sector counterparties in various market stress scenarios.

          August 2018

      • LM-8.3 LM-8.3 Operational Issues

        • LM-8.3.1

          Banks must address various operational issues relating to the use of collateral for obtaining liquidity. These include, but are not limited to:

          a) Awareness of the operational and timing requirements associated with accessing the collateral given its physical location;
          b) Understanding the liquidity risks associated with different types of payment and settlement systems (e.g. 'net' systems versus 'gross' systems) and their implications for collateral management; and
          c) Taking into account the implications of obligations embedded in the contractual terms of certain transactions which, when triggered, may reduce the availability of collateral for liquidity risk management. These refer to, for example, margin requirements and triggering events that require a bank to: 1) provide additional collateral as a result of changes in the market valuation of the transactions or in the bank's credit rating or financial position (in the case of derivative transactions), or; 2) hypothecate or deliver additional assets to the pool of underlying assets when the embedded triggering events occur (in the case of securitisation transactions).
          August 2018

        • LM-8.3.2

          Banks must test on a regular basis, and at least annually, the ability to use its source of collateral in repo operations, to ensure its capability of using the securities to obtain the required liquidity, if needed, and assess the market appetite for a particular security, including the related haircut applied to put the operation in place. Banks must also ensure that there are no operational issues that could have an impact on the timing and the feasibility of the operation (e.g. limits to the transferability of the security, in case this is held in a local and foreign branch portfolio).

          August 2018

        • LM-8.3.3

          For collateralised borrowing, banks must maintain all documentation related to the agreement with the counterparties.

          August 2018

    • LM-9 LM-9 Stress Testing and Scenario Analysis

      • LM-9.1 LM-9.1 Overview

        • LM-9.1.1

          In addition to conducting cash flow projections to monitor its liquidity positions under normal business conditions, a bank must regularly perform stress tests based on sufficiently severe but plausible scenarios to identify potential sources of liquidity strain under stressed conditions.

          August 2018

        • LM-9.1.2

          Banks must conduct stress tests based on sufficiently severe, but plausible scenarios and assumptions that are commensurate with the bank's business nature, size and complexity. The stress testing scenarios and assumptions adopted by a bank must reflect the current market conditions and address the bank's actual experiences in stressed situations. Such scenarios and assumptions must be reviewed regularly by the senior management, with any major changes endorsed by the bank's Board or its relevant delegated committee(s). The active involvement of senior management is vital to the stress testing process. During their regular reviews, senior management must consistently require consideration of sufficiently severe stress scenarios.

          August 2018

        • LM-9.1.3

          Stress tests must enable a bank to analyse the impact of stress scenarios on its consolidated group-wide liquidity position, as well as on the liquidity position of individual entities and business lines in order to understand where risks could arise. For the purposes of consolidated liquidity positions, the licensees may use a proportionate or component approach.

          August 2018

        • LM-9.1.4

          Stress tests must be performed for all significant currencies in aggregate and, separately, for positions in BHD or USD in wholesale banks functioning on the basis of a US Dollar based operating model, if relevant, and individual foreign currencies in which banks have significant positions.

          August 2018

        • LM-9.1.5

          The design and frequency of stress testing must be commensurate with the size and complexity of a bank and its liquidity risk exposures.

          August 2018

        • LM-9.1.6

          When conducting stress tests on their liquidity position, banks must also consider the insights and results of stress tests performed for other risks, including possible interaction with these other risks.

          August 2018

      • LM-9.2 LM-9.2 Scenarios and Assumptions

        • LM-9.2.1

          It is important for banks to construct sufficiently severe, but plausible stress scenarios and examine the resultant cash flow needs. While banks should aim to cover different stress events and levels of adversity, they must, at a minimum, include the following types of scenarios in their stress testing exercise:

          (a) An institution-specific stress scenario;
          (b) A general market stress scenario; and
          (c) A combination of both, including possible interaction with other risks.
          August 2018

        • LM-9.2.2

          A bank will need to assign the timing of cash flows for each type of asset and liability, as well as off-balance sheet and contingent items, by assessing the probability of the behaviour of those cash flows under the scenario being examined. The timing of cash inflows and outflows on the maturity ladder can vary among scenarios and the assumptions may differ quite sharply. In estimating liquidity needs, both contractual and non-contractual cash flows should be considered.

          August 2018

        • LM-9.2.3

          In designing stress scenarios, a bank must take into account, specific risks associated with its business activities, products or funding sources. These include, for example, heavy reliance on specific funding markets or significant exposures to complex financial instruments. The stress scenarios must be able to evaluate the potential adverse impact of these factors on the bank's liquidity position.

          August 2018

        • LM-9.2.4

          A bank should take a reasonably conservative approach when setting stress assumptions. There are a number of possible areas that the assumptions should cover. For illustrative purposes, these areas include, but are not limited to, the following:

          (a) The run-off for retail funding;
          (b) Asset market illiquidity and erosion in the value of liquid assets;
          (c) The loss or impairment of secured and unsecured wholesale funding sources;
          (d) The correlation between funding markets and effectiveness of diversification across available sources of funding;
          (e) The availability of contingent lines extended to the banks;
          (f) The availability of funding in different tenors;
          (g) Contingent claims, including potential draws on committed lines extended to third parties or the bank's connected parties (such as its overseas branches, associated entities in its consolidated group, controller or head office);
          (h) Liquidity drains associated with contractual obligations or non-contractual obligations involving off-balance sheet vehicles and activities, as well as complex products or transactions;
          (i) Additional margin calls and collateral requirements (e.g. in derivative or other contracts with embedded trigger clauses);
          (j) Estimates of future balance sheet growth;
          (k) Currency convertibility and access to foreign exchange markets;
          (l) The transferability of liquidity across entities, sectors and jurisdictions, taking into account legal, regulatory, operational and time zone restrictions and constraints;
          (m) Access to the payment and settlement systems which are imperative to a bank.
          (n) The impact of credit rating triggers;
          (o) The access to central bank facilities;
          (p) The operational ability of the bank to monetise assets; and
          (q) The bank's remedial actions and the availability of the necessary documentation and operational expertise and experience to execute them, taking into account the potential reputational impact when executing these actions.
          August 2018

        • LM-9.2.5

          All stress scenarios and their underlying assumptions must be properly defined and documented in the bank's Liquidity Risk Management Policy statement.

          August 2018

        • Institution-specific Stress Scenarios

          • LM-9.2.6

            An institution-specific stress scenario must cover situations that could arise from a bank experiencing either real or perceived problems (e.g. asset quality problems, solvency concerns, credit rating downgrade, rumours relating to the bank's credibility or management fraud, etc.) which affect public confidence in the bank and its firm-wide or group-wide operations. It must represent the bank's view of the behaviour of its cash flows in a sufficiently severe stress scenario. A key assumption is that many of the bank's liabilities cannot be rolled-over or replaced, resulting in the need to utilise its liquidity cushion.

            August 2018

          • LM-9.2.7

            This scenario will likely entail an acute deposit run. Such a scenario would typically include the following characteristics:

            (a) Significant daily run-off rates for deposits particularly at the initial stage of the stress scenario, with increasing requests from customers to redeem their time deposits before maturity;
            (b) Interbank deposits repaid at maturity;
            (c) No new unsecured or secured funding obtainable from the market; and
            (d) Forced sale of marketable securities at discounted prices.
            August 2018

        • General Market Stress Scenarios

          • LM-9.2.8

            A general market stress scenario is one where liquidity, at a large number of financial institutions in one or more markets, is affected. Characteristics of this scenario may include:

            (a) A market-wide liquidity squeeze, with severe contraction in the availability of secured and unsecured funding sources, and a simultaneous drying up of market liquidity in some previously high liquidity markets;
            (b) Substantial discounts needed to sell or repo assets and wide differences in funding access among banks, due to the occurrence of a severe tearing of their perceived credit quality (i.e. flight to quality);
            (c) Restrictions on currency convertibility; and
            (d) Severe operational or settlement disruptions affecting one or more payment or settlement systems.
            August 2018

        • Combined Stress Scenarios

          • LM-9.2.9

            Banks must incorporate a stress scenario into their stress test framework that has the key characteristics of both an institution-specific stress scenario and a general market stress scenario combined ('combined stress scenario'), with appropriate modulations of the underlying assumptions, as necessary, to reflect a set of adverse circumstances that could plausibly happen.

            August 2018

          • LM-9.2.10

            The following are some relevant factors that could be considered in formulating a bank's 'combined stress scenario':

            (a) As a greater number of financial institutions in the market will be affected under a combined stress scenario, this may change the way in which some institution-specific stress elements are to be structured. For example, instead of a quick but severe bank run, there may be a less acute, but more persistent and protracted run-off of customer deposits; and
            (b) Even lower realizable values of assets may result as the bank concerned seeks to sell or repo large quantities of assets when the relevant asset markets become less liquid and market participants are generally in need of liquidity.
            August 2018

        • Minimum Stress Period

          • LM-9.2.11

            Banks must assume the minimum stress period for an institution-specific stress scenario to last for no less than 5 working days, and that for a general market stress scenario and a combined stress scenario to last for no less than one calendar month. However, a bank must adopt a longer minimum stress period for the purposes of liquidity stress-testing if its liquidity risk profile warrants this. To gauge a bank's survival period under stress, it is also generally expected that, in addition to the minimum stress period, the bank's stress test must also include sufficiently granular time-bands to assess the bank's ability to meet its obligations in the near to medium-term.

            August 2018

      • LM-9.3 LM-9.3 Utilisation of Stress Test Results

        • LM-9.3.1

          The stress testing results must be linked to the overall liquidity risk management process of a bank, including the setting of the liquidity risk tolerance and the internal liquidity risk limits). To this end, senior management must:

          (a) Ensure proper documentation of the stress scenarios and related assumptions, and review the scenarios and assumptions periodically;
          (b) Evaluate the stress testing results and consider any possible need for remedial or mitigating actions. Remedial or mitigating actions may include actions to limit the bank's liquidity risk exposures, obtain more long-term funding, restructure the composition of assets, and increase the size of the bank's liquidity cushion or the adoption of any other measures to adjust the bank's liquidity profile to fit its risk tolerance. Where such actions are not considered necessary to address stress test results indicating potential liquidity strains or shortfalls, senior management must document the justifications for their view;
          (c) Report the stress testing results and vulnerabilities identified to the Board (or its relevant delegated committee(s)), with recommendations for any resulting actions. Where appropriate, the CBB must be informed of the results and anticipated actions if they are material to the bank (i.e. in addition to normal stress testing reporting arrangements); and
          (d) Integrate the stress-testing results into the bank's strategic business planning and Contingency Funding Plan ('CFP').
          August 2018

    • LM-10 LM-10 Contingency Funding Plan

      • LM-10.1 LM-10.1 Overview

        • LM-10.1.1

          A bank must have a CFP that clearly sets out its strategies for addressing liquidity and funding shortfalls to the extent beyond the level estimated from the stress tests performed by the bank under institution-specific, market-wide and combined stress scenarios and beyond the level covered by the bank's liquidity cushion. The CFP must contain a set of policies, procedures and action plans that prepare a bank to deal with relevant liquidity stress events in a timely and cost-effective manner, with clearly established lines of responsibility and invocation and escalation procedures. The CFP must be approved by the Board and regularly tested and updated to ensure that it is operationally robust.

          August 2018

        • LM-10.1.2

          The CFP must be commensurate with the bank's complexity, risk profile, scope of operations and role in the financial system. The design of a CFP, including its action plans and procedures, must be closely integrated with the bank's ongoing analysis of liquidity risk. The CFP must address liquidity issues over a range of different time horizons.

          August 2018

      • LM-10.2 LM-10.2 Strategy, Plans and Procedures

        • Contingency Funding Measures and Sources

          • LM-10.2.1

            The CFP must provide a bank's management with a diversified set of viable, readily deployable potential contingency funding measures for preserving and making up liquidity shortfalls in emergency situations. All available potential sources of funding must be outlined, along with the estimated amount of funds that can be derived from these sources, their expected degree of reliability, under what conditions these sources must be used, and the lead time needed to access additional funds from each of the sources.

            August 2018

          • LM-10.2.2

            Banks must analyse the viability and likely impact on market perception of adopting different contingency funding measures. Some of the factors that must be considered include:

            (a) The impact of stressed market conditions on a bank's ability to raise funding through different sources;
            (b) The interaction between asset markets and funding liquidity, especially in situations where there is an extensive or complete loss of typically available market funding options;
            (c) Any second-round effects, as well as reputation, legal, regulatory and operational constraints, related to the execution of such measures; and
            (d) Any peculiarities (including special terms and conditions) associated with particular funding sources. For example, banks must generally refrain from excessive reliance on back-up credit lines (even if committed) and need to understand various conditions, such as notice periods, that could affect a bank's ability to access such lines quickly.
            August 2018

          • LM-10.2.3

            In developing contingency funding measures, banks should also be aware of the operational procedures needed to transfer liquidity and collateral across group entities, borders and business lines, taking into account legal, regulatory, operational and time zone restrictions and controls governing such transfers. The CFP should incorporate relevant operational procedures and realistic timelines for such transfers. Assets intended to be pledged as collateral in the event that backup funding sources are utilised, should be held by a legal entity and in a location consistent with management's funding plans.

            August 2018

        • Early Warning Signals and Triggering Events

          • LM-10.2.4

            The CFP must clearly mention a set of triggering events that will activate the plan, as well as the mechanisms for identification, monitoring and reporting of such events at an early stage. Banks may consider the various early warning indicators highlighted in Section LM-2.3 in relation to this.

            August 2018

        • Roles and Responsibilities

          • LM-10.2.5

            The CFP must contain clear policies and procedures enabling a bank's management to make timely and well-informed decisions, communicate the decisions effectively, and execute contingency measures swiftly and proficiently. To achieve this, the roles and responsibilities, and internal procedures for liquidity stress management must be clearly delineated. These must cover:

            (a) The authority to invoke the CFP and the establishment of a formal 'crisis management team' to facilitate internal coordination and communication across different business lines and locations and decision-making by senior management in a stress situation;
            (b) Clear escalation and prioritisation procedures detailing what actions to take, who can take them, and when and how each of the actions can and must be activated;
            (c) Names and contact details of members of the team responsible for implementing the CFP and the locations of team members; and
            (d) The designation of alternates for key roles.
            August 2018

        • Intraday Liquidity Considerations

          • LM-10.2.6

            The CFP must include potential steps to meet intraday critical payments. In situations where intraday liquidity resources become scarce, a bank must have the ability to identify critical payments and to sequence or schedule payments based on priority.

            August 2018

        • Communications and Public Disclosure

          • LM-10.2.7

            As part of the CFP, a bank must develop a communication plan to deliver, on a timely basis, clear and consistent communication to internal and external parties, in a time of stress, to support general confidence in the bank. Internal communication must cover employees and encompass different business lines and locations of the bank. External parties must include the CBB, other relevant local or overseas public authorities, clients and creditors. The plan must, in particular, address communication with shareholders and other external stakeholders, such as market participants, correspondents, custodians and major counterparties and customers to whom assurance about the bank is extremely important, as their actions could significantly affect the bank's reputation and liquidity position.

            August 2018

      • LM-10.3 LM-10.3 Testing, Update and Maintenance

        • LM-10.3.1

          The CFP must be subject to regular testing to ensure its effectiveness and operational feasibility, particularly in respect of the availability of the contingency sources of funding listed in it.

          August 2018

        • LM-10.3.2

          The testing of the CFP must cover:

          (a) Verifying key assumptions, such as the ability to sell or repo certain assets or periodically draw down credit lines;
          (b) Ensuring that roles and responsibilities are appropriate and understood;
          (c) Confirming that contact information is up-to-date, with reporting lines clearly stated and synchronised with the latest organisation chart;
          (d) Proving the transferability of cash and collateral (especially across borders and entities); and
          (e) Reviewing that the necessary legal and operational documentation is in place to execute the plan at short notice.
          August 2018

        • LM-10.3.3

          The ALCO must review all aspects of the CFP following each testing exercise and ensure that follow-up actions are delivered.

          August 2018

        • LM-10.3.4

          The ALCO must review and update the CFP on an annual basis at least, or more often, as warranted by changes in business or market circumstances, to ensure that the CFP remains robust over time. Any changes to the CFP must be properly documented and approved by the Board (or its relevant delegated committee).

          August 2018

        • LM-10.3.5

          The CFP must be consistent with the bank's business continuity plans and should be operational under situations where business continuity arrangements have been invoked. As such, a bank should ensure effective coordination between teams managing issues surrounding liquidity crisis and business continuity.

          August 2018

    • LM-11 LM-11 Liquidity Coverage Ratio

      • LM-11.1 LM-11.1 General Requirements

        • LM-11.1.1

          The requirements of this section is applicable to all Bahraini conventional bank licensees.

          August 2018

        • LM-11.1.2

          Liquidity Coverage Ratio (LCR) has been developed to promote short-term resilience of a bank's liquidity risk profile. The LCR requirements aim to ensure that a bank has an adequate stock of unencumbered high quality liquidity assets (HQLA) that consists of assets that can be converted into cash immediately to meet its liquidity needs for a 30-calendar day stressed liquidity period. The stock of unencumbered HQLA should enable the bank to survive until day 30 of the stress scenario, by which time appropriate corrective actions would have been taken by management to find the necessary solutions to the liquidity crisis.

          August 2018

        • LM-11.1.3

          Bahraini conventional bank licensees must calculate LCR on a consolidated and on a "solo" basis by using the following formula:

                  Stock of HQLA        
          Net cash outflows over the next 30 calendar days

          August 2018

        • LM-11.1.4

          Bahraini conventional bank licensees must meet the minimum LCR of not less than 100 percent on a daily basis.

          August 2018

        • LM-11.1.5

          When applying these requirements on a consolidated basis, the computations of LCR for branches and subsidiaries outside Bahrain must be as per the Rulebook requirements applied to all legal entities being consolidated except for the treatment of retail/small business deposits that should follow the relevant parameters adopted in host jurisdictions in which the bank operates.

          August 2018

        • LM-11.1.6

          In cases of restrictions or reasonable doubt about the capability of Bahraini conventional bank licensees with foreign branches and subsidiaries to transfer surplus liquidity from these branches and subsidiaries to the parent entity, the banks must exclude this surplus liquidity from the calculation of the LCR on a consolidated basis.

          August 2018

        • LM-11.1.7

          No excess liquidity should be recognized by a bank with overseas operations in its consolidated LCR. Thus, the eligible HQLA held by a legal entity being consolidated to meet its local LCR requirements (where applicable) can be included in the consolidated LCR to the extent that such HQLA are used to cover the total net cash outflows of that entity. Any surplus at the legal entity level can only be included in the consolidated stock if the assets would also be freely available to the consolidated (parent) entity in times of stress.

          August 2018

        • LM-11.1.8

          LCR in significant currencies: A currency is considered significant if the aggregate liabilities (both on and off-balance sheet) in that currency amount to 5 percent or more of the bank's aggregate liabilities (both on and off-balance sheet) in all currencies. Bahraini conventional bank licensees must monitor the LCR for each significant currency for the bank and its branches/subsidiaries, inside and outside Bahrain.

          August 2018

        • Frequency of Reporting

          • LM-11.1.9

            Bahraini conventional bank licensees are required to submit their "solo" LCR to the CBB within 7 calendar days following the month end, and their consolidated LCR within 14 calendar days following the month end (as required under Section BR-4.3).

            Amended: July 2019
            August 2018

          • LM-11.1.10

            In cases where the LCR falls, or is expected to fall, below 100 percent, Bahraini conventional bank licensees must immediately notify the CBB, report the reasons for the breach or potential breach and present a plan showing the measures they intend to take to restore the LCR ratio.

            August 2018

          • LM-11.1.11

            The stress scenarios assumed in these requirements must be viewed as a minimum supervisory requirement for Bahraini conventional bank licensees. Banks must construct their own scenarios proportionate to their size, business model and complexity of operations, to assess the level of liquidity they must hold over and above this minimum level. These Internal stress scenarios must incorporate time horizons longer than the one mandated by the requirements mentioned in this section.

            August 2018

          • LM-11.1.12

            Bahraini conventional bank licensees must disclose the information on the LCR concurrently with the publication of their quarterly and year-end financial statements. The LCR must be presented as simple averages of daily LCRs over the current and previous period.

            August 2018

      • LM-11.2 LM-11.2 High Quality Liquid Assets (HQLA)

        • The LCR Components and Operational Requirements

          • LM-11.2.1

            Bahraini conventional bank licensees must hold a stock of unencumbered HQLA to cover the total net cash outflows over a 30-day period under prescribed stress scenario outlined in the LCR requirements.

            August 2018

          • LM-11.2.2

            Assets qualify as HQLA if they can be easily and immediately converted into cash at little or no loss of value under stress circumstances.

            August 2018

          • LM-11.2.3

            Bahraini conventional bank licensees must ensure that no operational impediments exist that can prevent timely monetisation of HQLA during a stress period. Banks also have to demonstrate that they can immediately use the stock of HQLA as a source of available liquidity that can be converted into cash (either through outright sale or repo) to fill funding gaps between cash inflows and outflows at any time during stress periods.

            August 2018

          • LM-11.2.4

            The stock of HQLA must be well diversified within the asset classes themselves (except for sovereign debt of Bahrain, central bank reserves, central bank debt securities and cash). Bahraini conventional bank licensees must have policies and limits in place in order to avoid concentration with respect to asset types, issue and issuer types, and currency (consistent with the distribution of net cash outflows by currency) within asset classes.

            August 2018

          • LM-11.2.5

            Bahraini conventional bank licensees must ensure that they have internal policies and measures in place, in line with the following operational requirements:

            (a) Banks must periodically monetise a representative proportion of the assets in its stock of HQLA through outright sale or repos, in order to test access to the market, the effectiveness of its process of monetisation, and to minimise the risk of negative signalling during a period of actual stress;
            (b) All assets in the stock must be unencumbered, meaning free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell or transfer these assets;
            (c) Assets received in reverse repos and securities financing transactions that are held at the bank, which have not been rehypothecated, and which are legally available for the bank's use, can be considered as part of the stock of HQLA;
            (e) Assets which qualify for HQLA that have been deposited with the central bank but have not been used to generate liquidity may also be included in the stock of HQLA; and
            (f) A bank must exclude from the stock those assets that, although meeting with the definition of 'unencumbered', the bank would not have the operational capability to monetise them for whatever reasons;
            (g) The bank must have a policy in place that identifies legal entities, geographical locations, currencies and specific custodial or bank accounts where HQLA are held;
            (h) The bank must identify whether there are any regulatory, legal or accounting impediments to the transfer of these assets to the banking group level, and only include within its stock of HQLA the assets that are freely transferable;
            (i) The bank must exclude from the stock of HQLA, those assets where there are impediments to sale, such as large fire-sale discounts;
            (j) Banks must not include, in the stock of HQLA, any assets, or liquidity generated from assets, they have received under right of hypothecation, if the beneficial owner has the contractual right to withdraw those assets during the 30-day stress period;
            (k) Banks must include within the stock of HQLA the assets held during the reporting period, irrespective of the residual maturity of these assets. The two categories of assets that can be included in the stock of HQLA are 'Level 1' and 'Level 2'. Level 1 assets can be included without any limit, whereas Level 2 assets can only comprise up to 40 percent of total HQLA;
            (l) Level 2 assets are divided into two categories; level 2A and level 2B, according to the qualifying conditions identified in these requirements;
            (m) As part of level 2, banks may include level 2B assets up to 15 percent of total HQLA. However, level 2 assets must not exceed a cap of 40 percent of total HQLA assets;
            (n) The cap on level 2 and level 2B assets must be determined after the application of required haircuts and after taking into account the unwinding of short-term securities financing transactions maturing within 30 calendar days that involve the exchange of HQLA; and
            (o) Banks must ensure that they maintain appropriate systems and policies to control and monitor potential risks, such as market and credit risk which the banks may face while maintaining these assets.
            August 2018

          • LM-11.2.6

            The composition of HQLA is as follows:

            Level 1 Assets

            Level 1 assets comprise of an unlimited share of the total pool and are not subject to haircuts.

            Level 1 assets are limited to:

            (i) Coins and banknotes;
            (ii) Assets with central banks in countries in which the LCR is being calculated, including cash reserves, to the extent that the CBB allows banks to draw-down these assets in times of stress;
            (iii) Debt securities/Sukuk issued by Government of Bahrain or Gulf Cooperation Council (GCC) countries;
            (iv) Debt securities/Sukuk issued or guaranteed by sovereigns, central banks, PSEs, the International Monetary Fund ('IMF'), the Bank for International Settlements ('BIS'), the Islamic Development Bank ('IDB') or its subsidiaries, the European Central Bank ('ECB') and European Commission ('EC'), or Multilateral Development Banks ('MDB') satisfying the following conditions:
            a) Assigned a 0 percent risk weight as shown in Appendix A;
            b) Traded in large, deep and active repo or cash markets and characterized by a low level of concentration;
            c) Have a proven track record of reliable liquidity in the cash or repo market even during stressed market conditions;
            d) Not an obligation of a financial institution or any of its subsidiaries.
            (v) Where the sovereign has a non-0 percent risk weight, debt securities/Sukuk issued in domestic currency by the sovereign or central bank of the country in which the liquidity risk is being taken, or in the bank's home country; and
            (vi) Where the sovereign has a non-0 percent risk weight, debt securities/Sukuk in foreign currencies issued by the sovereign or central bank up to the amount of the bank's stressed net cash outflows in that specific foreign currency arising from the bank's operations in that jurisdiction.

            Level 2 Assets

            Level 2 assets are subject to a 40 percent cap of the overall stock of HQLA assets after haircuts have been applied.

            A. Level 2A assets

            A 15 % haircut is applied to the current market value of each level 2A asset held in the stock of HQLA.

            Level 2A assets are limited to the following;
            (i) Debt securities/Sukuk issued or guaranteed by sovereigns, central banks, PSEs or multilateral development banks that satisfy all the following conditions:
            a. Assigned a 20 percent risk weight, as per Appendix A;
            b. Traded in large deep and active repo or cash markets and characterised by low level of concentration;
            c. Have a proven track record of reliable source of liquidity in the markets (sale or repo) even during stressed market conditions (i.e. maximum price decline not exceeding 10 percent or the increase in haircut not exceeding 10 percent over a 30-day period during a relevant significant stress period); and
            d. Not an obligation of a financial institution, or any of its affiliated entities.
            (ii) Debt securities (including commercial paper)/Sukuk that can be monetised, and covered bonds that satisfy all of the following conditions:
            a. Not issued by a financial institution or any of its affiliated entities;
            b. In the case of covered bonds, not issued by the bank itself or any of its affiliated entities;
            c. Either have a long-term credit rating from a recognized external credit assessment institution ('ECAI') of at least AA-or, in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating;
            d. Traded in large, deep and active cash or repo markets and characterized by a low level of concentration; and
            e. Have a proven track record of reliable liquidity in the markets, even during stressed market conditions (i.e. maximum price decline not exceeding 10 percent, or the increase in haircut not exceeding 10 percent over a 30-day period during a relevant period of significant liquidity stress).
            B. Level 2B assets

            Level 2B assets are limited to the following;
            (i) Debt securities (including commercial paper)/Sukuk issued by non-financial institutions, subject to a 50 percent haircut, that satisfy all of the following conditions:
            a. Debt securities/Sukuk issued by non-financial institutions, or one of their subsidiaries, and have a long-term credit rating between A+ and BBB- or equivalent, or in the absence of a long-term rating, a short-term rating equivalent to the long-term rating;
            b. Traded in large deep and active repo, or cash markets characterized by a low level of concentration; and
            c. Have a proven track record as a reliable source of liquidity in the markets even during stressed market conditions (i.e. maximum price decline not exceeding 20 percent. or the increase in haircut not exceeding 20 percent over a 30-day period during a relevant period of significant liquidity stress);
            (ii) Common equity shares subject to a 50 percent haircut that satisfy all of the following conditions:
            a. Not issued by a financial institution or any of its affiliated entities;
            b. Exchange traded and centrally cleared;
            c. A constituent of the major stock index in the home jurisdiction or where the liquidity risk is being taken;
            d. Denominated in BHD, USD or in the currency of the jurisdiction where the liquidity risk is being taken;
            e. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
            f. Have a proven track record as a reliable source of liquidity in the markets, even during stressed market conditions (i.e. maximum price decline of not exceeding 40 percent, or increase in haircut not exceeding 40 percent over a 30-day period during a relevant period of significant liquidity stress).

            Appendix A provides the calculation of the caps and haircuts.

            August 2018

          • LM-11.2.7

            If a bank wishes to include other assets under level 2B assets, prior approval must be obtained from the CBB.

            August 2018

          • LM-11.2.8

            Bahraini conventional bank licensees must demonstrate their ability to monitor the concentration of the assets in their stock of HQLA, and they must have adequate policies in place for monitoring asset concentration and granular distribution.

            August 2018

      • LM-11.3 LM-11.3 Cash Outflows

        • LM-11.3.1

          Net cash outflow is defined as the total expected cash outflows, minus total expected cash inflows in the stress scenario for the subsequent 30 calendar days. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and OBS commitments with the run-off rates, as shown in these requirements. Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in, up to an aggregate cap of 75 percent of total expected cash outflows. (See Appendix A)

          August 2018

        • LM-11.3.2

          If an asset is included as part of the stock of HQLA (i.e. the numerator), the associated cash inflows cannot also be counted as cash inflows (i.e. the denominator).

          August 2018

        • Outflows

          • LM-11.3.3

            Retail deposits are defined as deposits placed with a bank by a natural person. Deposits from legal entities, sole proprietorships or partnerships are captured in wholesale deposit categories. Retail deposits include demand deposits, saving accounts and term deposits.

            August 2018

          • LM-11.3.4

            Retail deposits are divided into 'stable' and 'less stable' categories as described below:

            A. Stable Deposits

            Stable deposits are subject to a run-off rate of 3%. Stable deposits must meet the following conditions:
            i. Fully insured6 under a deposit insurance scheme; and
            ii. Meets either of the following 2 conditions (a) or (b):
            a) The depositors have other established relationships with the bank that make deposit withdrawal highly unlikely. An established relationship is deemed to exist between the depositor and the bank, if:
            •   The bank has an active contractual relationship with the depositor of at least 12 months duration;
            •   The depositor has a borrowing relationship with the bank for residential loans or other long term loans; or
            •   The depositor has a minimum number of active products, other than loans, with the bank;
            Or
            b) The deposits are in transactional accounts (e.g. accounts where salaries are automatically deposited).
            B. Less Stable Deposits
            (i) Cash outflows related to retail term deposits with a residual maturity or withdrawal notice period greater than 30 days will be excluded from the total expected cash outflows if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR, or if early withdrawal results in a significant penalty greater than the loss of profits payable on the deposit;
            (ii) The CBB may, at its discretion, apply run-off rates on these deposits if there are concerns that depositors might withdraw their deposits in the same manner as demand deposits during either normal or stress times, or if there are concerns that banks may have to repay such deposits early in stressed times for reputational reasons;
            (iii) If a bank is unable to readily identify which retail deposits would qualify as 'stable' according to the definition provided above, it must place the full amount in the 'less stable' category; and
            (iv) Run-off rates shall be applied to less stable deposits as outlined in Appendix A.

            6 6 'Fully insured' means that 100 percent of the deposit amount is covered by an effective deposit insurance scheme. Deposit balances up to the deposit insurance limit can be treated as "fully insured". However, any amount in excess of the deposit insurance limit is to be treated as less stable'. For example, if a depositor has a deposit of BD 150,000 that is covered by a deposit insurance scheme, which has a limit of BD 100,000, where the depositor would receive at least BD 100,000 from the deposit insurance scheme if the bank were unable to pay, then BD 100,000 would be considered "fully insured" and treated as stable deposits, while BD 50,000 would be treated as less stable deposits.

            6 An established relationship is deemed to exist between the depositor and the bank, if:

            •   The bank has an active contractual relationship with the depositor of at least 12 months duration; or
            •   The depositor has a borrowing relationship with the bank for residential loans or other long term loans; or

            The depositor has a minimum number of active products, other than loans, with the bank.

            August 2018

        • Unsecured Wholesale Funding

          • LM-11.3.5

            Unsecured wholesale funding is defined as those liabilities due to non-naturalised persons (i.e. legal entities, including sole proprietorships) and are not collateralized by legal rights to specifically designated assets owned by the bank in the case of bankruptcy, insolvency, liquidation or resolution. Obligations related to derivative contracts are excluded from this definition.

            August 2018

          • LM-11.3.6

            Bahraini conventional bank licensees must include all funding which is callable within the LCR's horizon of 30 days or that has its earliest possible contractual maturity date situated within this horizon (such as maturing term deposits and unsecured debt securities), as well as funding with an undetermined maturity. This must also include funding with options that are exercisable at the investor's discretion within the 30-day calendar day horizon. For funding with options exercisable at the bank's discretion where there is a possibility of not exercising the option (e.g. for reputational reasons), banks must include these liabilities as outflows.

            August 2018

          • LM-11.3.7

            Wholesale funding that is callable by the funds provider subject to a contractually defined and binding notice period exceeding 30 days must not be included in the calculation of the LCR.

            August 2018

          • LM-11.3.8

            For the purpose of the LCR, deposits and unsecured wholesale funding are to be categorized as below (please see Appendix A).

            A. Unsecured Wholesale Funding Provided by Small Business Customers
            (i) This category includes deposits and other funds provided by small business customers (other than financial institutions). For the purpose of these requirements, small business customer deposits are defined as deposits which have the same characteristics of retail accounts, provided that total aggregate funding raised from one small business customer is less than BHD 500,000 (on a consolidated basis where applicable); and
            (ii) Term deposits provided by small business customers are treated the same way as retail deposits.
            B. Operational Deposits Generated by Clearing, Custody and Cash Management Activities
            (i) Certain banking activities that lead to financial and non-financial customers needing to place, or leave deposits with a bank in order to facilitate their access and ability to use payment and settlement systems and otherwise make payments. These funds may receive a 25 percent run-off factor, only if the customer has a substantive dependency with the bank and the deposit is required for such activities. Banks must seek the CBB's prior approval on such accounts and the CBB may choose not to allow the banks to use operational deposit run-off rates in certain cases;
            (ii) Qualifying activities in this context refer to clearing, custody or cash management activities that meet the following criteria;
            a. The customer is reliant on the bank to perform these services as an independent third-party intermediary over the next 30 days. For example, this condition would not be met if the customer has alternative back-up arrangements;
            b. These services must be provided under a legally binding agreement; and
            c. The termination of such arrangements shall be subject either to a notice period of at least 30 days, or significant switching costs to be borne by the customer if the operational deposits are moved before 30 days.
            (iii) Qualifying operational deposits generated by such activities are ones where:
            a. The deposits are held in specifically designated accounts and priced without giving an economic incentive to the customer for maintaining such deposits; and
            b. The deposits are by-products of the underlying services and not solicited in bulk in the wholesale market.
            (iv) Any excess balances that could be withdrawn, leaving enough funds to fulfil the clearing, custody and cash management activities, do not qualify for the 25 percent run-off rate. Only that portion of the deposit which is proven to meet the customer's needs can qualify as stable. Excess balances must be treated in the category for non-operational deposits;
            (v) Banks must determine methodology for identifying excess balances in operational accounts;
            (vi) If the deposit arises out of correspondent banking, or from the provision of prime brokerage services, it will be treated as if there were no operational activities for the purpose of determining run-off factors; and
            (vii) That portion of the operational deposits generated by clearing, custody and cash management activities that is fully covered by deposit insurance can receive the same treatment as 'stable' retail deposits and, as such, can be subject to the 5 percent runoff rate factor.
            C. Unsecured Wholesale Funding Provided by Non-financial Corporates and Sovereigns, Central Banks, Multilateral Development Banks and PSEs

            This category comprises all deposits and other extensions of unsecured funding from non-financial corporate customers (that are not categorized as small business customers) and both domestic and foreign sovereign, central bank, multilateral development bank and PSE, Bahrain's Social Insurance Organization and GCC, Public Investment Funds (PIFs)7 that are not held for operational purposes. The run-off factor for these funds is 40 percent and, in cases where the deposit is fully insured, the run-off factor shall be 20 percent.
            D. Unsecured Wholesale Funding Provided by Other Legal Entity Customers
            (i) This category comprise all deposits and other funding from other institutions (including banks, securities firms, insurance companies, etc.), fiduciaries, beneficiaries, special purpose vehicles, affiliated entities of the bank and other entities that are not specifically held for operational purposes and included in the prior categories. The run-off factor for these funds is 100 percent:
            (ii) All notes, bonds and other debt securities issued by the bank are included in this category regardless of the holder, unless the bond is sold exclusively in the retail market and held in retail accounts (including small business customer accounts treated as retail, as per LM-11.3.8A) in which the instruments can be treated in the appropriate retail or small business customer deposit category. To be treated as such, it is not sufficient that the debt instruments are specifically designed and marketed to retail or small business customers, but rather there must be limitations placed such that those instruments cannot be bought and held by parties other than retail or small business customers; and
            (iii) Customer cash balances arising from the provision of prime brokerage services must be considered separate from any balances related to client protection regimes imposed by the regulatory authorities, and must not be netted against other customer exposures included in this Module.

            7 Only deposits from GCC PIFs where the PIF is a controller of the bank must be included under this classification.

            August 2018

        • Secured Funding

          • LM-11.3.9

            Secured funding is defined as those liabilities and general obligations that are collateralised by legal rights to specifically designated assets owned by the bank in the case of bankruptcy, insolvency, liquidation or resolution. The amount of outflow is calculated based on the amount of funds raised through the transaction, and not the value of the underlying collateral. The table below summarises the applicable factors:

            Categories for outstanding maturing secured Amount to add to cash flows %
            Backed by Level 1 assets or with central banks 0%
            Bank by Level 2A assets 15%
            •   Secured funding transactions with domestic sovereign, PSE or multilateral development bank that are not backed by Level 1 or 2 assets
            •   Backed by RMBS eligible for inclusion in Level 2B
            25%
            Backed by other Level 2B assets 50%
            All other transactions 100%
            August 2018

        • Other Cash Outflows

          • LM-11.3.10

            Additional items and their runoff rates as follows:

            A. Derivatives cash outflows:
            (i) The sum of all net cash outflows will receive a 100 percent factor. Banks must calculate, in accordance with their existing valuation methodologies, expected contractual derivative cash inflows and outflows. Cash flows must be calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. The banks must exclude from such calculations, those liquidity requirements that would result from increased collateral needs due to market value movements or falls in value of collateral posted. Options must be assumed to be exercised when they are in the money to the option buyer;
            (ii) Where derivative payments are collateralized by HQLA, cash outflows must be calculated net of any corresponding cash inflows arising from collateral received for derivatives, or that would result from contractual obligations for cash or collateral to be provided to the bank, if the bank is entitled to re-use the collateral in new transactions; and
            (iii) Below run-off rates apply in the following cases:
            a. Increased liquidity needs related to downgrade triggers embedded in financing transactions, derivatives and other contracts. Banks must review those contracts in detail and identify the clauses that require the posting of additional collateral or early repayment upon the ratings downgrades, by and up to three notches. A 100 percent run-off rate will be applied to the amount of collateral that would be posted for, or contractual cash outflows associated with, the credit rating downgrades;
            b. Increased liquidity needs related to the changes in the market value of the bank's posted collateral. A run-off rate of 20 percent must apply to cover the possibility of changes in value of the collateral posted by the bank in the derivatives contract, as well as other transactions. This rate must apply to all collateral, excluding level 1 assets after offsetting the collateral posted by the same counterparty, which can be used again without any restrictions. This rate will be calculated based on the notional amount of the asset after any other applicable haircuts;
            c. A run-off rate of 100 percent will apply to non-segregated collateral that could contractually be recalled by the counterparty because the collateral is in excess of the counterparty's current collateral requirements;
            d. A run-off rate of 100 percent will apply to the collateral that is contractually due, but where the counterparty has not yet demanded the posting of such collateral;
            e. A run-off rate of 100 percent will apply to the amount of HQLA collateral that can be substituted for non-HQLA assets without the bank's consent; and
            f. Banks must calculate the liquidity needs to face potentially substantial liquidity risk exposures, to valuation changes of derivative contracts. This must be calculated by identifying the largest absolute net 30-day collateral flow realized during the preceding 24 months. The net flows of collateral must be calculated by offsetting the collateral inflows and outflows. This must be executed using the same Master Netting Agreement ('MNA')
            B. Asset Backed Securities, Covered Bonds and Other Structured Financing Instruments

            Such transactions are subject to a run-off rate of 100 percent of the funding transaction maturing within the 30-day period, when these instruments are issued by the bank itself (assuming that the refinancing market will not exist).
            C. Asset-backed Commercial Paper, Securities Investment Vehicles and Other Financing Facilities

            A run-off rate of 100 percent must apply to the payments due within a 30-day period. In cases where assets are returnable, a run-off rate of 100 percent must apply to the returned assets when there are derivatives, or derivative-like components, contractually mentioned in the agreements for the structure, allowing the 'return' of assets in a financing arrangement (assuming that the refinancing market will not exist).
            D. Asset-backed Commercial Paper, Securities Investment Vehicles and Other Financing Facilities

            A run-off rate of 100 percent must apply to the payments due within a 30-day period. In cases where assets are returnable, a run-off rate of 100 percent must apply to the returned assets when there are derivatives, or derivative-like components, contractually mentioned in the agreements for the structure, allowing the 'return' of assets in a financing arrangement (assuming that the refinancing market will not exist).
            E. Drawdowns on Committed Credit and Liquidity Facilities

            These facilities include contractually irrevocable ('committed') or conditionally revocable agreements to extend funds. Unconditionally revocable facilities that are unconditionally cancellable are excluded from this section and included in 'Other Contingent Funding Liabilities' section for the purpose of the following requirements:
            (i) When calculating the facilities mentioned in the preceding paragraph, the currently undrawn portion of these facilities is the calculated net of any HQLA if the HQLA have already been posted as collateral by the counterparty to secure the facilities, or are contractually obliged to be posted when the counterparty will draw down the facility if the bank is entitled to re-use the collateral and there is no undue correlation between the probability of drawing the facility and the market value of the collateral. In such cases, the assets posted as collateral can be netted to the extent that this collateral is not already counted in the stock of HQLA, as per these requirements;
            (ii) For the purpose of these requirements, a liquidity facility is defined as any committed, undrawn (unused) backup facility that would be utilized to refinance the debt obligations of a customer in situations where such a customer is unable to rollover that debt in financial markets. To calculate the LCR, an amount equivalent to the currently outstanding debt issued by the customer maturing within a 30-day period is taken, while excluding the portion of the backing debt within this period. General working capital facilities for corporate entities will not be classified as liquidity facilities, but as credit facilities. Any other undrawn facilities will be classified as credit facilities; and
            (iii) Any facilities provided to hedge funds and special purpose funding vehicles or other vehicles used to finance the banks own assets, must be captured in their entirety as a liquidity facility, to other legal entities.
            F. Contractual Obligations To Extend Funds Within a 30-day Period

            Any contractual lending obligations to financial institutions not captured elsewhere in the requirements must be captured here at a 100 percent run-off rate.


            If the total of all contractual obligations to extend funds to retail and non-financial corporate clients within the next 30 calendar days (not captured in the prior categories) exceeds 50 percent of the total contractual inflows due in the next 30 calendar days from these clients, the difference must be reported as a 100 percent outflow (i.e. the excess above 50 percent of the total inflow of these clients within a period of 30 days).
            G. Other Contingent Funding Obligations

            The table below shows the cash outflow run-off rates for other contingent funding obligations:

            Table: Run-off rates for Other Contingent Funding Obligations

            Type of Contingent Funding Run-off Rates (%)
            Revocable and unconditional financing and liquidity facilities 'uncommitted'. 5%
            Non-contractual contingent funding obligations related to potential liquidity draws from joint venture or minority investments in entities. 5%
            Obligations related to trade financing (including letters of guarantee and letters of credit). 5%
            Guarantees and letters of credit unrelated to trade finance obligations. 5%
            Non-contractual commitments related to customers' short positions covered by other customers' collateral. 50%
            Outstanding debt securities/Sukuk (more than 30 days maturity). 5%
            Any other non-contractual obligations not captured above. 5%
            (i) Lending commitments, such as direct import or export financing for non-financial corporate firms are excluded from this treatment and banks will apply the run-off rates specified in Appendix A; and
            (ii) A 100 percent run-off rate must apply for any other contractual cash outflows within the next 30 calendar days, not captured above, other than operational expenses (which are not covered by this Module).
            August 2018

      • LM-11.4 LM-11.4 Cash Inflows

        • LM-11.4.1

          When considering its available cash inflows, the bank must only include contractual inflows from outstanding exposures that are fully performing and for which the bank has no reason to expect a default within the 30-day time horizon. Contingent inflows are not included in total net cash inflows.

          August 2018

        • LM-11.4.2

          Bahraini conventional bank licensees need to monitor the concentration of expected inflows across wholesale counterparties in the context of the banks' liquidity risk management, in order to ensure that liquidity position is not overly dependent on the arrival of expected inflows from one or a limited number of wholesale counterparties.

          August 2018

        • LM-11.4.3

          The amount of inflows that can offset outflows is capped at 75 percent of the total expected cash outflows, as calculated in the Module for the purpose of calculating the net cash outflows.

          August 2018

        • A. Secured Lending, Including Reverse Repos and Securities Borrowing

          • LM-11.4.4

            A bank must assume that maturing financing transactions secured by level 1 assets will be rolled-over and will not give rise to any cash inflows; as a result, an inflow factor of 0 percent will be applied to this kind of transaction. While maturing financing transactions secured by Level 2 HQLA will lead to cash inflows equivalent to the relevant haircut for the specific assets. A bank is assumed not to roll-over maturing secured financing transactions which have been secured by non-HQLA assets, and can assume receiving back 100 percent of the cash related to those agreements (i.e. an inflow factor of 100 percent).

            August 2018

          • LM-11.4.5

            Maturing secured lending transactions backed by different asset categories will receive different factors provided that the collateral obtained through reverse repo, or securities borrowing which matures within the 30-day horizon, is not used to cover short positions.

            August 2018

          • LM-11.4.6

            If the collateral obtained through reverse repo or securities borrowing matures within the 30-day horizon, and is re-used to cover short positions that could be extended beyond 30 days, a bank must assume that the reverse repo or securities borrowing arrangements will be rolled-over and will not give rise to any cash inflow (0 percent).

            August 2018

          • LM-11.4.7

            In the case of a bank's short positions, if the short position is being covered by an unsecured security borrowing, the bank must assign a 100 percent outflow of either cash or HQLA to secure the borrowing, or cash to close out the short position by buying back the security. This must be assigned a 100% run-off rate under the other contractual cash outflows described in LM-11.3.10(F). However, if the bank's short position is being covered by a collateralized securities financing transaction, the bank must assume the short position will be maintained throughout the 30-day period and receive a 0 percent outflow.

            August 2018

        • B. Committed Facilities

          • LM-11.4.8

            No cash inflows are assumed from credit facilities or liquidity facilities that the bank holds at other institutions for its own purposes. As such, these transactions must receive a 0 percent cash inflow rate, meaning that this scenario does not consider inflows from committed credit or liquidity facilities.

            August 2018

        • C. Other Inflows by Counterparty

          • LM-11.4.9

            For all other types of transactions, either secured or unsecured, the bank must apply inflow rates according to the counterparty category, as explained in the following paragraphs.

            August 2018

          • LM-11.4.10

            When considering loan payments, the bank must only include inflows from fully performing loans. For revolving credit facilities, this assumes that the existing loans are rolled-over and that any remaining balances (undrawn) are treated in the same way as a committed facility according to LM-11.3.10(E).

            August 2018

          • LM-11.4.11

            Inflows from loans that have no specific maturity (i.e. have non-defined or open maturity) must not be included; therefore, no assumptions must be applied as to when maturity of such loans would occur. An exception to this would be minimum payments of principal, commission or interest associated with an open maturity financing transactions, provided that such payments are contractually due within 30 days. These minimum payment amounts must be captured as inflows at the rates prescribed in the paragraphs below (articles a. and b.).

            August 2018

          • LM-11.4.12

            Bahraini conventional bank licensees must apply the below rates to the cash inflows maturing within 30 calendar days by counterparty:

            a. Cash inflows from retail customers and small business customers: 50 percent of the contractual amount.
            b. Other wholesale inflows:
            i. 100 percent for financial institutions and central bank counterparties; and
            ii. 50 percent for non-financial wholesale counterparties.
            c. Operational deposits: Deposits held at other financial institutions for operational purposes will receive a 0 percent inflow rate.
            August 2018

          • LM-11.4.13

            Inflows from securities maturing within 30 days not included in the stock of HQLA must be treated in the same category as inflows from financial institutions (i.e. 100 percent inflow). Bahraini conventional bank licensees may also recognize in this category inflows from the release of balances held in segregated accounts in accordance with regulatory requirements for the protection of customer trading assets, provided that these segregated balances are maintained in HQLA. Liquid assets from level 1 and level 2 securities maturing within 30 days must be included as HQLA, provided that they meet all operational and definitional requirements, as laid out in LM-11.2.

            August 2018

        • D. Other Cash Inflows

          • LM-11.4.14

            Derivatives cash inflows: The sum of all net cash inflows must receive a 100 percent inflows factor. The amounts of derivative cash inflows and outflows must be calculated in accordance with the methodology described in LM-11.3.10(A) Sub Paragraph.(i).

            August 2018

          • LM-11.4.15

            Where derivative contracts are collateralized by HQLA, cash inflows must be calculated net of any corresponding cash or contractual outflows that would result, all other things being equal, from contractual obligations for cash or collateral to be posed by the bank, given these contractual obligations would reduce the stock of HQLA. This is in accordance with the principle that banks must not double-count liquidity inflows or outflows.

            August 2018

          • LM-11.4.16

            Other contractual cash inflows: Other contractual cash inflows must be captured here, with an explanation given as to what this bucket comprises of; they must receive a 100 percent inflow rate. Cash inflows related to cash flows which are not pertinent to the bank's primary activities are not taken into account in the calculation of the net cash outflows for the purposes of calculating the LCR.

            August 2018

    • LM-12 LM-12 Net Stable Funding Ratio

      • LM-12.1 LM-12.1 Introduction

        • LM-12.1.1

          The content of this section is applicable to all locally incorporated conventional banks licensed by the Central Bank of Bahrain.

          August 2018

        • LM-12.1.2

          The objective of the Net Stable Funding Ratio (NSFR) is to promote the resilience of banks' liquidity risk profiles and to incentivise a more resilient banking sector over a longer time horizon. The NSFR will require banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. A sustainable funding structure is intended to reduce the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on-balance sheet and off-balance sheet items, and promotes funding stability.

          August 2018

      • LM-12.2 LM-12.2 Scope of Application

        • LM-12.2.1

          Bahraini conventional bank licensees shall calculate the NSFR

          separately for each of the following levels:

          (a) Level (A): The NSFR for the bank on solo basis; and
          (b) Level (B): The NSFR for the bank on a consolidated basis.
          August 2018

        • LM-12.2.2

          When applying these requirements on a consolidated basis, the available stable funding ('ASF') factors applied for branches and subsidiaries outside Bahrain must be as per the requirements in this Module.

          August 2018

      • LM-12.3 LM-12.3 Requirements and Calculation Methodology

        • LM-12.3.1

          The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. This ratio must be equal to at least 100 percent on an ongoing basis. 'Available stable funding' is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to 1 year. 'Required stable funding' is defined as the portion of assets and OBS exposures expected to be funded on an ongoing basis over a 1-year horizon. The amount of such stable funding required of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution, as well as those of its OBS exposures.

          August 2018

        • LM-12.3.2

          The NSFR (as a percentage) must be calculated as follows:

          Available stable funding >=100
          Required stable funding
          August 2018

        • LM-12.3.3

          The NSFR definitions mirror those outlined in the section LM-11 'Liquidity Coverage Ratio unless otherwise specified.

          August 2018

      • LM-12.4 LM-12.4 NSFR Components

        • A) Available Stable Funding

          • LM-12.4.1

            The amount of ASF is measured based on the broad characteristics of the relative stability of an institution's funding sources, including the contractual maturity of its liabilities and the differences in the propensity of different types of funding providers to withdraw their funding. The amount of ASF is calculated by first assigning the carrying value of a bank's capital and liabilities to one of five categories, as presented below in Table (1), before the application of any regulatory deductions, filters or other adjustments. The amount assigned to each category is then multiplied by an ASF factor, and the total ASF is the sum of the weighted amounts.

            August 2018

          • LM-12.4.2

            When determining the maturity of an equity or liability instrument, investors are assumed to redeem a call option at the earliest possible date. In particular, where the market expects certain liabilities to be redeemed before their legal final maturity date, banks must assume such behaviour for the purpose of the NSFR and include these liabilities in the corresponding ASF category. For long-dated liabilities, only the portion of cash flows falling at or beyond the 6-month and 1-year time horizons must be treated as having an effective residual maturity of 6 months or more, and 1 year or more, respectively.

            August 2018

        • Calculation of Derivative Liability Amounts

          • LM-12.4.3

            Derivative liabilities are calculated first based on the replacement cost for derivative contracts (obtained by marking to market) where the contract has a negative value. When an eligible bilateral netting contract is in place that meets the conditions as specified in the 'bilateral netting agreements' conditions specified in Appendix F, the replacement cost for the set of derivative exposures covered by the contract will be the net replacement cost.

            August 2018

          • LM-12.4.4

            In calculating NSFR derivative liabilities, collateral posted in the form ofvariation margin in connection with derivative contracts, regardless of the asset type, must be deducted from the negative replacement cost amount.8, 2


            8 NSFR derivative liabilities = (derivative liabilities) - (total collateral posted as variation margin on derivative liabilities).

            2 To the extent that the bank's accounting framework reflects on the balance sheet, in connection with a derivative contract, an asset associated with collateral posted as variation margin that is deducted from the replacement cost amount for purposes of the NSFR, that asset should not be included in the calculation of a bank's required stable funding ('RSF') to avoid any double-counting.

            August 2018

        • Liabilities and Capital Receiving a 100 percent ASF Factor

          • LM-12.4.5

            Liabilities and capital instruments receiving a 100 percent ASF factor comprise:

            (a) The total amount of regulatory capital, before the application of capital deductions9, including general provisions calculated under the regulatory capital and excluding the proportion of Tier 2 instruments with residual maturity of less than 1 year. With regards to branches of foreign banks, this category includes the actual value of funds designated for the branch/branches;
            (b) The total amount of any capital instrument not included in (a ) that has an effective residual maturity of 1 year or more, but excluding any instruments with explicit or embedded options that, if exercised, would reduce the expected maturity to less than 1 year; and
            (c) The total amount of secured and unsecured borrowings and liabilities (including term deposits) with effective residual maturities of 1 year or more. Cash flows falling below the 1-year horizon, but arising from liabilities with a final maturity greater than 1 year do not qualify for the 100 percent ASF factor.

            9 Capital instruments reported here should meet all requirements outlined in CBB Capital Adequacy Ratio—Basel III Guidelines.

            August 2018

        • Liabilities Receiving a 95 percent ASF Factor

          • LM-12.4.6

            Liabilities receiving a 95 percent ASF factor comprise of 'stable' non-maturing deposits (demand) deposits, saving deposits and/or term deposits with residual maturities of less than 1 year provided by retail customers.

            August 2018

          • LM-12.4.7

            Stable deposits for this purpose are the amount of the deposits that are fully insured10 by a deposit insurance scheme, and where:

            (a) The depositors have other established relationships with the bank that make deposit withdrawal highly unlikely; or
            (b) The deposits are in transactional accounts (e.g. accounts where salaries are automatically deposited).

            All other deposits and accounts that do not satisfy these criteria shall be treated as less stable deposits.


            10 'Fully insured' means that 100 percent of the deposit amount is covered by an effective deposit insurance scheme. Deposit balances up to the deposit insurance limit can be treated as "fully insured". However, any amount in excess of the deposit insurance limit is to be treated as 'less stable'. For example, if a depositor has a deposit of BD 150,000 that is covered by a deposit insurance scheme, which has a limit of BD 100,000, where the depositor would receive at least BD 100,000 from the deposit insurance scheme if the bank were unable to pay, then BD 100,000 would be considered "fully insured" and treated as stable deposits, while BD 50,000 would be treated as less stable deposits.

            August 2018

          • LM-12.4.8

            The presence of deposit insurance alone is not sufficient to consider a deposit 'stable' if it does not satisfy all of the conditions previously outlined.

            August 2018

        • Liabilities Receiving a 90 Percent ASF Factor

          • LM-12.4.9

            Liabilities receiving a 90 percent ASF factor comprise of 'less stable' demand deposits, saving deposits and/or term deposits with residual maturities of less than 1 year provided by retail and small business customers.

            August 2018

        • Liabilities Receiving a 50 Percent ASF Factor

          • LM-12.4.10

            Liabilities receiving a 50 percent ASF factor comprise:

            (a) Funding (secured and unsecured) with a residual maturity of less than 1 year provided by non-financial corporate customers;
            (b) Operational deposits (as defined in Appendix E);
            (c) Funding with residual maturity of less than 1 year from sovereigns, public sector entities (PSEs), and multilateral and national development banks; and
            (d) Other funding (secured and unsecured) not included in the categories above with a residual maturity of between 6 months to less than 1 year, including funding from central banks and financial institutions.

            'Funding' refers to all sources of funding including deposits, loans and others.

            August 2018

        • 5) Liabilities Receiving a 0 Percent ASF Factor

          • LM-12.4.11

            Liabilities receiving a 0 percent ASF factor comprise:

            (a) All other liability categories not included in the above categories, including other funding with residual maturity of less than 6 months from the central bank and financial institutions;
            (b) Other liabilities without a stated maturity. This category may include short positions and open maturity positions. Two exceptions can be recognized for liabilities without a stated maturity:
            i. First, deferred tax liabilities, which must be treated according to the nearest possible date on which such liabilities could be realized; and
            ii. Second, minority interest, which must be treated according to the term of the instrument, usually in perpetuity.
            These exceptions would then be assigned either a 100 percent ASF factor if the effective maturity is 1 year or greater, or 50 percent, if the effective maturity is between 6 months and less than 1 year.
            (c) NSFR derivative liabilities, as calculated according to LM-12.4.3 and LM-12.4.4, and NSFR derivative assets, as calculated according to LM-12.4.21 and LM-12.4.22, if the NSFR derivative liabilities are greater than NSFR derivative assets;11 and
            (d) 'Trade date' payables arising from purchases of financial instruments, foreign currencies and commodities that (i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction, or (ii) have failed to, but are still expected to, settle.

            11 In this case, ASF = 0% x MAX ((NSFR derivative liabilities - NSFR derivative assets), 0).

            August 2018

          • LM-12.4.12

            Table (1) below summarizes the components of each of the ASF categories and the associated maximum ASF factor to be applied in calculating a bank's total amount of available stable funding.

            Table 1: Summary of Liability Categories and Associated ASF Factors

            ASF Factor Components of ASF Category
            100%
            •   Total regulatory capital (excluding Tier 2 instruments with a residual maturity of less than 1 year);
            •   Other capital instruments and liabilities with an effective residual maturity of 1 year or more;
            •   Deferred tax liabilities with a residual maturity of 1 year or greater; and
            •   Minority interest with a residual maturity of 1 year or more.
            95% Stable demand deposits, saving deposits and term deposits with a residual maturity of less than 1 year provided by retail customers.
            90% Less stable demand deposits, saving deposits and term deposits with a residual maturity of less than 1 year provided by retail and small business customers.
            50%
            •   Funding with a residual maturity of less than 1 year provided by non-financial corporate customers;
            •   Operational deposits;
            •   Funding with a residual maturity of less than 1 year from sovereigns, PSEs, and multilateral and national development banks, Bahrain's Social Insurance Organization and GCC PIFs (where the PIF is a controller of the bank);
            •   Other secured or unsecured funding with a residual maturity between 6 months and less than 1 year not included in the above categories, including funding provided by central banks and financial institutions;
            •   Deferred tax liabilities with a residual maturity of between 6 months and less than 1 year; and
            •   Minority interest with residual maturity between 6 months and less than 1 year.
            ASF Factor Components of ASF Category
            0%
            •   All other liabilities and equity not included in the above categories, including liabilities without a stated maturity (with a specific treatment for deferred tax liabilities and minority interests);
            •   NSFR derivative liabilities net of NSFR derivative assets if NSFR derivative liabilities are greater than NSFR derivative assets; and
            •   'Trade date' payables arising from purchases of financial instruments, foreign currencies and commodities.
            Amended: January 2020
            August 2018

        • Required Stable Funding (RSF)

          • LM-12.4.13

            The amount of RSF funding is measured based on the broad characteristics of the liquidity risk profile of an institution's assets and OBS exposures. The amount of required stable funding is calculated by first assigning the carrying value of an institution's assets to the categories listed in Table 2 below. The amount assigned to each category is then multiplied by its associated RSF factor, and the total RSF is the sum of the weighted amounts added to the amount of OBS activity (or potential liquidity exposure) multiplied by its associated RSF factor.

            August 2018

          • LM-12.4.14

            Definitions mirror those outlined in the LCR, unless otherwise specified12.


            12 For the purposes of calculating the NSFR, HQLA are defined as all HQLA without regard to LCR operational requirements and LCR caps on Level 2 and Level 2B assets that may otherwise limit the ability of some HQLA to be included as eligible HQLA in calculation of the LCR.

            August 2018

          • LM-12.4.15

            The RSF factors assigned to various types of assets are intended to approximate the amount of a particular asset that would have to be funded, either because it will be rolled-over, or because it could not be monetised through sale or used as collateral in a secured borrowing transaction over the course of 1 year without significant expense. Such amounts are expected to be supported by stable funding.

            August 2018

          • LM-12.4.16

            Assets must be allocated to the appropriate RSF factor based on their residual maturity or liquidity value. When determining the maturity of an instrument, investors must be assumed to exercise any option to extend maturity. In particular, where the market expects certain assets to be extended in their maturity, banks must assume such behaviour for the purpose of the NSFR and include these assets in the corresponding RSF category. For amortizing loans, the portion that comes due within the 1-year horizon can be treated in the less-than-1-year residual maturity category.

            August 2018

          • LM-12.4.17

            For the purposes of determining its required stable funding, a bank must; (i) include financial instruments, foreign currencies and commodities for which a purchase order has been executed, and (ii) exclude financial instruments, foreign currencies and commodities for which a sales order has been executed, even if such transactions have not been reflected in the balance sheet under a settlement-date accounting model, provided that; (i) such transactions are not reflected as derivatives or secured financing transactions in the bank's balance sheet, and (ii) the effects of such transactions will be reflected in the institution's balance sheet when settled.

            August 2018

        • Encumbered Assets

          • LM-12.4.18

            Encumbered assets receive RSF factors as follows:

            (a) Assets on the balance sheet that are encumbered for 1 year or more receive a 100 percent RSF factor;
            (b) Assets encumbered for a period of between 6 months and less than 1 year receive the following RSF factors:
            i. 50 percent RSF factor if these assets would receive an RSF factor lower than or equal to 50 percent if unencumbered; and ii. If these assets receive an RSF factor higher than 50 percent if unencumbered, the higher RSF factor is applied.
            (c) Where assets have less than 6 months remaining in the encumbrance period, those assets may receive the same RSF factor as an equivalent asset that is unencumbered.

            Assets that are encumbered for exceptional13 central bank liquidity operations receive 0 percent RSF factor.


            13 In general, exceptional central bank liquidity operations are considered to be non-standard, temporary operations conducted by the central bank in a period of market-wide financial stress and/or exceptional macroeconomic challenges.

            August 2018

        • Secured Financing Transactions

          • LM-12.4.19

            For secured funding arrangements, including securities financing transactions, the following applies:

            (a) Banks must include securities that have been borrowed in securities financing transactions (such as reverse repos and collateral swaps), that appear on the banks' balance sheets and where the banks retain beneficial ownership. Otherwise, banks must not include the securities; and
            (b) Where banks have encumbered securities in repos or other securities financing transactions, but have retained beneficial ownership and those assets remain on the bank's balance sheet, the bank must allocate such securities to the appropriate RSF category.
            August 2018

          • LM-12.4.20

            Securities financing transactions with a single counterparty may be measured net when calculating the NSFR, provided that the netting conditions are as set out below:

            (a) Transactions have the same final settlement date;
            (b) The right to net the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable both currently in the normal course of business and in the event of; (i) default; (ii) insolvency; and (iii) bankruptcy; and
            (c) Transactions are settled net, settled simultaneously, or are subject to a settlement mechanism that results in a single net amount on the settlement date.
            August 2018

        • Calculation of Derivative Asset Amounts

          • LM-12.4.21

            Derivative assets are calculated first based on the replacement cost for derivative contracts (obtained by marking to market) where the contract has a positive value. When an eligible bilateral netting contract is in place that meets the conditions as specified, as per the 'bilateral netting agreements' conditions specified in Appendix F, the replacement cost for the set of derivative exposures covered by the contract will be the net replacement cost.

            August 2018

          • LM-12.4.22

            In calculating NSFR derivative assets, collateral received in connection with derivative contracts may not offset the positive replacement cost amount, regardless of whether or not netting is permitted under the bank's operative accounting or risk-based framework, unless it is received in the form of a cash variation margin and meets the conditions as specified in Appendix G14. Any remaining balance sheet liability associated with; (a) variation margin received that does not meet the criteria above, or (b) initial margin received, may not offset derivative assets and must be assigned a 0 percent ASF factor.


            14 NSFR derivative assets = (derivative assets) - (cash collateral received as variation margin on derivative assets).

            August 2018

        • 1) Assets Assigned a 0 Percent RSF Factor

          • LM-12.4.23

            Assets assigned a 0 percent RSF factor comprise:

            (a) Coins and banknotes immediately available to meet obligations;
            (b) All central bank reserves (including required reserves and excess reserves);
            (c) All claims on central banks with residual maturities of less than 6 months; and
            (d) 'Trade date' receivables arising from the sales of financial instruments, foreign currencies and commodities that; (i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction, or (ii) have failed to, but are still expected to, settle.
            August 2018

        • 2) Assets Assigned a 5 Percent RSF Factor

          • LM-12.4.24

            Assets assigned a 5 percent RSF factor comprise unencumbered level 1 HQLA, as defined in Appendix H, excluding assets receiving a 0 percent RSF factor as specified above, and including:

            (a) Marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs and MDBs that are assigned a 0 percent risk weight under Appendix I, Government of Bahrain, the CBB, the BIS, the IMG, the ECB and the EC; and
            (b) Marketable securities representing claims on, or guaranteed by, certain non-0 percent risk-weighted sovereign or central bank debt securities, as specified in Appendix I.
            August 2018

        • 3) Assets Assigned a 10 Percent RSF Factor

          • LM-12.4.25

            Unencumbered loans and deposits with financial institutions with residual maturities of less than 6 months, where the loan is secured against level 1 HQLA as defined in Appendix H, and where the bank has the ability to freely re-hypothecate the received collateral for the life of the loan.

            August 2018

        • 4) Assets Assigned a 15 Percent RSF Factor

          • LM-12.4.26

            Assets assigned a 15 percent RSF factor comprise of:

            (a) Unencumbered level 2A HQLA, as defined in Appendix H, including:
            (i) Marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs or MDBs that are assigned a 20 percent risk weight under Appendix I; and
            (ii) Corporate debt securities/Sukuk (including commercial paper) and covered bonds with a credit rating equal or equivalent to at least AA-.
            (b) Other unencumbered loans and deposits with financial institutions with residual maturities of less than 6 months, not included in LM-12.4.25.
            August 2018

        • 5) Assets Assigned a 50 Percent RSF Factor

          • LM-12.4.27

            Assets assigned a 50 percent RSF factor comprise:

            (a) Unencumbered level 2B HQLA, as defined and subject to the conditions set forth in Appendix H, including:
            (i) Corporate debt securities/Sukuk (including commercial paper) with a credit rating of between A+ and BBB-;
            (ii) Exchange-traded common equity shares not issued by financial institutions or their affiliates.
            (b) Any HQLA, as defined in Appendix H, that are encumbered for a period of between 6 months and less than 1 year;
            (c) All loans and deposits with financial institutions and central banks with residual maturity of between 6 months and less than 1 year;
            (d) Deposits held at other deposit-taking financial institutions for operational purposes that are subject to the 50 percent ASF factor in LM-12.4.10; and
            (e) All other non-HQLA not included in the above categories that have a residual maturity of less than 1 year, including loans to non-financial corporate clients, loans to retail customers (i.e. natural persons) and small business customers, and loans to sovereigns and PSEs.
            August 2018

        • 6) Assets Assigned a 65 Percent RSF Factor

          • LM-12.4.28

            Assets assigned a 65 percent RSF factor comprise of:

            (a) Unencumbered residential mortgages with a residual maturity of 1 year or more that would qualify for a 35 percent or lower risk weight under the Capital Adequacy Ratio Guidelines; and
            (b) Other unencumbered loans and deposits not included in the above categories, excluding loans and deposits with financial institutions, with a residual maturity of 1 year or more that would qualify for a 35 percent or lower risk weight under the CBB Capital Adequacy Ratio Guidelines.
            August 2018

        • 7) Assets Assigned a 85 Percent RSF Factor

          • LM-12.4.29

            Assets assigned an 85 percent RSF factor comprise:

            (a) Cash, securities or other assets posted as initial margin for derivative contracts15 and cash or other assets provided to contribute to the default fund of a central counterparty ('CCP'). Where securities or other assets, posted as initial margin for derivative contracts, would otherwise receive a higher RSF factor, they must retain that higher factor.
            (b) Other unencumbered performing loans16 that do not qualify for the 35 percent or lower risk weight under the CBB Capital Adequacy Ratio Guidelines and have residual maturities of 1 year or more, excluding loans and deposits with financial institutions;
            (c) Unencumbered securities with a remaining maturity of 1 year or more and exchange-traded equities, in cases where the issuer is not in default and where the securities do not qualify as HQLA according to the LCR; and
            (d) Physical traded commodities, including gold.

            15 Initial margin posted on behalf of a customer, where the bank does not guarantee performance of the third party, would be exempt from this requirement.

            16 Performing loans are considered to be those that are not past due for more than 90 days. Conversely, non-performing loans are considered to be loans that are more than 90 days past due.

            August 2018

        • 8) Assets Assigned a 100 Percent RSF Factor

          • LM-12.4.30

            Assets assigned a 100 percent RSF factor comprise:

            (a) All assets that are encumbered for a period of 1 year or more;
            (b) NSFR derivative assets, as calculated according to LM-12.4.21 and LM-12.4.22, and NSFR derivative liabilities, as calculated according to LM-12.4.3 and LM-12.4.4, if NSFR derivative assets are greater than NSFR derivative liabilities;17
            (c) All other assets not included in the above categories, including non-performing loans (net of specific provisions), loans and deposits with financial institutions with a residual maturity of 1 year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, insurance assets and defaulted securities; and
            (d) 20 percent of derivative liabilities (i.e. negative replacement cost amounts), as calculated according to LM-12.4.3 (before deducting variation margin posted). The CBB has the discretion to lower the value of this factor, with a floor of 5%.

            17 RSF = 100% x MAX ((NSFR derivative assets - NSFR derivative liabilities), 0).

            August 2018

          • LM-12.4.31

            Table 2 summarizes the specific types of assets to be assigned to each asset category and their associated RSF factor.

            Table 2: Summary of Asset Categories and Associated RSF Factors

            RSF Factor Components of RSF Factor
            0%
            •   Coins and banknotes;
            •   All central bank reserves;
            •   All claims on central banks with residual maturities of less than 6 months; and
            •   'Trade date' receivables arising from the sales of financial instruments, foreign currencies and commodities.
            5% Unencumbered level 1 HQLA, excluding coins, banknotes and central bank reserves.
            10% Unencumbered loans and deposits with financial institutions with residual maturities of less than 6 months, where the loan is secured against level 1 HQLA and where the bank has the ability to freely rehypothecate the received collateral for the life of the loan.
            15%
            •   Unencumbered level 2A HQLA;
            •   All other unencumbered loans and deposits with financial institutions with residual maturities of less than 6 months not included in the above categories.
            50%
            •   Unencumbered level 2B HQLA;
            •   HQLA encumbered for a period of 6 months or more, and less than 1 year;
            •   Loans and deposits with financial institutions and central banks with residual maturities between 6 months and less than 1 year;
            •   Deposits held at other financial institutions for operational purposes; and
            •   All other assets not included in the above categories with residual maturity of less than 1 year, including loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns and PSEs.
            65%
            •   Unencumbered residential mortgages with a residual maturity of 1 year or more, and with a risk weight of less than or equal to 35 percent, as per the CBB Capital Adequacy Ratio Guidelines; and
            •   Other unencumbered loans and deposits not included in the above categories, excluding loans and deposits with financial institutions, with a residual maturity of 1 year or more, and with a risk weight of less than or equal to 35 percent, as per the CBB Capital Adequacy Ratio Guidelines.
            85%
            •   Cash, securities or other assets posted as initial margin for derivative contracts and cash or other assets provided to contribute to the default fund of a CCP;
            •   Other unencumbered performing loans with risk weights greater than 35 percent, as per the CBB Capital Adequacy Ratio Guidelines and residual maturities of 1 year or more, excluding loans and deposits with financial institutions;
            Unencumbered securities that are not in default and do not qualify as HQLA with a remaining maturity of 1 year or more, and exchange-traded equities in cases where the issuer is not in default and where the securities do not qualify as HQLA according to the LCR; and
            •   Physical traded commodities, including gold.
            100%
            •   All assets that are encumbered for a period of 1 year or more;
            •   NSFR derivative assets net of NSFR derivative liabilities, if NSFR derivative assets are greater than NSFR derivative liabilities;
            •   20 percent of derivative liabilities (net of eligible cash variation margin); The CBB has discretion to lower the value of this factor, with a floor of 5%; and
            •   All other assets not included in the above categories, including non-performing loans (net of specific provisions), loans and deposits with financial institutions with a residual maturity of 1 year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, insurance assets and defaulted securities.
            August 2018

        • Off-balance Sheet Exposures

          • LM-12.4.32

            Many potential OBS liquidity exposures require little direct or immediate funding, but can lead to significant liquidity drains over a longer time horizon. The NSFR assigns an RSF factor to various OBS activities in order to ensure that institutions hold stable funding for the portion of OBS exposures that may be expected to require funding within a 1-year horizon.

            August 2018

          • LM-12.4.33

            Consistent with the LCR, the NSFR identifies OBS exposure categories based broadly on whether the commitment is a credit or liquidity facility, or some other contingent funding obligation. Table 3 identifies the specific types of OBS exposures to be assigned to each OBS category and their associated RSF factor.

            Table 3: Summary of OBS Categories and Associated RSF Factors

            RSF Factor RSF Category
            5% of the currently undrawn portion
            •   Irrevocable and conditionally revocable credit and liquidity facilities;
            •   Other contingent funding obligations, including products and instruments such as:
            •   Unconditionally revocable credit and liquidity facilities;
            •   Trade finance-related obligations (including guarantees and letters of credit);
            •   Guarantees and letters of credit unrelated to trade finance obligations;
            •   Non-contractual obligations such as:
            •   Potential requests for debt repurchases of the bank's own debt, or that of related conduits, securities investment vehicles and other such financing facilities;
            •   Structured products where customers anticipate ready marketability, such as adjustable rate notes and variable rate demand notes ('VRDNs').
            •   Managed funds that are marketed with the objective of maintaining a stable value.
            August 2018

      • LM-12.5 LM-12.5 General Disclosure Requirements

        • LM-12.5.1

          Bahraini conventional bank licensees must report their NSFR ratios to the CBB on a quarterly basis within 14 calendar days of the quarter end as per Appendix BR-24.

          Amended: January 2020
          August 2018

        • LM-12.5.2

          Bahraini conventional bank licensees must disclose the NSFR on a consolidated basis in their quarterly and year-end financial statements as per Appendix C. Banks must also make previous NSFR reports available on their websites.

          Amended: January 2020
          August 2018

        • LM-12.5.3

          Bahraini conventional bank licensees must must provide sufficient qualitative disclosures relevant to the NSFR, in their quarterly and year-end financial statements, to facilitate understanding of the results and data disclosed. This may include analysis of the main drivers of the NSFR results, changes during the period for which the data is prepared or compared to the date of the last disclosure (such as changes to the bank's strategy, funding structure or any other circumstances).

          Amended: January 2020
          August 2018

    • Appendix A Illustrative Summary of the LCR

      Item Factor
      Stock of HQLA
      A. Level 1 Assets
      •   Coins and banknotes;
      •   Qualified balances with the CBB (including placements and reserves);
      •   Debt securities/Sukuk issued by the CBB or the Government of Bahrain;
      •   Debt securities/Sukuk issued governments of GCC member states and their central banks;
      •   Debt securities/Sukuk that can be monetised and issued or guaranteed by sovereigns, central banks, PSEs, IMF, BIS, ECB, EC, or MDBs;
      •   Debt securities/Sukuk issued in local currency by sovereign or the country's central bank, where the liquidity risk arises or the banks home country—given a non-0 percent Risk-weight (RW); and
      •   Debt securities/Sukuk issued in foreign currency by sovereign or central bank that does not exceed the value of the net cash outflow in the foreign currency caused by a stress scenario based on the bank's operations in the country where the liquidity risk arises from—given a non-0 percent RW.
      100%
      Total level 1 Assets
      B. Level 2 assets (maximum of 40 percent Of HQLA)
       
      1) Level 2A assets
       
      •   Debt securities/Sukuk that can be issued and liquidated or guaranteed by sovereigns, central banks, PSEs, and qualified MDBs;
      •   Debt securities/Sukuk qualified for liquidation (including commercial paper); and
      •   Qualified covered bonds.
      85%
      2) Level 2B assets (maximum of 15 percent of HQLA)
       
      •   Debt securities/Sukuk (including commercial paper) issued by qualified non-financial institutions; and
      •   Qualified common equity shares.
      50%
      Total level 2 Assets (1+2)  
      Total value of stock of HQLA  
      Cash Outflows
      Retail Deposits
      Demand deposits and term deposits (maturity within 30 days):  
      •   Stable deposits; and
      3%
      •   Less stable—retail deposits
      10%
      B. Unsecured Wholesale Funding
      Small Business Customer deposits 10%
      Operational deposits generated by clearing, custody, and cash management: 25%
      Deposits from non-financial institutions, sovereign, central banks, multilateral development banks, PSEs, and Bahrain's Social Insurance Organization and GCC PIFs where PIF is a controller of the bank. 40%
      Deposits from other legal entity corporations. 100%
      C. Secured Funding
       
      •   Backed by level 1 assets or with central banks;
      0%
      •   Backed by level 2A assets;
      15%
      •   Secured funding transactions with domestic sovereign, PSE's or multilateral development banks that are not baked by level 1 or 2A assets;
      25%
      •   Backed by other level 2B assets;
      50%
      •   All others.
      100%
      D. Other Cash Outflow
       
      Net derivative cash outflow 100%
      Asset-backed securities, covered bonds, and other structured financing instruments 100%
      Asset-backed commercial paper, securities paper, securities investment vehicles, and other similar financing tool 100%
      Committed: credit and liquidity facilities given by bank to:  
      •   Retail (including credit cards) and small business customers (from amount not used);
      5%
      •   Non-financial corporates, sovereigns and central banks, PSEs and multilateral development banks (from amount not used);
      10% credit 30% Liquidity
      •   Banks subject to prudential supervision (from amount not used);
      40%
      •   Other financial institutions (including securities firms and insurance firms) (from amount not used);
      40% credit 100% liquidity
      •   Other legal entities (from amount not used).
      100%
      Other Contingent Funding Obligations  
      •   Guarantees, LCs, revocable credit and liquidity facilities, non-contractual commitments;
      5%
      •   Customer short positions that are covered by other customers' collateral.
      50%
      Increased liquidity needs related to the potential for valuations changes on posted collateral 20%
      Other contractual cash outflows 100%
      Total Cash Outflow  
      Cash Inflows Inflow rates
      A. Secured lending transactions backed by the following asset category:
       
        Level 1 assets; 0%
        Level 2A assets; and 15%
        Level 2B assets. 50%
        Margin lending backed by all other collateral: 50%
        Other collateral. 100%
      B. Committed facilities—credit and liquidity facilities given to banks;
      0%
      C. Other inflows by:
       
       
      •   Retail and small business customer;
      50%
       
      •   Non-retail customers:
       
        1.Financial institutions and central banks; and
        2.Non-financial institutions.
      100%
      50%
      •   Operational deposits held at other financial institutions.
      0%
      D. Other net derivative cash inflows; and
      100%
      E. Other contractual cash inflows.
      100%
      Total Cash Inflows  
      Net cash outflow = total cash outflow—total cash inflow or lowest value (75 percent of total cash outflow).  
      Liquidity coverage ratio—HQLA / Net cash outflow.  
      August 2018

    • Appendix B LCR Common Disclosure Template

        Total unweighted value (average) Total weighted value (average)
      High-quality liquid assets
      1 Total HQLA    
      Cash outflows
      2 Retail deposits and deposits from small business customers, of which:
      3 Stable deposits    
      4 Less stable deposits    
      5 Unsecured wholesale funding, of which:
      6 Operational deposits (all counterparties) and deposits in networks of cooperative banks    
      7 Non-operational deposits (all counterparties)    
      8 Unsecured debt    
      9 Secured wholesale funding    
      10 Additional requirements, of which:
      11 Outflows related to derivative exposures and other collateral requirements    
      12 Outflows related to loss of funding on debt products    
      13 Credit and liquidity facilities    
      14 Other contractual funding obligations    
      15 Other contingent funding obligations    
      16 Total Cash Outflows    
      Cash inflows
      17 Secured lending (eg reverse repos)    
      18 Inflows from fully performing exposures    
      19 Other cash inflows    
      20 Total Cash Outflows    
        Total adjusted value
      21 Total HQLA    
      22 Total net cash outflows    
      23 Liquidity Coverage Ratio (%)    
      August 2018

    • Appendix C NSFR Common Disclosure Template

      Appendix C: NSFR Common Disclosure Template18

      For the Period Ending on.../.../...... "Value in BHD 000"

      No. Item Unweighted Values (i.e. before applying relevant factors)  
      No specified maturity Less than 6 months More than 6 months and less than one year Over one year Total weighte d value
      Available Stable Funding (ASF):          
      1 Capital:          
      2 Regulatory Capital          
      3 Other Capital Instruments          
      4 Retail deposits and deposits from small business customers:          
      5 Stable deposits          
      6 Less stable deposits          
      7 Wholesale funding:          
      8 Operational deposits          
      9 Other wholesale funding          
      10 Other liabilities:          
      11 NSFR derivative liabilities          
      12 All other liabilities not included in the above categories          
      13 Total ASF          
      Required Stable Funding (RSF):
      14 Total NSFR high-quality liquid assets (HQLA)          
      15 Deposits held at other financial institutions for operational purposes          
      16 Performing loans and securities:          
      17 Performing loans to financial institutions secured by Level 1 HQLA          
      18 Performing loans to financial institutions secured by non-level 1 HQLA and unsecured performing loans to financial institutions          
      19 Performing loans to non- financial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and PSEs, of which:          
      20
      •   With a risk weight of less than or equal to 35% as per the CBB Capital Adequacy Ratio guidelines
               
      21 Performing residential mortgages, of which:          
      22 With a risk weight of less than or equal to 35% under the CBB Capital Adequacy Ratio Guidelines          
      23 Securities that are not in default and do not qualify as HQLA, including exchange-traded equities          
      24 Other assets:          
      25 Physical traded commodities, including gold          
      26 Assets posted as initial margin for derivative contracts and contributions to default funds of CCPs          
      27 NSFR derivative assets          
      28 NSFR derivative liabilities before deduction of variation margin posted          
      29 All other assets not included in the above categories          
      30 OBS items          
      31 Total RSF          
      32 NSFR (%)          

      18 Quarterly statement.

      12 Quarterly statement

      August 2018

    • Appendix D Definitions

      Appendix D: Definitions19

      In the context of these Guidelines, the following terminologies take the meanings corresponding to each of them:

      1. 'Bank' means any bank fully recognized as such by the relevant regulator of the country in which it is registered, except such a bank which:
      a. In the opinion of the central bank, is not adequately supervised by the relevant banking supervisory authority;
      b. The license or other authorization of which to carry on banking business is, for the time being, suspended.
      2. 'Banking groups' are groups that engage predominantly in banking activities and are registered as banks in the relevant jurisdiction.
      3. 'PSE' means a public sector entity which is specified as such either by the central bank ('domestic PSE') or by an overseas banking supervisory authority ('foreign PSE'). Domestic PSEs include those entities owned by the government, excluding the subsidiaries of such institutions undertaking commercial activities.
      4. 'Financial Institutions' are institutions defined as financial institutions by the CBB (local financial institutions) or by foreign banking regulators (foreign financial institutions); examples of financial institutions include investment companies, insurance companies and currency exchange companies.
      5. 'MDB' means a multilateral development bank, which refers to any bank or lending or development body established by agreement between, or guaranteed by, two or more countries, territories or international organizations, other than for purely commercial purposes.
      6. 'Off-balance Sheet ('OBS') Activities" refers to a banks' business that does not generally involve booking assets or liabilities. Examples include the granting of standby commitments, letters of credit and guarantees.
      7. 'Repo-style Transactions' means transactions involving the sale and repurchase ('repo') of assets, purchase and resale ('reverse repo') of assets, as well as securities lending and securities borrowing. The term 'repo-style transactions' is generally taken to refer to any of the following transactions of a bank:
      i Sale and repurchase ('repo') of securities—the bank agrees to sell securities to a third party for cash with a commitment to repurchase the securities at an agreed price on an agreed future date.
      ii Securities lending—the bank lends securities to a third party and receives either cash or other securities from that party in exchange as collateral.
      iii Purchase and resale ('reverse repo') of securities—the bank agrees to acquire securities from a third party for cash, with a commitment to resell the securities at an agreed price on an agreed future date (i.e. the reverse of repo transactions).
      iv Securities borrowing—the bank borrows securities from a third party and gives cash or other securities to that party in exchange as collateral.
      8. 'Secured Obligations' means obligations that are secured by legal rights on specifically designated assets owned by the bank which are used in the case of bankruptcy, insolvency or liquidation.
      9. 'High-Quality Liquid Asset ('HQLA')' an asset is considered to be HQLA if it can be easily and immediately converted into cash at little or no loss of value under stress scenarios.
      10. 'Operational Deposits' are the deposits generated by clearing, custody and cash management activities.
      11. 'Stable Deposits' are the amounts of the deposits that are fully insured by a deposit insurance scheme which represents a portion from the deposits in the transactional accounts (e.g. accounts where salaries are automatically deposited), as per the provisions of those regulations.
      12. 'Transactional Accounts' are defined as the accounts used to settle transactions pertaining to salaries and customer income.
      13. 'Unencumbered Assets' means assets free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell or transfer these assets. Liquid assets should not be used to cover trading positions or to secure, collateralize or credit-enhance any transaction, nor be designated to cover operational costs (such as rents and salaries).
      14. 'Retail Deposits' are defined as deposits placed with a bank by a natural person. Deposits from legal entities, sole proprietorships or partnerships are captured in wholesale deposit categories.
      15. 'Wholesale Funding' is defined as those deposits and obligations that are raised from non-natural persons (i.e. legal entities, including sole proprietorships and partnerships).
      16. 'Small Business Deposits' are the deposits that are considered as having similar characteristics to retail accounts, provided the total aggregated funding raised from one small business customer is less than BHD 500,000 (on a consolidated basis where applicable).
      17. 'Default Funds', also known as clearing deposits or guarantee fund contributions (or any other names), are clearing members' funded or unfunded contributions towards, or underwriting of, a CCP's mutualized loss-sharing arrangements.
      18. 'Central Counterparty (CCP)' is the party that intermediates in the settlement process between counterparties to contracts related to financial instruments, becoming the buyer to every seller, and the seller to every buyer in the market.
      19. 'Principal Amount' means the amount of any outstanding claim (excluding any interest and other expenses) on, or contingent liability in respect of, the relevant counterparty.
      20. 'Variation Margin' means a clearing member's or client's funded collateral posted on a daily or intraday basis, to a CCP based upon price movements of their transactions.
      21. 'Initial Margin' means a clearing member's or client's funded collateral posted to the CCP to mitigate the potential future exposure of the CCP to the clearing member, arising from the possible future change in the value of the transactions.
      22. 'Fiduciary' is a legal entity that is authorised to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles.

      19 Definitions mirror those in the Capital Adequacy Ratio—Basel III and the LCR guidelines.

      August 2018

    • Appendix E Operational Deposits

      Appendix E: Operational Deposits20

      1. Certain banking activities related to payments and settlement systems lead to customers needing to place, or leave, deposits with a bank in order to cover such transactions. This is conditional on the fact that the activities have a substantive dependency with the bank and the deposit is required for such activities;
      2. Qualifying activities in this context refer to clearing, custody or cash-management activities that meet the following criteria:
      a. The customer is reliant on the bank to perform these services as an independent third party intermediary in order to fulfil its normal banking activities over the next 30 days. For example, this condition would not be met if the bank is aware that the customer has adequate back-up arrangements;
      b. These services must be provided under a legally-binding agreement to customers; and
      c. The termination of such agreements shall be subject either to a notice period of at least 30 days or significant switching costs (such as those related to transaction, information technology, early termination or legal costs) to be borne by the customer if the operational deposits are moved before 30 days.
      3. Qualifying operational deposits generated by such activities are ones where:
      a. The deposits are by-products of the underlying services provided by the bank and are not sought out in the wholesale market; and
      b. The deposits are held in specifically designated accounts and priced without giving an economic incentive to the customer.
      4. Only that part of the deposit balance with the service provider that is proven to serve a customer's operational needs can qualify as stable. Excess balances should be treated in the appropriate category for (non-operational) deposits. If the bank is unable to determine the amount of the excess balance, the entire deposit should be considered non-operational;
      5. Banks must determine the methodology for identifying excess balances in operational accounts. The methodology should be conducted at a sufficiently granular level to adequately assess the risk of withdrawal in an idiosyncratic stress. The methodology should take into account relevant factors, such as the average balances in advance of specific payment needs;
      6. If the deposit arises out of correspondent banking, or from the provision of prime brokerage services, it will be treated as if it was a non-operational activity for the purpose of determining run-off factors21 .

      Appendix E: Operational Deposits22 (Continued)

      7. The portion of the operational deposits generated by clearing, custody and cash management activities that is fully covered by deposit insurance can receive the same treatment as 'stable' retail deposits;
      8. A clearing relationship, in this context, refers to a service arrangement, granted by the bank as a direct participant in settlement systems that enables customers to transfer funds (or securities) indirectly through participants in domestic settlements systems to final recipients. Such services are limited to the following activities; transmission, overdraft and settlement;
      9. A custody relationship refers to the provision of safekeeping, reporting, processing of assets or the facilitation of the operational and administrative elements of related activities on behalf of customers in the process of their transacting and retaining financial assets. Such services are limited to the settlement of securities transactions, the transfer of contractual payments, the processing of collateral, and the receipt of dividends and other income, transfer of funds and stocks and agency services, including payment and settlement services (excluding correspondent banking);
      10. A cash management relationship refers to the provision of cash management and related services to customers. Cash management services refers to those products and services provided to a customer to manage its cash flows, assets and liabilities, and conduct financial transactions necessary to the customer's operational activities. Such services are limited to payment remittance, collection and aggregation of funds, payroll administration, and control over the disbursement of funds.

      20 Based on the definition of operational deposits in the LCR guidelines.

      21 Correspondent banking refers to arrangements under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services in order to settle foreign currency transactions (e.g. so called 'nostro' and 'vostro' accounts used to settle transactions in a currency other than the domestic currency of the respondent bank, for the provision of clearing and settlement of payments). Prime brokerage is a package of services offered to large active investors, particularly institutional hedge funds. These services usually include: clearing, settlement and custody; consolidated reporting; financing (margin, repo or synthetic); securities lending; capital introduction, and risk analytics.

      22 Based on the definition of operational deposits in the LCR guidelines.

      August 2018

    • Appendix F Bilateral Netting Agreements

      Appendix F: Bilateral Netting Agreements23

      1. Exposures to the same counterparties arising out of a range of forwards, swaps, options and similar derivative contracts, could be subject to a netting treatment according to the following requirements.
      2. Accordingly, for the NSFR purposes:
      a. Banks may net transactions subject to novation under which any obligation between a bank and its counterparty to deliver a given currency, on a given value date, is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations;
      b. Banks may also net transactions subject to any legally valid form of bilateral netting not covered in (a), including other forms of novation; and
      c. In both cases (a) and (b), a bank will need to satisfy the CBB that it has:
      i. A netting contract or agreement with the counterparty which creates a single legal obligation, covering all included transactions, so that the bank would have either a claim to receive, or an obligation to pay, only the net sum of the positive and negative mark-to-market values of included individual transactions in the event a counterparty fails to perform due to any of the following; default, bankruptcy, liquidation or similar circumstances;
      ii. Written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and administrative authorities would find the bank's exposure to be such a net amount under:
      a) The law of the jurisdiction in which the counterparty is chartered and the branch that conducted the netting;
      b) The law that governs the individual transactions;
      c) The law that governs any contract or agreement necessary to effect the netting;
      iii. In this context, the banks may use the following applicable market accepted standard agreements:
      •   International Swaps and Derivatives Association ('ISDA') Master Agreement (English law or New York law, as applicable);
      •   International Foreign Exchange Master Agreement('IFEMA') for FX transactions
      •   FX Net Agreements for FX transactions;
      •   Worldwide Foreign Exchange Netting and Close-Out Agreement for FX transactions;
      •   Global Foreign Exchange Netting and Close-Out Agreement ('FXNET "Non-User" Agreement') for FX transactions;
      •   International Currency Option Master Agreement ('ICOM');
      iv. Banks are only permitted to avail the benefit of Master Netting Agreements in jurisdictions where such agreements are legally enforceable (i.e. where legal precedence exists). The use of such netting should also be supported by the positive opinion of the licensed bank's Legal department; and
      v. Banks intending to use any Master Netting Agreements other than those listed in previous paragraph should seek the explicit approval of the CBB to do so.
      3. Procedures are in place to ensure that the legal characteristics of netting arrangements are kept under review, in the light of possible changes that may be applicable to these type of agreements at a later stage;
      4. In certain arrangements (such as contracts including 'walk away clauses') where the counterparty terminates the contract, this event is not taken into consideration for the purposes of calculating the NSFR. Thus, the exposure is calculated without taking into account the Netting Agreement;
      5. Exposure on bilaterally-netted derivative transactions will be calculated as the sum of the net mark-to-market replacement cost, if positive, plus an add-on based on the notional underlying principal. The add-on for netted transactions ('ANet') will equal the weighted average of the gross add-on ('AGross')24 and the gross add-on adjusted by the ratio of net current replacement cost to gross current replacement cost ('NGR'). This is expressed through the following formula:

      ANet=0.4*AGross+0.6*NGR*AGross

      Where:

      NGR=level of net replacement cost/level of gross replacement cost for transactions subject to legally enforceable netting agreements.25
      6. The scale of the gross add-ons to apply in this formula will be the same as those for non-netted transactions, as set out in the CBB's Capital Adequacy Ratio Guidelines. The CBB will continue to review the scale of add-ons to make sure they are appropriate; and
      7. For purposes of calculating potential future credit exposure to a netting counterparty for forward foreign exchange contracts and other similar contracts, in which notional principal is equivalent to cash flows, notional principal is defined as the net receipts falling due on each value date in each currency.

      23 Based on the Capital Adequacy Ratio � Basel III Guidelines.

      24 AGross equals the sum of individual add-on amounts (calculated by multiplying the notional principal amount by the appropriate add-on factors set out in the CBB Capital Adequacy Ratio Guidelines) of all transactions subject to legally-enforceable netting agreements with one counterparty

      25 The CBB permits a choice of calculating the NGR on a counterparty by counterparty or on an aggregate basis level for all transactions subject to legally enforceable netting agreements. However, the method chosen by a licensed bank is to be used consistently. Under the aggregate approach, net negative current exposures to individual counterparties cannot be used to offset net positive current exposures of another counterparty, i.e. for each counterparty the net current exposure used in calculating the NGR is the maximum of the net replacement cost or zero. Note that under the aggregate approach, the NGR is to be applied individually to each legally enforceable netting agreement.

      August 2018

    • Appendix G Utilising the Cash Portion of Variation Margin Received to Reduce the Replacement Cost

      Appendix G: Utilising the Cash Portion of Variation Margin Received to Reduce the Replacement Cost26

      Banks may use the cash portion of variation margin received to reduce the replacement cost portion (but not the potential future exposure) of the leverage ratio exposure measure, and may deduct the receivables assets from the cash variation margin provided from the leverage ratio exposure measure (if the cash variation margin provided has been recognized as an asset under the bank's accounting framework) subject to the following conditions being met:

      a. For trades not cleared through a qualifying central counterparty ('QCCP') the cash received by the recipient counterparty is not segregated from the cash portion of the variation margin;
      b. Variation margin is calculated and exchanged on a daily basis based on mark-to-market valuation of derivatives positions;
      c. The cash variation margin is received in the same currency as the currency of settlement of the derivative contract;
      d. Variation margin exchanged is enough to cover the mark-to-market exposure of the derivative; and
      e. Derivatives transactions and variation margins are covered by a single MNA between the counterparties, and the MNA must be legally enforceable.

      26 Based on the Leverage Ratio for Conventional Banks guidelines.

      August 2018

    • Appendix H High Quality Liquid Assets as per the LCR

      1. Assets are generally qualified as HQLA if they can be easily and immediately converted into cash at little, or no, loss of value under stress circumstances; and
      2. The conditions identified in the following paragraphs must be satisfied by levels 1 and 2 assets.
      1) Level 1 Assets
      3. Level 1 assets are included in their applicable market value, can comprise of an unlimited share of the pool and are not subject to haircuts.
      4. Level 1 assets are limited to:
      a. Coins and banknotes;
      b. Assets with central banks in the countries in which the liquidity risk is being taken (including cash reserves27 ) to the extent that allows banks to draw down these assets in times of stress;
      c. Debt securities/Sukuk issued by the CBB or the Government of the State of Bahrain;
      d. Debt securities/Sukuk issued or guaranteed by sovereigns, central banks, PSEs, the IMF, the BIS, the ECB and EC, or development banks and satisfying all of the following conditions:
      i. Assigned a 0 percent risk-weight as shown in Appendix I;
      ii. Traded in large, deep and active repo or cash markets, characterized by a low level of concentration;
      iii. Have a proven record as a reliable source of liquidity in the markets (repo or sale), even during stressed market conditions;
      iv. Not an obligation of a financial institution or any of its subsidiary entities28 ;
      e. Where the sovereign has a non-0 percent risk weight, debt securities/Sukuk issued in domestic currency by the sovereign or central bank in the country in which the liquidity risk is being taken or in the bank's home country; and
      f. Where the sovereign has a non-0 percent risk weight, debt securities/Sukuk in foreign currencies issued by the sovereign or central bank up to the amount of the bank's stressed net cash outflows in that specific foreign currency stemming from the bank's operations in the jurisdiction where the bank's liquidity risk is being taken.
      2) Level 2 Assets
      A. Level 2A Assets
      5. Level 2A assets are limited to the following:
      a. Debt securities/Sukuk issued or guaranteed by sovereigns, central banks, PSEs or MDBs that satisfy all of the following conditions:
      i. Assigned a 20 percent risk weight as per Annexure (F);
      ii. Traded in large, deep and active repo or cash markets as characterized by a low level of concentration;
      iii. Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (i.e. maximum decline of price not exceeding 10 percent, or the increase in haircut not exceeding 10 percent over a 30-day period during a relevant period of significant liquidity stress); and
      iv. Not an obligation of a financial institution or any of its affiliated entities.

      Debt securities/Sukuk that can be monetised (including commercial paper)29 and covered bonds30 that satisfy all of the following conditions:
      i. Not issued by a financial institution or any of its affiliated entities;
      ii. In the case of covered bonds: not issued by the bank itself or any of its affiliated entities;
      iii. Either have a long-term credit rating from a recognized ECAI of at least (AA-) or in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating;
      iv. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
      v. Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (i.e. maximum decline of price not exceeding 10 percent, or the increase in haircut not exceeding 10 percent, over a 30-day period during a relevant period of significant liquidity stress).
      B. Level 2B Assets
      6. Level 2B assets are limited to the following:
      a. Debt securities/Sukuk (including commercial paper) issued by nonfinancial institutions, that satisfy all of the following conditions:
      i. Debt securities/Sukuk issued by non-financial institutions or one of their subsidiaries and have a long-term credit rating between A+ and BBB- or the equivalent, or in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating;
      ii. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
      iii. Have a proven record as a reliable source of liquidity in the markets even during stressed market conditions (i.e. maximum decline of price not exceeding 20 percent or the increase in haircut not exceeding 20 percent over a 30-day period during a relevant period of significant liquidity stress).
      b. Common equity shares that satisfy all of the following conditions, subject to a 50 percent haircut:
      i. Not issued by a financial institution or any of its affiliated entities.
      ii. Exchange traded and centrally cleared;
      iii. A constituent of the major stock index in Bahrain or where the liquidity risk is taken;
      iv. Denominated in Bahraini Dinar or in the currency of the jurisdiction where the liquidity risk is taken;
      v. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
      vi. Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, (i.e. a maximum decline of share price not exceeding 40 percent, or increase in haircut not exceeding 40 percent, over a 30-day period during a relevant period of significant liquidity).
      7. If a bank wishes to include other assets under Level 2B assets, prior approval must be obtained from the CBB.

      27 In this context, the central bank reserves would include demand deposits, overnight deposits and term deposits with the central bank that: (i) are repayable within 30 day or are explicitly and contractually repayable on notice from the depositing bank; or (ii) that the bank can use to obtain financing on a term basis or on an overnight basis. Other term deposits with central banks are not eligible for the stock of HQLA.

      28 This requires that the holder of the security must not have recourse to the financial institution or any of the financial institution's affiliated entities. In practice, this means that securities, such as government-guaranteed issuance during the financial crisis, which remain liabilities of the financial institution, would not qualify for the stock of HQLA. The only exception is when the bank also qualifies as a PSE under the CBB Capital Adequacy Ratio—Basel III Guidelines where securities issued by the bank could qualify for level 1 assets if all necessary conditions are satisfied.

      29 Corporate debt securities (including commercial papers) do not include complex structured products or subordinated debt.

      30 Covered bonds are bonds issued and owned by a bank or mortgage institution and are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.

      August 2018

    • Appendix I Mapping Notations Used by Individual ECAIs for Sovereigns, Central Banks, PSEs and MDBs

      Credit Quality31 Risk Weight
      Claims on sovereigns/central banks
      (AAA to AA-) or Equivalent 0%
      (A+ to A-) or Equivalent 20%
      Claims on PSEs
      Claims on local (Bahraini) PSEs 0%
      (AAA to AA-) or Equivalent 20%
      Claims on MDBs
      As per the Capital Adequacy Ratio Guidelines 0%
      As per the Capital Adequacy Ratio Guidelines 20%

      31 Based on rating by Standard and Poor's.

      August 2018

    • Appendix J Illustrative NSFR Computation Template

      August 2018

  • DA DA Digital Finance Advice

    • DA-A DA-A Introduction

      • DA-A.1 DA-A.1 Purpose

        • DA-A.1.1

          This Module sets out the Central Bank of Bahrain's (CBB's) Directive relevant to licensees providing digital financial advice or 'robo-advice' as defined in Module LR, Licensing Requirements Module of the CBB Rulebook Volume 1 in the Kingdom of Bahrain.

          Added: April 2019

        • DA-A.1.2

          This Module should be read in conjunction with the requirements in other parts of the CBB Rulebook, Volume 1, applicable to licensees particularly:

          (a) Principles of Business Module;
          (b) High level Controls Module;
          (c) General Requirements Module;
          (d) Business and Market Conduct Module;
          (e) Operational Risk Management Module;
          (f) Financial Crime Module; and
          (g) Enforcement Module.
          Added: April 2019

        • Legal Basis

          • DA-A.1.3

            This Module contains the CBB's Directive (as amended from time to time) applicable to licensees providing digital financial advice and is issued under the powers available to the CBB under Article 38 of the CBB Law.

            Added: April 2019

          • DA-A.1.4

            For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

            Added: April 2019

      • DA-A.2 DA-A.2 Module History

        • DA-A.2.1

          This Module was first issued in March 2019. It is numbered as version 01. All subsequent changes to this Module are annotated with a sequential version number: UG-3 provides further details on Rulebook maintenance and version control.

          Added: April 2019

        • DA-A.2.2

          A list of recent changes made to this Module is provided below:

          Module Ref. Change Date Description of Changes
               
               
               
               

    • DA-B DA-B Scope of Application

      • DA-B.1 DA-B.1 Introduction

        • DA-B.1.1

          Digital financial advice, otherwise also referred to in common jargon as 'robo advice' or 'automated advice' has gained much popularity globally following advancements in technology. The provision of financial advice is a regulated activity under this Rulebook and the use of technology for providing digital financial advice needs to be governed within the context of sound prudential and conduct regulations in order to safeguard the interests of clients. This Module sets forth the key requirements applicable to licensees who wish to use a digital financial advice tool.

          Added: April 2019

        • DA-B.1.2

          The core of digital financial advice tools is the algorithms embedded in the software. The algorithms use a variety of financial modelling techniques and assumptions to translate data inputs into suggested actions at each step of the financial advice value chain. For this reason, it is essential that the entire process is subject to a comprehensive governance and controls framework.

          Added: April 2019

        • DA-B.1.3

          Additionally, there are confidentiality and data privacy implications if the digital financial advice tool uses the cloud for the analytics. If client data is processed by the tool using the cloud there must be safeguards to avoid noncompliance with applicable laws.

          Added: April 2019

    • DA-1 DA-1 Systems and Controls

      • DA-1.1 DA-1.1 Oversight and Internal Controls

        • Board and Senior Management Involvement

          • DA-1.1.1

            Board and senior management of the licensees providing digital financial advice must maintain effective oversight and governance of the digital financial advice process and the client-facing tool. The board and senior management must establish sound policies, procedures, systems, methodologies and tools in relation to the provision of digital financial advice. Such policies must be comprehensive and cover the following:

            (a) System design and system design documentation;
            (b) Construction of the algorithms, changes and their maintenance;
            (c) Suspension of the use of digital financial advice tool should there be errors;
            (d) Security and access controls;
            (e) Updating input parameters on a timely basis, for example, factors such as market changes or changes in law;
            (f) End to end processes for the advisory service using the digital financial advice tool;
            (g) Oversight over the management of the client-facing tool; and
            (h) Documentation of test strategy explaining scope of testing the algorithms.
            Added: April 2019

        • Internal Controls and Risks

          • DA-1.1.2

            Licensees must establish adequate internal controls to safeguard their clients from unsuitable advice and effectively manage the operational and other relevant risks arising therefrom.

            Added: April 2019

          • DA-1.1.3

            Licensees must ensure that there are documented measures to protect confidentiality of client data consistent with Law No. 30 of 2018, Personal Data Protection Law (PDPL) issued on 12 July 2018.

            Added: April 2019

          • DA-1.1.4

            Licensees providing digital financial advice must ensure that their overall control framework and the algorithm functionality is evaluated and independently tested by an independent external consultant other than the external auditor:

            a) initially upon implementation of this Module and prior to launching the digital financial advice to clients;
            b) when there are any material changes to the systems and controls; and
            c) at least once every 3 years.
            Added: April 2019

          • DA-1.1.5

            The evaluation requirements referred to in Paragraph DA-1.1.4 should cover at a minimum:

            a) the internal control infrastructure, given the nature, scope and complexity of the digital financial advice operation;
            b) the appropriateness of third-party systems or tools used;
            c) validation of the underlying models;
            d) the algorithm's functionality;
            e) the cyber security policies and controls;
            f) the completeness and accuracy of client profiling process including the relevant KYC requirements;
            g) controls on client data protection and confidentiality.
            Added: April 2019

          • DA-1.1.6

            Licensees must ensure that reports of the evaluation referred to in paragraph DA-1.1.4 is provided to the CBB within 2 weeks of completion of the reports, provided however, that the report required under DA-1.1.4(a) should be submitted for the CBB's review and no-objection prior to launching the digital financial advice to clients.

            Added: April 2019

          • DA-1.1.7

            Licensees must ensure that the requirements relating to enhanced due diligence as required under Module FC are met when the client is assessed as higher risk and also where the client relationship (whether at the time of on-boarding or otherwise) is on a non-face-to-face basis.

            Added: April 2019

          • DA-1.1.8

            Licensees offering digital financial advice involving overseas funds must ensure that they comply with the requirements for obtaining authorization, registration and/ or acknowledgement of filing from the CBB under Module ARR of the CBB Rulebook 7: Collective Investment Undertakings.

            Added: April 2019

      • DA-1.2 DA-1.2 Technology

        • DA-1.2.1

          Licensees providing digital financial advice must ensure that they maintain an up to date security policy document containing the following information:

          a) a description of the business IT systems supporting the digital financial advice tool;
          b) the logical security measures and mechanisms in place, specifying the control the licensee will have over such access as well as the nature and frequency of such control;
          c) policies and processes for system monitoring, authentication, confidentiality of communication, intrusion detection, antivirus systems and logs;
          d) the physical security measures and mechanisms of the premises and the data centre of the licensee, such as access controls and environmental security; and
          e) the type of authorised connections from outside, such as with technology partners, service providers and employees working remotely, including the rationale for such connections where applicable.
          Added: April 2019

      • DA-1.3 DA-1.3 Client On boarding and Profiling

        • Client Agreements and On boarding

          • DA-1.3.1

            Further to the requirements under BC-2.4 relevant to retail clients, the licensees providing digital financial advice must agree in writing the terms of business with their clients and ensure that the following are stipulated:

            a) the full scope of the digital financial advice;
            b) the basis for providing digital financial advice including but not limited to methodologies used for the algorithm,
            c) the fees, charges or commissions relevant to the advice being offered;
            d) the specific conditions or triggers and the processes relating to suspension or discontinuation of the use of the digital financial advice client facing tool and possible use or replacement of human judgement;
            e) changes to the algorithm, the key input parameter, assumptions underlying the digital financial advice client facing tool;
            f) the dispute resolution processes are available to the clients if they wish to make a complaint; and
            g) terms on how clients can withdraw from the arrangement and any associated costs.
            Added: April 2019

          • DA-1.3.2

            The terms of business referred to in Paragraph DA-1.3.1 may be presented in a digital format and customer consent may be obtained in digital format subject to complying with relevant law/s.

            Added: April 2019

          • DA-1.3.3

            At the time of on boarding clients and prior to the signing of client agreements, the licensees must:

            (a) explain the scope of the advice (i.e. what advice is being offered, any restrictions or limitations, and any relevant matters not forming part of the advice);
            (b) actively demonstrate to the clients that the advice they are seeking is within the scope of what is being offered;
            (c) explain the methodological approaches to the strategy and the algorithms underlying it;
            (d) inform clients if the licensee believes that the digital financial advice is not appropriate to him based on the understanding of the client profile and objectives;
            (e) inform the clients on the likely benefits and risk resulting from the digital financial advice; and
            (f) ensure that the client understands that any performance numbers presented are hypothetical projections of return and that actual performance of the portfolio may vary from initial projections.
            Added: April 2019

          • DA-1.3.4

            Licensees are not required to disclose the detailed methodology itself, rather the approach utilised in designing the algorithm should be described.

            Added: April 2019

        • Client Profiling

          • DA-1.3.5

            Licensees providing digital financial advice to clients must record the client profile accurately and comprehensively if they are critical or to the extent needed for the algorithms underlying the client facing tool. The licensees must at a minimum:

            (a) obtain information to understand the clients overall financial situation, including sources of regular income, financial returns objective, time horizon, liquidity, legal issues, taxes and any unique constraints;
            (b) obtain information to make assessment of both the customers' risk tolerance, capacity and willingness;
            (c) have a process in place for resolving contradictory or inconsistent responses or advice in a client profiling tool or questionnaire, if any;
            (d) have a process for assessing whether investing (as opposed to saving or paying off debt) is appropriate for the client individual;
            (e) establish a process for contacting customers to update changes to their profile, at least annually; and
            (f) establish appropriate governance and supervisory mechanisms for the client profiling tool.
            Added: April 2019

          • DA-1.3.6

            Due to the nature of digital financial advice tools, much information referred to in the Paragraph DA-1.3.5 will be obtained using questionnaires, which should be comprehensive and fuzzy logic enabled.

            Added: April 2019

          • DA-1.3.7

            Licensees must obtain a declaration from the client to ensure that he understands the scope and nature of digital financial advice and the associated risks and limitations.

            Added: April 2019

          • DA-1.3.8

            Licensees must disclose in writing any actual or potential conflicts of interest arising from any connection or association with product provider, including any material information or facts that may compromise its objectivity or independence.

            Added: April 2019

          • DA-1.3.9

            Licensees must disclose in writing the full particulates of any arrangement, including basis for commissions, charges or fees, involving related parties including parent, associates, fellow subsidiaries and other connected parties.

            Added: April 2019

          • DA-1.3.10

            Any disclosure of information that requires acceptance by the client should be tracked for an acknowledgement or response from the client confirming receipt thereof.

            Added: April 2019

    • DA-2 DA-2 Algorithm Governance

      • DA-2.1 DA-2.1 Design of Algorithm

        • DA-2.1.1

          Licensees providing digital financial advice must ensure that the algorithm embedded within the client facing tool is sufficiently robust and that the algorithm is designed to sufficiently analyse the information in order to make a suitable recommendation. The algorithms must be able to identify and determine clients who are unsuitable for investing in products.

          Added: April 2019

        • DA-2.1.2

          Licensees providing digital financial advice must:

          (a) have appropriate system design documentation that clearly sets out the purpose, scope and design of the algorithms;
          (b) establish decision trees or decision rules as part of the documentation, where relevant;
          (c) establish controls to detect any error or bias in the algorithms;
          (d) have appropriate processes for managing any changes to an algorithm which must include security arrangements to monitor and prevent unauthorised access to the algorithm;
          (e) be able to control, monitor and keep records describing any changes made to algorithms (one way of doing this may be to store different versions of the algorithm electronically);
          (f) review and update algorithms whenever there are factors that may affect their relevance (e.g. market changes and changes in the law);
          (g) have in place controls and processes to suspend the provision of advice either when there are two or more conflicting answers to the risk profiling questions or when an error within an algorithm is detected and that error is likely to result in client loss and/or a breach of client agreement or laws and regulations;
          (h) have in place an appropriate internal sign-off process to ensure that the steps above have been followed; and
          (i) perform compliance checks on the quality of advice provided by the client-facing tool. This must include post-transaction sample testing.
          Added: April 2019

        • DA-2.1.3

          Licensees offering digital financial advice may base their algorithms on different methodological approaches (e.g. Modern Portfolio Theory). Each algorithm would have different assumptions, underlying rules and limitations. In addition, some digital advisers may override the automated algorithm or temporarily halt the digital advisory service in extreme market conditions.

          Added: April 2019

      • DA-2.2 DA-2.2 Testing and Updating Algorithms

        • DA-2.2.1

          Licensees providing digital financial advice must perform back-test to ensure that the methodology reliably produces an output that is consistent with the intended investment recommendation. Such back-testing must be performed at periodic intervals and when changes are made to the tool.

          Added: April 2019

        • DA-2.2.2

          Back-testing in Paragraph DA-2.2.1 refers to testing the digital financial advice tool that seeks to estimate the performance of a strategy or model if it had been employed during a past period. This requires simulating past conditions with sufficient detail.

          Added: April 2019

        • DA-2.2.3

          Licensees providing digital financial advice must maintain and document the policies, procedures and controls to monitor and test their algorithm. They must ensure that, at a minimum, the following process are in place:

          (a) have a documented test strategy that explains the scope of the licensee's testing of algorithms which should include
          i. test plans,
          ii. test cases,
          iii. test results,
          iv. defect resolution (if relevant), and
          v. final test results.
          (b) establish robust testing of algorithms to occur before digital financial advice is first provided to a client, and on a regular basis after that; and
          (c) conduct stress tests at least once a year under various scenarios including extreme adverse and unpredictable market conditions.
          Added: April 2019

        • DA-2.2.4

          Licensees providing digital financial advice must ensure that they have adequate human resources with the competency and expertise to develop and review the methodology of the algorithms.

          Added: April 2019

        • DA-2.2.5

          Licensees providing digital financial advice must not outsource the key processes and management of the client facing tool.

          Added: April 2019

        • DA-2.2.6

          Licensees providing digital financial advice may choose to outsource the development (based on the approach, methodology and design input provided by the licensee) and the day to day maintenance of client-facing tools to a third party. However, the licensee remains responsible for the underlying approach to financial advice, the methodology, design input and also the quality of the advice provided. In order to be able to assume this responsibility, the licensee must understand and control the rationale, risks and decision rules behind the algorithm. Licensees should, nonetheless, subject the outsourcing service provider to appropriate due diligence processes as required by the relevant rules on outsourcing in Module OM.

          Added: April 2019

    • DA-3 DA-3 Dealing and Rebalancing Portfolio

      • DA-3.1 DA-3.1 Dealing Incidental to Offering Digital Financial Advice

        • DA-3.1.1

          Licensees dealing in securities as agents or brokers as part of the digital financial advice offering must comply with the requirements related to conflicts of interest under Module BC and rules incidental to it.

          Added: April 2019

    • DA-4 DA-4 Disclosures

      • DA-4.1 DA-4.1 Ongoing Disclosure

        • DA-4.1.1

          Further to the requirements under BC-2.6 of Module BC of the Rulebook, licensees providing digital financial advice must ensure that the following are disclosed to their clients:

          (a) adequate explanations about the functioning of any client facing tool including whether there are affirmations or confirmations that the client would provide as the tool is being populated;
          (b) at key points in the advice process, inform the client about the limitations and potential consequences of the scope of advice in plain and simple language
          (c) throughout the advice process, inform the client about key concepts and the relevant risks and benefits associated with the advice being provided; and
          (d) disclose separately the fees, costs and charges.
          Added: April 2019

        • DA-4.1.2

          Licensees must disclose to their clients in writing the following with respect to the algorithms used:

          (a) assumptions, limitations and risks of the algorithms;
          (b) circumstances under which the licensees may override the algorithms or temporarily halt the digital advisory service; and
          (c) any material adjustments to the algorithms.
          Added: April 2019

        • DA-4.1.3

          Licensees that provide general financial advice to non-retail clients must provide a warning that such advice does not take into account the client's profile and personal circumstances.

          Added: April 2019

        • DA-4.1.4

          For the purpose of Paragraph DA-4.1.3, general financial advice is defined as financial advice that does not take into account the particular personal circumstances, such as the objectives, financial situation and needs of the client. For example, if an adviser gives information about a product but does not consider the financial goals of the client and the adviser does not actually recommend the client to specifically take up the said product, it is considered general advice.

          Added: April 2019

  • Reporting Requirements

    • BR BR CBB Reporting Requirements

      • BR-A BR-A Introduction

        • BR-A.1 BR-A.1 Purpose

          • Executive Summary

            • BR-A.1.1

              The purpose of this Module is to set out the Central Bank of Bahrain's (CBB') reporting requirements applicable to the banks as part of the CBB's on-going supervision activities.

              Amended: January 2011
              Amended: October 2010
              October 2007

            • BR-A.1.2

              This Module provides support for certain other parts of the Rulebook, mainly:

              (a) Principles of Business;
              (b) Public Disclosure;
              (c) Credit Risk Management;
              (d) Operational Risk Management;
              (e) Financial Crime;
              (f) Capital Adequacy;
              (g) High-Level Controls;
              (h) Business and Market Conduct; and
              (i) Audit Firms.
              Amended: October 2010
              October 2007

            • BR-A.1.3

              Unless otherwise stated, all reports referred to in this Module should be addressed to Banking Supervision Directorate of the CBB.

              Amended: October 2010
              October 2007

          • Legal Basis

            • BR-A.1.4

              This Module contains the CBB's Directive (as amended from time to time) relating to reporting requirements of the CBB and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to conventional bank licensees.

              Amended: January 2011
              October 2007

            • BR-A.1.5

              For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

              October 07

        • BR-A.2 BR-A.2 Key Requirements

          • Power to Request Information

            • BR-A.2.1

              In accordance with Article 111 of the CBB Law, all licensed banks must provide all information that the CBB may reasonably request in order to discharge its regulatory obligations.

              Amended: October 2010

          • Regular Reporting — Annual Requirements

            • BR-A.2.2

              All Bahraini Conventional Banks Licensees in the Kingdom of Bahrain are required to submit to the CBB their annual audited financial statements (in compliance with the provisions set out under Section BR-1.1) no later than 3 months of the end of the bank's financial year. In addition, these banks are also required to submit supplementary information (as listed under Section BR-1.1) to the CBB.

              Amended: April 2019
              Amended: October 2010
              April 2008
              October 2007

            • BR-A.2.3

              All Bahrain branches of foreign banks are required to submit to the CBB their annual audited financial statements (in compliance with the provisions set out under Section BR-1.2) no later than the end of 3 months from the financial year end. In addition, these banks are also required to submit supplementary information (as listed under Section BR-1.2) to the CBB.

              Amended: April 2016
              Amended: October 2010
              October 2007

          • Regular Reporting — Semi-annual Requirements

            • BR-A.2.4

              All Bahrain retail branches of foreign banks are required to submit to the CBB their Balance Sheet and Profit and Loss Accounts (in compliance with the provisions set out under Section BR-2.1) no later than the end of 2 months from the reporting period end.

              Amended: April 2016
              Amended: April 2011
              Amended: October 2010
              October 2007

          • Regular Reporting — Quarterly Requirements

            • BR-A.2.5

              All Bahraini Conventional Banks Licensees in the Kingdom of Bahrain are required to submit to the CBB the following information on a quarterly basis:

              (a) PIR Forms and auditors reviews thereon (in accordance with the provisions set out under Section BR-3.1); and
              (b) Reviewed (unaudited) quarterly financial statements (in accordance with the provisions set out under Section BR-3.1).
              Amended: April 2019
              Amended: October 2011
              Amended: October 2010
              October 2007

            • BR-A.2.6

              All Bahrain branches of foreign banks are required to submit to the CBB PIR Forms (in accordance with the provisions set out under Section BR-3.2).

              Amended: July 2011
              Amended: October 2010
              October 2007

            • BR-A.2.7

              [This Paragraph was deleted July 2011].

          • Regular Reporting — Monthly Requirements

            • BR-A.2.8

              All banks licensed by the CBB in the Kingdom of Bahrain are required to submit to the CBB monthly statistical returns (as required under Section BR-4.1).

              Amended: January 2011
              Amended: October 2010
              October 2007

            • BR-A.2.8A

              All banks licensed by the CBB in the Kingdom of Bahrain are required to report monthly to the CBB of all payments and transfers of funds amounting to BD 3,000 or above from accounts held by the bank for charitable organisations registered in the Kingdom of Bahrain (as required under Paragraphs BR-4.1.5 and FC-1.6.4).

              Added: October 2011

            • BR-A.2.9

              All Bahraini Conventional Banks Licensees listed on the Bahrain Stock Exchange are required to report to the Capital Markets Supervision Directorate of the CBB, on a monthly basis, information relating to their Directors' interests in the shares of Bahraini Conventional Banks Licensees listed on the Bahrain Stock Exchange and submit exposures to connected counterparties to Banking Supervision Directorate (in accordance with the provisions set out under Section BR-4.3).

              Amended: April 2019
              Amended: October 2010
              October 2009
              October 2007

          • IIS Reporting Requirements

            • BR-A.2.9A

              All banks licensed by the CBB are required to complete online non-financial information related to their institution by accessing the CBB's institutional information system (IIS) (as required under Section BR-4A.1).

              Amended: April 2012
              Added: January 2011

          • Ad-hoc Reporting and Notification

            • BR-A.2.10

              All banks licensed by the CBB in the Kingdom of Bahrain are required to notify and report to the CBB on the following matters in Section BR-5.1:

              (a) Large exposures;
              (b) Changes in strategy and/or corporate plan;
              (c) Changes in management;
              (d) [This sub-paragraph was deleted in July 2019];
              (e) Appointment of a Compliance Manager/Officer;
              (f) Money laundering and suspicious transactions;
              (g) [This sub-paragraph was deleted in October 2022];
              (h) Authorised signatories;
              (i) Material losses through loan write-offs, fraud or other events;
              (j) Material transfers of assets or liabilities; and
              (k) Enforcement actions imposed by host regulators on overseas subsidiaries and branches.
              Amended: October 2022
              Amended: October 2020
              Amended: July 2019
              Amended: October 2011
              Amended: October 2010
              April 2010
              October 2007

            • BR-A.2.11

              All Bahraini Conventional Banks Licensees are required to give the CBB immediate written notification of any actual breach by such bank of the minimum Risk Asset Ratio(s) (RAR) and to consult with the CBB prior to entering into any term borrowing arrangements (Section BR-5.2).

              Amended: April 2019
              Amended: April 2012
              Amended: October 2010
              October 2007

            • BR-A.2.12

              All retail banks licensed by the CBB in the Kingdom of Bahrain are required to notify the CBB on the introduction of new and expanded customers and products (Section BR-5.3).

              Amended: October 2011
              Amended: October 2010
              October 2007

            • BR-A.2.13

              Conventional bank licensees must clearly indicate the purpose of any communication addressed to the CBB. In cases of lack of response to such communication by the CBB, the licensee must not infer or assume implied acceptance, approval or acknowledgement of the contents of such communication.

              Added: October 2019

        • BR-A.3 BR-A.3 Module History

          • BR-A.3.1

            This Module was first issued in July 2004 by the BMA as part of the conventional principles volume. All regulations in this volume have been effective since this date. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change is made: UG-3 provides further details on Rulebook maintenance and version control.

            October 07

          • BR-A.3.2

            When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

            October 07

          • BR-A.3.3

            The most recent changes made to this Module are detailed in the table below:

            Summary of Changes

            Module Ref.Change DateDescription of Changes
            BR-5.1.1301/04/05Notification of fraud.
            BR-5.101/10/05New threshold for reporting of transfers by charities and prior approval of appointment of compliance officer /manager.
            BR-5.1.401/01/06Addition of contact details to management information details.
            BR-3.3, BR-4.1 & BR-5.1.1401/04/06Revised statistical returns instructions and new notification requirement for material losses.
            BR-3.3 and BR-4.101/07/06Submission of Form SR-6 is a monthly requirement.
            BR-4.101/07/06Deletion of references to precious metals and commodities returns. Transfer of reserve requirements material from BR-4.2 to BR-4.1.
            BR-4.201/07/06Deletion of reserve requirements material (moved to BR-4.1).
            BR-4.1.301/07/06Revised date for submission of statistical forms
            BR-5.1.901/07/06Minor changes reflecting change of Compliance Unit to Directorate
            BR-A.110/2007New Rule BR-A.1.4 introduced categorising this Module as a Directive.
            BR-610/2007New Rule allowing access to premises per the provisions of the CBB Law
            BR-A.2, BR-1.1, BR-4.1, BR-5.204/2008New reporting deadlines, new 7% reserves ratio, new paragraph on reporting of write-offs
            BR-3.1.601/2009New Agreed Upon Procedures report for PIR
            BR-1.101/2009Enhanced guidance on supplementary information and references to annual financial statements
            BR-3.101/2009Reference to consolidated and non-consolidated basis dropped as only 1 PIR form is required.
            BR-4.1.4b07/2009The minimum daily cash reserve balance with the CBB brought back to 5% from 7%.
            BR- A.2 and BR- 4.3.410/2009New reporting arrangements for exposures to connected counterparties.
            BR-A.2.10 and BR-5.1.1604/2010Approval for material transfers of assets or liabilities
            BR-A.2.210/2010Due date changed to 3 months to be consistent in the Rulebook.
            BR-1.1.310/2010Required information updated to be consistent in the Rulebook.
            BR-1.2.510/2010Wording changed to be consistent in the Rulebooks.
            BR-3.1.210/2010Reference to legal entity deleted.
            BR-3.1.310/2010Reference changed to be consistent with IAS and IFRS.
            BR-3.1.410/2010Wording changed to be consistent in the Rulebook.
            BR-3.1.510/2010Changed to Guidance.
            BR-A.2.4, BR-2.1.2 and BR-3.1.810/2010Due date changed to 2 months to be consistent in the Rulebook.
            BR-3.2.5 and BR-5.110/2010References corrected.
            BR10/2010Minor changes to formatting and spelling to be consistent in the Rulebook.
            BR-A.1.401/2011Clarified legal basis.
            BR-A.2.9A01/2011Added reference to IIS Reporting Requirements
            BR-4A01/2011Added new Chapter on other reporting requirements and refer to IIS reporting requirements.
            BR-A.2.404/2011Corrected order or wording.
            BR-1.1.304/2011Added report on controllers required under paragraph GR-5.1.9.
            BR-1.2.3 and BR-3.1.1004/2011Clarified due date.
            BR-4.3.204/2011Corrected reference to licensed exchange.
            BR-4.3.304/2011Clarified reference to calendar days.
            BR-5.1.1, BR-5.1.2 and BR-5.1.304/2011Clarified to whom Rules apply.
            BR-5.1.704/2011Clarified due date for notification.
            BR-5.1.1004/2011Clarified reference to calendar days.
            BR-A.2.7, BR-3.3 and BR-4.107/2011Clarified that all statistical returns must be filed monthly
            BR-1.1.3 (h)07/2011Deleted incorrect cross reference.
            BR-A.2.6 and BR-3.2.207/2011Corrected reference for quarterly reporting by branches of foreign banks.
            BR-5.1.1607/2011Regulation under consultation.
            BR-5.1.1707/2011Added additional notification requirements.
            BR-A.2.5, BR-A.2.8A and BR-A.2.1010/2011Key requirements amended to reflect current reporting requirements.
            BR-A.2.1210/2011Clarified language to be in line with references in BR-5.3 and BC-4.7.
            BR-1.1.3 and BR-2.210/2011Clarification of existing requirement for the Agreed Upon Procedures Report and setting a deadline for the submission of the report.
            BR-3.1.1010/2011This Paragraph was deleted as requirement is now part of Form PIR.
            BR-3.1.12 and BR-3.2.610/2011New requirements for reporting of complaints in accordance with BC-9.7.1.
            BR-4.1.5 and BR-5.1.1510/2011Updated to reflect change in reporting requirement from ad-hoc to monthly.
            BR-610/2011Updated Chapter to be consistent with other Volumes of the Rulebook.
            BR-6.1 and BR-6.401/2012Added Sections to be consistent with other Volumes of the CBB Rulebook.
            BR-A.2.9A04/2012Corrected cross reference.
            BR-1.1.3 and BR-1.1.504/2012Minor amendments.
            BR-1.2.3(d) and BR-1.2.3A04/2012Amended due date of head office's annual audited financial statements.
            BR-2.1.204/2012Clarified what interim semi-annual statements are to be submitted by retail branches of foreign banks.
            BR-A.2.11 and BR-5.2.404/2012Requirement for locally incorporated banks to consult with CBB prior to entering into any term borrowing arrangements.
            BR-5.1.4 and BR-5.1.504/2012Paragraph BR-5.1.4 deleted and BR-5.1.5 amended as any changes to approved persons must receive CBB prior approval as per Paragraph LR-1A.1.23.
            BR-5.3.304/2012Added cross reference to Section BC-6.1 on installation or removal of off-site ATM in Bahrain.
            BR-3.1.707/2012Clarified the exemption status for requirements under Paragraph BR-3.1.6
            BR-5.1.1107/2012Added requirement to provide details of what authorised signatories are authorised to sign for.
            BR-4A.1.101/2013Clarified deadline to update IIS.
            BR-1.1.3(i) and BR-1.1.3A04/2013Clarified due date for report on board meetings to be in line with Paragraph HC-1.3.8.
            BR-5.1.304/2013Amended to clarify that CBB prior approval is required and also added requests for capital increases.
            BR-5.1.1804/2013Added requirement for CBB prior approval before exercising a call on a subordinated debt, in line with Paragraph CA-2.1.5A.
            BR-4A.207/2013Added new Section on reporting requirements for internet security measures.
            BR-1.1.3(l), BR-1.2.3(f), BR-1.3, BR-4A.3 and BR-4A.401/2014New reporting requirements added related to sound remuneration practices for banks.
            BR-4A.2.201/2014Corrected cross reference.
            BR-5.1.701/2014Added notification for any changes in financial instrument traders.
            BR-1.404/2014Added requirement for all retail banks to submit the eligible accounts report for the deposits protection scheme.
            BR-2.204/2014Added requirement for semi-annual report on private placements issued or promoted by banks.
            BR-5.104/2014Amended notification requirements.
            BR-5.204/2014Clarified Rules applicable to Bahraini conventional bank licensees pertaining to SPVs.
            BR-5.3.404/2014Added notification requirement where retail banks receive funds from an NGO where no valid fund collection license was submitted.
            BR-1.3.107/2014Changed due date for Details of remuneration paid report.
            BR-3.1.8A07/2014Added quarterly reporting requirements regarding interim financial statements as per 22 January 2014 ad hoc communication letter.
            BR-3.1.10 to BR-3.1.11A07/2014New quarterly reporting requirements added for details of large exposures and overseas subsidiaries and branches.
            BR-4A.3.107/2014Noted exception to requirement to submit report on the bank's compliance with the remuneration rules.
            BR-1.1.3(e)10/2014Corrected terminology for reporting of restructured loans.
            BR-1.2.310/2014Reference added to new reporting form Appendix BR-21 for non-performing and restructured loans.
            BR-2.310/2014New Section added on semi-annual disclosure requirements for all branches of foreign banks.
            BR-3.1.8A10/2014Reference added to new form Appendix BR-20 for quarterly financial review.
            BR-5.1.18 and BR-5.2.810/2014Clarified that this requirement applies to Bahraini conventional bank licensees, and not to all licensed banks.
            BR-2.1.301/2015Corrected wording of Rule.
            BR-4A.2.101/2015Clarified that Rule is applicable to all banks to be consistent with Section OM-6.2.
            BR-5.2.201/2015Corrected cross reference and terminology.
            BR-5.2.7 to BR-5.2.1101/2015Rules and guidance transferred from Module PCD.
            BR-5.2.1201/2015Corrected cross reference.
            BR-2.2.404/2015Amended deadline for submission of report on private placements to within three months of the reporting period.
            BR-3.1.7A04/2015Existing exemptions in respect of PIR review will cease as at 31st December 2014 for all Bahraini conventional bank licensees.
            BR-4A.307/2015Amended Section to allow for CBB-approved consultancy firm to prepare report on the bank's compliance with the remuneration Rules outlined in Chapter HC-5.
            BR-A.2.3, BR-A.2.4, BR-1.1.2 and BR-1.2.204/2016Clarified due date for financial statements.
            BR-1.104/2016Added Rule regarding submission of draft year-end financial statements and attendance at CBB meeting with supervisory point of contact and external auditor.
            BR-1.1.3A07/2016Guidance provided on reporting requirements dealing with non-operational subsidiaries.
            BR-1.1.3B07/2016Paragraph renumbered.
            BR-1.1.507/2016Requirements aligned with PD-1.2.6.
            BR-1.2.510/2016Amended terminology of annual accounts
            BR-3.1.610/2016Deleted repetition
            BR-1.1.304/2017Added sub-paragraph (m) on CPD requirements.
            BR-1.2.304/2017Added sub-paragraph (g) on CPD requirements.
            BR-4A.504/2017Added a new Section on On-site Inspection Reporting.
            BR-1.1.3(k)07/2017Deleted sub paragraph (k) and relocated to BR-1.1.3C.
            BR-1.1.3B07/2017Amended wording of Paragraph.
            BR-1.1.3C07/2017Added new paragraph to amend submission deadline of agreed upon procedures report.
            BR-4A.4.107/2017Amended submission deadline.
            BR-3.1.9A10/2017Added a new paragraph on submission of Largest Country Exposures.
            BR-1.2.307/2018Amended Paragraph to clarify submission deadline.
            BR-5.1.707/2018Deleted Paragraph.
            BR-1.1.310/2018Added a new sub-paragraph (n) on the Financial Advice Programme/course.
            BR-1.2.310/2018Added a new sub-paragraph (h) on the Financial Advice Programme/course.
            BR-1.1.3(e)04/2019Deleted sub-paragraph.
            BR-1.2.3(b)04/2019Deleted sub-paragraph.
            BR-2.304/2019Deleted Section.
            BR Module04/2019Changed Locally incorporated to Bahraini Conventional Bank Licensees.
            BR-3.1.104/2019Amended Paragraph.
            BR-3.1.7B04/2019Added a new Paragraph on Information required for Annual and Interim Financial Review.
            BR-3.2.5A04/2019Added a new Paragraph on Information required for Annual and Interim Financial Review.
            BR-A.2.1007/2019Deleted sub-paragraph (d).
            BR-4.3.507/2019Added a new Paragraph on new form Appendix BR-23 for Liquidity Coverage Ratio (LCR) Reporting.
            BR-A.2.1310/2019Added a new Paragraph on licensees communications.
            BR-5.2.904/2020Amended sub-paragraph (e).
            BR-5.2.9A04/2020Added a new Paragraph on SPV reporting.
            BR-5.2.9A07/2020Added a new sub-paragraph (c) on credit facilities granted to SPVs.
            BR-A.2.1010/2020Added a new sub-paragraph (k) on ad-hoc reporting and notification.
            BR-2.1.2A07/2021Added a new Paragraph on submission of documents to the CBB prior publishing.
            BR-3.1.7B07/2021Deleted Paragraph.
            BR-3.1.8A07/2021Amended Paragraph on submission of reporting forms.
            BR-3.2.5A07/2021Amended Paragraph on submission of reporting forms for retail branches of foreign banks.
            BR-3.2.5B07/2021New Paragraph on submission of reporting forms for wholesale branches of foreign banks.
            BR-4A.607/2021Added a new Section on Reporting of API performance.
            BR-5.2.607/2021Amended Paragraph on CBB’s prior approval for any proposed capital increase in a subsidiary and for any major changes.
            BR-1.1.301/2022Deleted Sub-paragraph (n).
            BR-1.1.3B01/2022Amended Paragraph on the submission of the Board and Committee annual meetings report.
            BR-1.2.301/2022Deleted Sub-paragraph (h).
            BR-3.1.401/2022Amended Paragraph on the submission of the reporting forms.
            BR-3.2.301/2022Amended Paragraph on the submission of the quarterly reports.
            BR-3.2.5A01/2022Amended Paragraph on the submission of the Information Required for Annual and Interim Financial Review and the PIR forms for retail banks.
            BR-3.2.5B01/2022Amended Paragraph on the submission of the Information Required for Annual and Interim Financial Review and the PIR forms for wholesale banks.
            BR-4.1.301/2022Amended Paragraph removing the submission of a printed copy of the Appendix BR-2.
            BR-4A.5.201/2022Amended Paragraph on the submission of the written assessment of the observations/issues raised in the Inspection draft report.
            BR-5.1.1101/2022Deleted Paragraph.
            BR-3.1.1204/2022Amended Paragraph on reporting of complaints.
            BR-3.2.604/2022Amended Paragraph on reporting of complaints.
            BR-4A.204/2022Deleted Section.
            BR-5.1.1004/2022Deleted Paragraph.
            BR-5.3.304/2022Amended Paragraph on ATMs installation.
            BR-A.2.10(g)10/2022Deleted sub-paragraph.
            BR-5.1.1701/2023Amended Paragraph removing reference to OM.
            BR-1.1.3B04/2023Deleted Paragraph.
            BR-4A.704/2023Added a new Section on Prudential Meeting requirements.
            BR-4A-3.101/2024Amended reference to HC Module.
            BR-4A.6.105/2024Amended Paragraph on open banking reporting requirements.
            BR-4A.6.205/2024Added a new Paragraph on retail banks acting as AISPs and PISPs.

          • Effective Date

            • BR-A-3.4

              The contents in this Module are effective from the date shown at the foot of the page or from the date of changes shown in BR-A.3.3.

              October 07

      • BR-1 BR-1 Regular Reporting — Annual Requirements

        • BR-1.1 BR-1.1 Bahraini Conventional Banks Licensees

          • BR-1.1.1

            [This paragraph was deleted in April 2016.]

            Deleted: April 2016
            October 07

          • Annual Audited Financial Statements

            • BR-1.1.2

              All Bahraini Conventional Banks Licensees are required to submit to the CBB their annual audited financial statements within 3 months from the financial year end.

              Amended: April 2019
              Amended: April 2016
              Amended October 2010
              Amended January 2009
              Amended April 2008
              October 07

            • BR-1.1.2A

              All Bahraini Conventional Banks Licensees are required to submit to the CBB their draft year-end financial statements and must attend a meeting at the CBB with their supervisory point of contact (SPOC) and their external auditor to discuss such statements. The bank must obtain their audit committee's prior approval of the draft financial statements before submitting these to the CBB. Subsequent to the meeting with the CBB, the financial statements (subject to any adjustments) must be submitted to the Board for its approval and to the shareholders at the annual general meeting for ratification.

              Amended: April 2019
              Added: April 2016

          • Supplementary Information

            • BR-1.1.3

              In addition to the statements required in Paragraph BR-1.1.2, banks are also required to submit to the CBB the following information within 3 months of their financial year end:

              (a) The external auditors' management letter;
              (b) The audited accounts for the bank's ultimate holding company;
              (c) Audited financial statements of all subsidiaries (whether or not consolidated) and all overseas branches (including their accounting policies where these policies differ from those of the parent bank), along with their management letters;
              (d) The bank's group structure and the Bahrain office's internal organisation chart;
              (e) [This sub-paragraph was deleted in April 2019];
              (f) A list of subsidiaries, associated companies and affiliates of the bank, together with details of their locations and the amount of participation by the bank in these entities;
              (g) A reconciliation statement between the audited financial statements and the relevant prudential returns and monthly statistical returns;
              (h) [This Subparagraph was deleted in April 2013 and replaced with Paragraph BR-1.1.3B];
              (i) Report on controllers as required under Paragraph GR-5.1.9;
              (j) Any supplementary information required by the CBB;
              (k) [This Subparagraph was deleted in July 2017 and replaced with Paragraph BR-1.1.3C];
              (l) The remuneration agreed upon procedures as required under Paragraph BR-4A.3.1.
              (m) Report on the number of hours completed during the previous year in Continuous Professional Development (CPD) via CPD Form in Appendix BR-22 by the approved persons specifically board of directors and management as required under Paragraph TC-1.2.1.
              (n) [This Sub-paragraph was deleted in January 2022].
              Amended: January 2022
              Amended: April 2019
              Amended: October 2018
              Amended: July 2017
              Amended: April 2017
              Amended: July 2016
              Amended: October 2014
              Amended: January 2014
              Amended: April 2013
              Amended: April 2012
              Amended: October 2011
              Amended: July 2011
              Amended: April 2011
              Amended: October 2010
              January 2009
              October 07

            • BR-1.1.3A

              In instances where a bank has non-operational subsidiaries, the bank should contact its supervisory point of contact at the CBB to establish whether the requirements of Subparagraph BR-1.1.3(c) are applicable.

              Added: July 2016

            • BR-1.1.3B

              [This Paragraph was deleted in April 2023].

              Deleted: April 2023
              Amended: January 2022
              Amended: July 2017
              Amended: July 2016

            • BR-1.1.3C

              Banks are required to submit to the CBB an agreed upon procedures report concerning the annual disclosures required by Module PD, Section PD-1.3 and Chapter PD-6 (see also AU-3.2.3) within 4 months of their financial year end.

              Added: July 2017

          • Compliance

            • BR-1.1.4

              In addition to the provisions of Section AU-3.7, the audited financial statements or the annual report of these banks should be in full compliance with:

              (a) The International Financial Reporting Standards (IFRS); and
              (b) The disclosure requirements set out under Sections PD-1.2 and PD-1.3.
              Amended October 2010
              April 2008
              October 2007

          • Annual Report

            • BR-1.1.5

              Banks are reminded that they must submit a soft copy (electronic) of their full annual report to the CBB within 4 months of the end of their financial year (See PD-1.2.6).

              Amended: July 2016
              Amended: April 2012
              Amended: October 2010
              October 2009
              Added: January 2009

        • BR-1.2 BR-1.2 Branches of Foreign Banks

          • BR-1.2.1

            The content of this Section is applicable to branches (licensed by the CBB) of foreign banks.

            Amended: October 2010
            October 2007

          • Annual Audited Financial Statements

            • BR-1.2.2

              All branches, referred to under Paragraph BR-1.2.1, are required to submit to the CBB their annual audited financial statements of their Bahrain operations within 3 months from the financial year end. Such accounts must be prepared in a format agreed between the branch and its external auditor.

              Amended: April 2016
              Amended October 2010
              October 2007

          • Supplementary Information

            • BR-1.2.3

              In addition to the statements required in Paragraph BR-1.2.2, branches are also required to submit to the CBB within 3 months from their financial year end the following information:

              (a) The external auditor's management letter;
              (b) [This sub-paragraph was deleted in April 2019];
              (c) A reconciliation statement between the audited financial statements and the relevant prudential returns and monthly statistical returns;
              (d) [This Subparagraph was replaced by Paragraph BR-1.2.3A in April 2012];
              (e) A statement of provisions as set out in Paragraph BR-1.2.4, below; and
              (f) The remuneration agreed upon procedures as required under Paragraph BR-4A.3.1.
              (g) Report on the number of hours completed during the previous year in Continuous Professional Development (CPD) via CPD Form in Appendix BR-22 by the approved persons as required under Paragraph TC-1.2.1.
              (h) [This Sub-paragraph was deleted in January 2022].
              Amended: January 2022
              Amended: April 2019
              Amended: October 2018
              Amended: July 2018
              Amended: April 2017
              Amended: October 2014
              Amended: January 2014
              Amended: April 2012
              Amended: April 2011
              Amended October 2010
              October 2007

            • BR-1.2.3A

              Branches of foreign banks are also required to submit to the CBB the head office's Annual Report within 1 month of the date of publication and distribution by the head office.

              Added: April 2012

          • Provisions against Branch Assets in Head Office Books

            • BR-1.2.4

              If specific provisions against the assets of a branch are maintained in the books of its head office, the CBB should be advised on an annual basis and in writing (along with the information listed under Paragraph BR-1.2.3) of the amount of provisions set aside for the Bahrain branch's bad debts (and any other non-performing assets). For detailed guidance related to this subject, see Section CM-4.3.

              Amended October 2010
              October 2007

          • Compliance

            • BR-1.2.5

              The audited financial statements must be in full compliance with the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS).

              Amended October 2016
              Amended October 2010
              October 2007

        • BR-1.3 BR-1.3 All Banks

          • BR-1.3.1

            Banks must provide to the CBB details of total remuneration including the mix of fixed and variable remuneration as per Appendix BR-14. The report must be submitted annually and must be provided within 3 months of the financial year end.

            Amended: July 2014
            Added: January 2014

        • BR-1.4 BR-1.4 All Retail Banks

          • BR-1.4.1

            All conventional retail banks must submit to the CBB within two months of the financial year end, the eligible accounts report for the deposits protection scheme (Appendix BR-16) in accordance with the requirements of Paragraph CP-2.3.4B. Instructions for the completion of the report are included under Appendix BR-17.

            Added: April 2014

          • BR-1.4.2

            The report referred to under Paragraph BR-1.4.1 must be reviewed by the conventional retail bank's external auditor to confirm the accuracy of the data prior to its submission to the CBB (see Section AU-3.7).

            Added: April 2014

      • BR-2 BR-2 Regular Reporting — Semi-annual (Interim) Requirements

        • BR-2.1 BR-2.1 Retail Branches of Foreign Banks

          • BR-2.1.1

            The content of this Section is applicable only to retail branches (licensed by the CBB) of foreign banks.

            Amended October 2010
            October 2007

          • Financial Information

            • BR-2.1.2

              Branches (referred to under Paragraph BR-2.1.1) are required to submit to the CBB their reviewed semi-annual (interim) financial statements (in the same format as their Annual Audited Accounts) for their Bahrain operations within 2 months of the date of these statements.

              Amended: April 2012
              Amended: October 2010
              October 2007

            • BR-2.1.2A

              All retail branches of foreign banks must submit to the CBB at least 5 working days prior to the intended publication date, the following documents:

              (a) Draft interim financial statements; and
              (b) Completed Form: Information Required for Annual and Interim Financial Review (Appendix BR-21) prepared in accordance with Appendix BR-20.
              Added: July 2021

          • Compliance

            • BR-2.1.3

              The statements mentioned under Paragraph BR-2.1.2 must be in compliance with the requirements set out under Section PD-2.1.

              Amended: January 2015
              Amended: April 2008
              October 07

        • BR-2.2 BR-2.2 Bahraini Conventional Bank Licensees

          • BR-2.2.1

            The content of this Section is applicable to all Bahraini Conventional Banks Licensees licensed by the CBB in the Kingdom of Bahrain.

            Amended: April 2019
            Added: October 2011

          • Compliance with Module PD

            • BR-2.2.2

              The financial statements mentioned under Paragraph BR-3.1.8 should be in compliance with the requirements set out under Section PD-3.1.

              Added: October 2011

            • BR-2.2.3

              In addition to the financial statements required in Paragraph BR-3.1.8, banks are also required to submit to the CBB the following information within two months of the end of the half-year:

              (a) A copy of the disclosures required by Paragraph PD-3.1.6; and
              (b) An agreed-upon procedures report concerning the completeness of disclosures required by Paragraph PD-3.1.6 (see also AU-3.2.4).
              Added: October 2011

          • Report on Private Placements

            • BR-2.2.4

              When acting as an issuer, promoter or manager of a private placement of securities, Bahraini conventional bank licensees must provide on a semi-annual basis to investors and the CBB a progress report on the private placement. The semi-annual reports are to be provided as of 30th June and 31st December and must be submitted to the investors and the CBB within three months of the reporting period.

              Amended: April 2015
              Added: April 2014

            • BR-2.2.5

              The reports referred to in Paragraph BR-2.2.4 are to be issued following the issuance or distribution of a PPM for the solicitation of funds from investors.

              Added: April 2014

            • BR-2.2.6

              The requirements for the report on private placements are in addition to any requirements outlined in Module OFS (Offering of Securities) under Volume 6 (Capital Markets).

              Added: April 2014

            • BR-2.2.7

              Bahraini conventional bank licensees may opt to issue the required report on a more frequent basis.

              Added: April 2014

            • BR-2.2.8

              The report required under Paragraph BR-2.2.4 must be issued for private equity purchases of existing companies as well as for real estate and other projects under development and must follow the requirements of Appendix BR-18 under Part B of Volume 1.

              Added: April 2014

        • BR-2.3 BR-2.3 [This Section was deleted in April 2019].

          • BR-2.3.1

            [This Paragraph was deleted in April 2019].

            Deleted: April 2019
            Added: October 2014

          • [This Subsection was deleted in April 2019].

            • BR-2.3.2

              [This Paragraph was deleted in April 2019].

              Deleted: April 2019
              Added: October 2014

      • BR-3 BR-3 Regular Reporting — Quarterly Requirements

        • BR-3.1 BR-3.1 Bahraini Conventional Bank Licensees

          • BR-3.1.1

            The content of this Section is applicable to all Bahraini Conventional banks licensed by the CBB in the Kingdom of Bahrain.

            Amended: April 2019
            Amended: October 2010
            October 2007

          • Prudential Information Returns

            • BR-3.1.2

              PIR Forms – All banks, referred to under Paragraph BR-3.1.1, must complete PIR forms (see Appendix BR-5), on a quarterly basis. This form is intended to be a financial report of the bank. Banks should therefore include on it all assets and liabilities of their head office and their branches in Bahrain and abroad and subsidiaries where applicable. Separate figures in respect of the head office or 'Bahrain operations' are not required.

              Amended October 2010
              January 09
              October 07

            • BR-3.1.3

              Please refer to the relevant International Accounting and Financial Reporting Standards for definitions, accounting and consolidation requirements applicable to subsidiaries.

              Amended October 2010
              January 09
              October 07

            • BR-3.1.4

              The forms referred to under Paragraphs BR-3.1.2 must be submitted to the CBB on a quarterly basis within 30 calendar days of the end of the reporting date.

              Amended: January 2022
              Amended October 2010
              October 2007

            • BR-3.1.5

              For guidance on completion of PIR, refer to guidelines under Appendix BR-4.

              Amended October 2010
              October 2007

            • BR-3.1.6

              The CBB requires all banks to request their external auditor to conduct a review of the prudential returns on a quarterly basis. The results of such review (in the form of an Agreed Upon Procedures report as shown in Appendix BR 9) must be submitted to the CBB no later than 2 months from the end of the subject quarter.

              Amended October 2016
              Amended October 2010
              January 09
              October 07

            • BR-3.1.7

              Banks which demonstrate to the satisfaction of the CBB that they have fulfilled all of the CBB's requirements with regard to Prudential Returns for at least two consecutive quarters may apply (in writing) to the CBB for an exemption from the review procedure set out in Paragraph BR-3.1.6 above. Such exemption may be withdrawn by the CBB at any time, should errors be detected.

              Amended: July 2012
              Amended: October 2010
              October 2007

            • BR-3.1.7A

              For Bahraini conventional bank licensees, all existing exemptions in respect of PIR review as at 31st December 2014 will cease.

              Added: April 2015

          • Information required for Annual and Interim Financial Review

            • BR-3.1.7B

              [This Paragraph was deleted in July 2021].

              Deleted: July 2021
              Added: April 2019

          • Financial Information

            • BR-3.1.8

              All banks, referred to under Paragraph BR-3.1.1, are required to submit to the CBB reviewed (unaudited) quarterly financial statements (in the same format as their Annual Audited Accounts) on a quarterly basis (within 2 months of the date of these statements).

              Amended October 2010
              October 2007

            • BR-3.1.8A

              All Bahraini conventional bank licensees must submit to the CBB at least 5 working days prior to the intended publication date and before their board of directors' meeting to discuss the interim financial statements, the following documents:

              (a) Draft interim financial statements; and
              (b) Completed Form: Information Required for Annual and Interim Financial Review (Appendix BR-21) prepared in accordance with Appendix BR-20.
              Amended: July 2021
              Amended: October 2014
              Added: July 2014

          • Compliance

            • BR-3.1.9

              The statements mentioned under Paragraph BR-3.1.8 should be in compliance with the requirements set out under Section PD-3.1.

              Amended: April 2011
              October 07

          • Largest Country Exposures

            • BR-3.1.9A

              All Bahraini conventional bank licensees must submit to the CBB details of their largest country exposures on a consolidated basis through Electronic Submission of Returns and Analysis of Data (ESRAD). This report must be submitted to the CBB within 20 calendar days of the end of the relevant quarter.

              Added: October 2017

          • Large Exposures Report

            • BR-3.1.10

              All Bahraini conventional bank licensees must submit to the CBB details of their large exposures in accordance with Appendix BR-19. This report must be submitted to the CBB within 20 calendar days of the end of the relevant quarter.

              Amended: July 2014
              Deleted: October 2011
              Amended: April 2011
              Amended October 2010
              October 2007

          • Overseas Banking Subsidiaries and Branches

            • BR-3.1.11

              All Bahraini conventional bank licensees must submit to the CBB details of their overseas banking subsidiaries and branches in accordance with Appendix BR-8. This report must be submitted to the CBB within one month of the end of the relevant quarter.

              Amended: July 2014
              Amended October 2010
              July 2009
              October 2007

          • Non-Banking Subsidiaries

            • BR-3.1.11A

              All Bahraini conventional bank licensees must submit to the CBB reviewed statement of financial position and income statement of their non-banking subsidiaries. If reviewed statements are unavailable, management accounts will be accepted by the CBB. These statements are to be submitted within one month of the end of the relevant quarter.

              Added: July 2014

          • Reporting of Complaints

            • BR-3.1.12

              In accordance with Paragraph BC-9.7.1, all banks must submit to the CBB Consumer Protection Unit, 20 days after the end of the quarter, a report on complaints.

              Amended: April 2022
              Added: October 2011

        • BR-3.2 BR-3.2 Branches of Foreign Banks

          • BR-3.2.1

            The content of this Section is applicable to branches (licensed by the CBB) of foreign banks.

            Amended: October 2010
            October 2007

          • Prudential Information Returns

            • BR-3.2.2

              All branches, referred to under Paragraph BR-3.2.1, are required by the CBB to complete PIR forms (see Appendix BR-5) in accordance with guidelines set out under Appendix BR-3.

              Amended: July 2011
              Amended: October 2010
              October 2007

            • BR-3.2.3

              These should be submitted to the CBB no later than 30 calendar days from the end of the said quarter.

              Amended: January 2022
              Amended: October 2010
              October 2007

            • BR-3.2.4

              The CBB requires all banks to request their external auditor to conduct a review of the prudential returns on a quarterly basis. The results of such review (in the form of a return review report) should be submitted to the CBB no later than 2 months from the end of the subject quarter. A bank may apply for exemption from this requirement provided that it meets the criteria set out under Paragraph BR-3.2.5 below.

              Amended: October 2010
              October 2007

            • BR-3.2.5

              Banks which demonstrate to the satisfaction of the CBB that they have fulfilled all of the CBB's requirements with regard to Prudential Returns for at least two consecutive quarters may apply (in writing) to the CBB for an exemption from the review procedure set out in Paragraph BR-3.2.4 above.

              Amended: October 2010
              October 2007

          • Additional Information required for CBB’s Financial Review

            • BR-3.2.5A

              All retail branches of foreign banks must submit the completed Form: Information Required for Annual and Interim Financial Review (Appendix BR-21) prepared in accordance with Appendix BR-20 together with the PIR forms within 30 calendar days (See Paragraph BR-3.2.3) or together with any draft financial statement submissions (See Paragraph BR-2.1.2A).

              Amended: January 2022
              Amended: July 2021
              Added: April 2019

            • BR-3.2.5B

              All wholesale branches of foreign banks must submit the completed Form: Information Required for Annual and Interim Financial Review (Appendix BR-21) prepared in accordance with Appendix BR-20, together with the PIR forms within 30 calendar days of each quarter end (See Paragraph BR-3.2.3).

              Amended: January 2022
              Added: July 2021

          • Reporting of Complaints

            • BR-3.2.6

              In accordance with Paragraph BC-9.7.1, all banks must submit to the CBB Consumer Protection Unit, 20 days after the end of the quarter, a report on complaints.

              Amended: April 2022
              Added: October 2011

        • BR-3.3 BR-3.3 [deleted]

          [This Section was deleted in July 2011].

          • BR-3.3.1 [deleted]

            Deleted: July 2011

          • [deleted]

            Deleted: July 2011

            • BR-3.3.2 [deleted]

              Deleted: July 2011

            • BR-3.3.3 [deleted]

              Deleted: July 2011

      • BR-4 BR-4 Regular Reporting — Monthly Requirements

        • BR-4.1 BR-4.1 All Licensed Banks

          • BR-4.1.1

            The content of this Section is applicable to all banks (or as stated otherwise) licensed by the CBB in the Kingdom of Bahrain.

            Amended: October 2010
            October 2007

          • Statistical Returns

            • BR-4.1.2

              All banks, referred to under Paragraph BR-4.1.1, are required to submit to the CBB (Financial Stability Directorate) the following monthly statistical returns:

              (a) Form SR-1 – 'Monthly Balance Sheet';
              (b) Form SR-2 – 'Monthly Classification of Deposits and Other Liabilities to Banks and Non-banks';
              (c) Form SR-3 – 'Monthly Balance Sheet by Country and Class of Customer';
              (d) Form SR-4 – 'Monthly Balance Sheet by Currency'; and
              (e) Form SR-5 – 'Monthly Classification of Loans and Advances to Domestic Non-banks'; and
              (f) Form SR-6 – Monthly Survey of BD Interest Rates on Deposits and Loans (applicable to retail banks only).

              (For instructions relating to the completion of the above mentioned returns, refer to Appendix BR-1 and for returns forms refer to Appendix BR-2).

              Amended: July 2011
              Amended: October 2010
              October 2007

            • BR-4.1.3

              The returns included in Appendix BR-2 should be submitted to the CBB in electronic form (Excel spreadsheet) via email to erdsr@cbb.gov.bh no later than the 10th of the month following the end of the relevant month.

              Amended: January 2022
              Amended: October 2010
              October 2007

          • Precious Metals and Commodities Returns

            • BR-4.1.4

              [This Paragraph deleted with effect from 1 July 2006].

              October 07

          • Reserve Requirements

            • BR-4.1.4A

              The Banking Services Directorate will calculate the reserve requirement of each conventional bank licensee bank on a monthly basis using the figures reported in the monthly statistical report, Form SR-2 (see Rule BR-4.1.2 above) and will notify each bank of its required reserve (if any).

              Amended: July 2011
              October 07

            • BR-4.1.4B

              The monthly reserve requirements will be calculated as 5% of the total of a conventional bank licensee's BD deposits from non-banks and the BD Certificates of Deposit that it has issued to customers.

              Amended July 2011
              Amended July 2009
              Amended April 2008
              October 07

            • BR-4.1.4C

              Reserve requirements, because of their scope of coverage (cf. Rule BR-4.1.4B), generally only apply to retail banks. They may apply, however, to wholesale banks, if they undertake on-shore business (cf. Section LR-1.2).

              Amended: July 2011
              October 07

          • Accounts for Charity Organisations

            • BR-4.1.5

              All banks, referred to under Paragraph BR-4.1.1, must report to the CBB all payments and transfers of funds amounting to BD 3,000 or above (or equivalent in other currencies) from accounts held by the bank for charitable organisations registered in the Kingdom of Bahrain (also see Paragraph FC-1.6.4). Such report must include details of amount transferred, account name and number, and beneficiary (name and location).

              Added: October 2011

        • BR-4.2 Full Commercial Banks [This Section deleted 07/2006]

        • BR-4.3 BR-4.3 Bahraini Conventional Bank Licensees

          • BR-4.3.1

            The content of this Section is only applicable to Bahraini Conventional Banks Licensees.

            Amended: April 2019
            October 07

          • Directors' Interests in the Shares of Locally Incorporated Banks Listed on the Bahrain Stock Exchange

            • BR-4.3.2

              All locally incorporated banks listed on a licensed exchange are required to report to the Capital Markets Supervision Directorate of the CBB the following information, on a monthly basis, relating to their Directors:

              (a) The number and type of interests of each Director in the shares (i.e. whether by shareholding, options etc.) of all such banks in which the respective Directors have interests in and the rights associated with such interests;
              (b) The date on which, and manner in which, such interests were acquired or disposed of (as the case may be);
              (c) The acquisition price paid, or disposal price received, for such interests; and
              (d) The person(s) from, or to, whom the interests in such shares were acquired or disposed (as the case may be).
              Amended: April 2011
              Amended: October 2010
              October 2007

            • BR-4.3.3

              The information required in Paragraph BR-4.3.2 above should be submitted to the CBB no later than 15 calendar days following the end of the relevant month.

              Amended: April 2011
              Amended: October 2010
              October 2007

          • Exposures to Connected Counterparties

            • BR-4.3.4

              All banks, referred to under Paragraph BR-4.3.1, are required to submit to the CBB their exposures to connected parties on a monthly basis on the fourth working day of the month.

              (For instructions relating to the reporting of the above mentioned exposures, refer to Appendix BR-12 and for the concerned reporting forms refer to Appendix BR-11).

              Amended: October 2010
              Adopted: October 2009

          • Liquidity Coverage Ratio

            • BR-4.3.5

              Bahraini conventional bank licensees must submit their "solo" LCR to the CBB within 7 calendar days following the month end, and their consolidated LCR within 14 calendar days following the month end (see Appendix BR-23) through Electronic Submission of Returns and Analysis of Data (ESRAD).

              Added: July 2019

      • BR-4A BR-4A Other Reporting Requirements

        • BR-4A.1 BR-4A.1 IIS Reporting Requirements

          • Institutional Information System (IIS)

            • BR-4A.1.1

              All banks licensed by the CBB are required to complete online non-financial information related to their institution by accessing the CBB's institutional information system (IIS). Banks must update the required information at least on a quarterly basis or when a significant change occurs in the non-financial information included in the IIS. If no information has changed during the quarter, the bank must still access the IIS quarterly and confirm the information contained in the IIS. Licensees must ensure that they access the IIS within 20 calendar days from the end of the related quarter and either confirm or update the information contained in the IIS.

              Amended: January 2013
              Added: January 2011

            • BR-4A.1.2

              Banks failing to comply with the requirements of Paragraph BR-4A.1.1 or reporting inaccurate information are subject to financial penalties or other enforcement actions as outlined in Module (EN) Enforcement.

              Added: January 2011

        • BR-4A.2 BR-4A.2 [This Section was deleted in April 2022]

          • BR-4A.2.1

            [This Paragraph was deleted in April 2022].

            Deleted: April 2022
            Amended: January 2015
            Amended: July 2014
            Added: July 2013

          • BR-4A.2.2

            [This Paragraph was deleted in April 2022].

            Deleted: April 2022
            Amended: January 2014
            Added: July 2013

        • BR-4A.3 BR-4A.3 Compliance with Remuneration Rules under Module HC

          • BR-4A.3.1

            Unless specifically excluded in accordance with Paragraph AU-3.6.3, every conventional bank licensee must submit to the CBB within three months from the financial year-end, a report as to the bank's compliance with the remuneration Rules outlined in Chapter HC-6.

            Amended: January 2024
            Amended: July 2014
            Added: January 2014

          • BR-4A.3.1A

            Where a conventional bank licensee is not required to provide a report under Paragraph BR-4A.3.1, it must submit a notification to the CBB once it has been determined that it is excluded to file such report as per Paragraph AU-3.6.3.

            Added: July 2014

          • BR-4A.3.2

            The report required under Paragraph BR-4A.3.1 must be prepared by the bank's external auditor or a consultancy firm approved by the CBB.

            Amended: July 2015
            Added: January 2014

          • BR-4A.3.2A

            For a consultancy firm to be approved by the CBB for purposes of this Section, the conventional bank licensee should communicate with the CBB's supervisory point of contact for seeking the CBB's prior written approval.

            Added: July 2015

          • BR-4A.3.3

            The format of the Report required under Paragraph BR-4A.3.1 is included in Part B of the Rulebook as Appendix HC-(i), as part of the Supplementary Information.

            Amended: July 2015
            Added: January 2014

        • BR-4A.4 BR-4A.4 Remuneration of Top 12 Employees

          • BR-4A.4.1

            Banks must complete Appendix BR-15, details of their top 12 highly remunerated employees annually for each financial year. This report is to be completed by the bank within three months from the end of the period covered and kept at the bank's premises and provided to the CBB, upon request.

            Amended: July 2017
            Added: January 2014

        • BR-4A.5 BR-4A.5 Onsite Inspection Reporting

          • BR-4A.5.1

            For the purpose of onsite inspection by the CBB, conventional bank licensees must submit requested documents and completed questionnaires to the Inspection Directorate at the CBB three working days ahead of inspection team entry date.

            Added: April 2017

          • BR-4A.5.2

            Conventional bank licensees must review the contents of the draft Inspection Report and submit to the Inspection Directorate at the CBB a written assessment of the observations/issues raised within fifteen working days of receipt of such report. Evidentiary documents supporting management's comments must also be included in the response package.

            Amended: January 2022
            Added: April 2017

          • BR-4A.5.3

            Conventional bank licensees' board are required to review the contents of the Inspection Report and submit within one month, of the report issue date, a final response to such report along with an action plan addressing the issues raised within the stipulated timeline.

            Added: April 2017

          • BR-4A.5.4

            Banks failing to comply with the requirements of Paragraphs BR-4A.5.1 and BR-4A.5.2 are subject to date sensitive requirements and other enforcement actions as outlined in Module (EN) Enforcement.

            Added: April 2017

        • BR-4A.6 BR-4A.6 Reporting of API performance

          • BR-4A.6.1

            Conventional retail bank licensees must report on the availability and performance of Open Banking APIs in accordance with Appendix PD-6 within one month of each quarter end.

            Amended: September 2024
            Added: July 2021

          • Conventional Retail Bank Licensees acting as AISPs/PISPs

            • BR-4A.6.2

              Conventional retail bank licensees acting as AISPs/PISPs must submit the information required under Appendix OB-1 under Volume 5 to the CBB within 2 weeks of each month end.

              Added: September 2024

        • BR-4A.7 BR-4A.7 Prudential Meeting

          • BR-4A.7.1

            Conventional bank licensees must submit to the CBB at least three weeks prior to the prudential meeting date, all compliance and internal audit reports issued since the last prudential meeting along with status updates on resolved and pending issues.

            Added: April 2023

      • BR-5 BR-5 Ad-hoc Reporting and Notification

        • BR-5.1 BR-5.1 All Licensed Banks

          • BR-5.1.1

            The content of this Section is applicable to all banks, except as otherwise mentioned, (licensed by the CBB) in the Kingdom of Bahrain.

            Amended: April 2011
            Amended: October 2010
            October 2007

          • Large Exposures

            • BR-5.1.2

              Should any locally incorporated bank find that, for reasons outside its control or otherwise, it has an exposure to an individual counterparty (other than an exempt exposure) which results in it exceeding any of the limits set out under Chapter CM-5, this should be reported immediately to the CBB for its consideration, and action should be taken immediately to bring the exposure back within applicable limits as soon as possible.

              Amended: April 2011
              Amended: October 2010
              October 2007

          • Capital Increases, Changes in Strategy and Establishment of Subsidiaries/SPVs

            • BR-5.1.3

              [This Paragraph was moved to Section BR-5.2]

              Amended: April 2014
              Amended: April 2013
              Amended: April 2011
              Amended: October 2010
              October 2007

          • Current Management and Changes thereto

            • BR-5.1.4

              [This Paragraph was deleted in April 2012].

              Deleted: April 2012

            • BR-5.1.5

              The CBB must also be notified of any changes to the positions mentioned under Paragraph LR-1A.1.2 that may occur from time to time subject to observing the requirements set out in Section LR-1A.1. (See also Paragraph LR-1A.1.22).

              Amended: April 2014
              Amended: April 2012
              Amended: October 2010
              October 2007

            • BR-5.1.6

              For detailed rules and guidance on prior notification of appointment and changes in management inventory, refer to Chapters HC-1 and LR-1A.

              Amended: October 2010
              October 2007

          • Changes in Dealing Staff

            • BR-5.1.7

              [This Paragraph was deleted in July 2018].

              Deleted: July 2018

          • Appointment of a Compliance Manager/Officer

            • BR-5.1.8

              The appointment of a compliance manager/officer requires the CBB's prior approval (refer to Section LR-1A.1 for full details). The bank must outline how the compliance function fits into the bank's senior management reporting structure, and must give details of relevant reporting lines within the bank.

              Amended: April 2014
              Amended: October 2010
              October 2007

          • Money Laundering and Suspicious Transactions

            • BR-5.1.9

              The Money Laundering Reporting Officer (or his/her duly authorised delegate) must send a report to the Compliance Directorate of the CBB where he/she knows or has suspicions that a transaction might involve money laundering or terrorist financing, either due to the customer's economic standing or because it meets one of the examples of suspicious transactions described in Appendix FC-3.

              October 07

          • Promotion of Financial Products and Services Offered in/from Bahrain by Mean of Incentives etc.

            • BR-5.1.10

              [This Paragraph was deleted in April 2022].

              Deleted: April 2022
              Amended: April 2011
              Amended: October 2010
              October 2007

            • BR-5.1.11

              [This Paragraph was deleted in January 2022].

              Deleted: January 2022
              Amended: July 2012
              Amended: October 2010
              October 2007

          • UN SCR 1373 (2001)

            • BR-5.1.12

              The CBB requires all banks to notify it immediately of any act that might contravene the provisions of UN Security Council Resolution 1373 (2001). Banks should refer to Chapter FC-8 for full details of this requirement.

              Amended: October 2010
              October 2007

          • Notification of Fraud or other Material Concerns

            • BR-5.1.13

              All banks must report immediately to the CBB any frauds, either attempted or realised, or any well-founded concerns about the integrity of individual Directors or members of management. This obligation to disclose extends to individual Board members and members of management: i.e. if a Director or member of management has reasonable grounds to believe that information that should have been reported to the CBB has not, then they have a duty to report the matter personally to the CBB. All such cases shall be treated in the strictest confidence by the CBB.

              Amended: October 2010
              October 2007

            • BR-5.1.14

              All banks must report immediately to the CBB any material losses as soon as the bank becomes aware of them. This notification requirement is separate from notifications for loan write-offs (see BR-5.2.3) or frauds (see above), but refers to losses caused by external events (e.g. falls in stock markets) or internal control failures. In this context 'material' would mean: a loss which exceeds 5% of net earnings in a given quarter; or a loss which reduces the bank's capital adequacy by more than 1%; or a loss which reduces total assets by more than 1%.

              Amended: October 2010
              October 2007

          • Accounts for Charity Organisations

            • BR-5.1.15

              [This requirement was moved in October 2011 to Paragraph BR-4.1.5 as it is a monthly requirement].

              Amended: October 2011
              Amended: October 2010
              October 2007

          • Business Transfers

            • BR-5.1.16

              All banks must refer to Section GR-4.1 on business transfer requirements.

              Amended: April 2014
              Amended: July 2011
              Added: April 2010

          • Other Notifications

            • BR-5.1.17

              Banks must inform the CBB, in writing, of the following:

              (a) Any material problems or changes encountered with an outsourcing provider;
              (b) Any proposed ownership changes (whether in terms of structure or identity of controllers) prior to the change taking place and any change in controllers as a result of circumstances outside the bank's knowledge and/or control (ref GR-5.1.7); and
              (c) Any dismissal or suspension of any staff in internal audit, risk management, AML, compliance function or internal Shari'a review of the bank. The notification must include the reason for the dismissal or suspension of such individual.
              Amended: January 2023
              Amended: April 2014
              Added: July 2011

            • BR-5.1.17A

              Should the CBB have a cause for concern following its review of the notification referred to under Subparagraph BR-5.1.17(c), it may investigate the matter and should it establish the existence of any irregularity, misconduct or unfair decisions, it may take enforcement action on the bank, including an adverse action on the fit and proper status of the person(s) responsible.

              Added: April 2014

          • Settlement of Subordinated Loan

            • BR-5.1.18

              [This Paragraph was moved to Paragraph BR-5.2.12.]

              Amended: October 2014

        • BR-5.2 BR-5.2 Bahraini Conventional Banks

          • BR-5.2.1

            The content of this Section is applicable to all Bahraini conventional bank licensees licensed by the CBB in the Kingdom of Bahrain.

            Amended: April 2014
            Amended: October 2010
            October 2007

          • Capital Adequacy

            • BR-5.2.2

              All banks, referred to under Paragraph BR-5.2.1, must give the CBB immediate written notification of any actual breach by such banks of the minimum capital adequacy ratio (CAR) in accordance with Section CA-1.2. Where such notification is given, the bank must also adhere to the additional notification and reporting requirements as set out under Section CA-1.2.

              Amended: January 2015
              Amended: October 2010
              October 2007

          • Write-offs

            • BR-5.2.3

              All banks must notify the CBB of any write-off of a credit facility in excess of BD100,000 (or equivalent in other currencies) and must obtain the CBB's prior approval for write-offs concerning certain parties connected to the concerned bank or other entities (see Section CM-7.1 for full details).

              Amended: July 2012
              Amended: April 2008
              October 07

          • Term Financing Commitments

            • BR-5.2.4

              All banks must consult with the CBB before they enter into any term borrowing facilities or programs which have any restrictive covenants in relation to the capital or activities of the bank (such as the capital adequacy ratio, capital amount, leveraging, compliance with certain regulatory requirements, etc). For the sake of expediting the CBB's reaction to such consultations, banks must submit the draft term sheet of the facility to the Banking Supervision director at the CBB responsible for the supervision of the concerned bank, before committing themselves to the concerned facility (or renewing it).

          • Capital Increases, Changes in Strategy and Establishment of Subsidiaries/SPVs

            • BR-5.2.5

              All Bahraini conventional bank licensees must obtain the CBB's prior written approval for the opening of any new place of business either in the Kingdom of Bahrain or abroad (this would include the establishment or acquisition of a subsidiary, new branches or representative offices). Bahraini conventional bank licensees should refer to Article 51 of the CBB Law 2006 for full details.

              Added: April 2014

            • BR-5.2.6

              All Bahraini conventional bank licensees must obtain the CBB’s prior written approval for any proposed capital increase in a subsidiary and for any major change (regardless of type and/or effect) to the bank’s strategy or corporate plan prior to implementation (See also Paragraph HC-1.2.6).

              Amended: July 2021
              Added: April 2014

            • BR-5.2.7

              All Bahraini conventional bank licensees must obtain the CBB's prior specific written approval if they intend to act as originator, sponsor or manager of a special purpose vehicle ('SPV'), or if they intend to participate in the creation of an SPV, or if they intend to acquire a holding of 20% or more of the equity capital of an SPV. All Bahraini conventional bank licensees must seek prior specific written CBB approval if they are appointed as nominee shareholders of SPVs or hold votes by proxy arrangement in SPVs on behalf of other investors.

              Amended: January 2015
              Added: April 2014

            • BR-5.2.9A

              In addition to the points noted in BR-5.2.9, Bahraini conventional bank licensees which are involved with SPVs in any of the relationships described in Paragraph BR-5.2.7 must:

              (a) Not allow the SPVs to give any type of financial guarantee, warranty or indemnity to the investors in the SPVs or any other counterparty, either directly or on behalf of the bank.
              (b) Ensure that there are no legal or other restrictions on the availability of financial and other information relevant to the SPV and access to its business premises and records.
              (c) Not provide any credit facilities to the SPVs and/or extend any financial/liquidity support and/or guarantees.
              Amended: July 2020
              Added: April 2020

            • BR-5.2.8

              For purposes of Paragraph BR-5.2.7, in order to avoid any delays and/or disruption in implementation of a Bahraini conventional bank licensee's plan in this context, the CBB should be approached as soon as possible, even at a very preliminary stage.

              Added: January 2015

            • BR-5.2.9

              The CBB requires any Bahraini conventional bank licensee associated with an SPV to confirm the following points in any request for approval under Paragraph BR-5.2.7:

              (a) The purpose of the SPV;
              (b) The nature of the relationship between the Bahraini conventional bank licensee and the SPV (i.e. originator, sponsor, manager, investor, controller etc.);
              (c) The proposed consolidation/accounting treatment of the SPV in relation to the Bahraini conventional bank licensee both for the PIR and the audited financial statements' purposes as agreed with its external auditor;
              (d) The availability of financial and other information relevant to the SPV and access to its business premises and records; and
              (e) The Bahraini conventional bank licensee is not providing any guarantees, warranties or financial/liquidity support of any kind to the SPV.
              Amended: April 2020
              Added: January 2015

            • BR-5.2.10

              Where the SPV is consolidated into the accounts of a Bahraini conventional bank, the bank must provide separate accounting information on the SPV to the CBB on a quarterly basis. Furthermore, the annual audited financial statements of all consolidated SPVs must be submitted to the CBB within 3 months of the year end of the concerned SPV.

              Added: January 2015

            • BR-5.2.11

              Where a Bahraini conventional bank has a controller or majority ownership relationship with an SPV, or acts as sponsor, the bank must obtain the prior written approval of the CBB for any changes to the capital, ownership, management or control of SPV. All Bahraini conventional banks must also notify the CBB of any material events in relation to the SPV. If necessary, the CBB may require that formal information exchange arrangements are put in place (e.g. a memorandum of understanding) if the SPV is located in a foreign jurisdiction and its activities are not supervised locally.

              Added: January 2015

          • Early Settlement of Capital Items

            • BR-5.2.12

              In accordance with Paragraph CA-2.1.6(e) and (g) and CA-2.1.10(e), Bahraini conventional bank licensees must seek the CBB's prior written approval before exercising a call on an additional Tier one or Tier two capital issue, partially or in full, prior to the end of its term.

              Amended: January 2015
              Added: October 2014

        • BR-5.3 BR-5.3 Retail Banks

          • BR-5.3.1

            The content of this Section is only applicable to retail banks licensed by the CBB in the Kingdom of Bahrain.

            Amended: October 2010
            October 2007

          • Introduction of New or Expanded Customer Products and Facilities

            • BR-5.3.2

              All banks, referred to under Paragraph BR-5.3.1, should notify the CBB of information relating to any new or expanded customer products and facilities in accordance with the requirements set out under Section BC-4.7.

              Amended: October 2010
              October 2007

          • Installation or Removal of ATM in Bahrain

            • BR-5.3.3

              In accordance with Section BC-6.1, all banks referred to under Paragraph BR-5.3.1, must notify the CBB in writing if they installed or removed an ATM in Bahrain.

              Amended: April 2022
              Added: April 2012

          • Funds Received from NGO where no Valid Funds Collection License

            • BR-5.3.4

              In accordance with Paragraph BC-4.11.3, retail banks must notify the CBB in instances where donated funds have been received by an NGO and no valid funds collection license was submitted.

              Added: April 2014

      • BR-6 BR-6 Information Gathering by the CBB

        • BR-6.1 BR-6.1 Power to Request Information

          • BR-6.1.1

            In accordance with Article 111 of the CBB Law, banks must provide all information that the CBB may reasonably request in order to discharge its regulatory obligations.

            Added: January 2012

          • BR-6.1.2

            Banks must provide all relevant information and assistance to the CBB inspectors and appointed experts on demand as required by Articles 111 and 114 of the CBB Law. Failure by banks to cooperate fully with the CBB's inspectors or appointed experts, or to respond to their examination reports within the time limits specified, will be treated as demonstrating a material lack of cooperation with the CBB which will result in other enforcement measures being considered, as described elsewhere in Module EN. This rule is supported by Article 114(a) of the CBB Law.

            Added: January 2012

          • BR-6.1.3

            Article 163 of the CBB Law provides for criminal sanctions where false or misleading statements are made to the CBB or any person /appointed expert appointed by the CBB to conduct an inspection or investigation on the business of the licensee or the listed licensee.

            Added: January 2012

          • Information Requested on Behalf of other Supervisors

            • BR-6.1.4

              The CBB may ask banks to provide it with information at the request of or on behalf of other supervisors to enable them to discharge their functions properly. Those supervisors may include overseas supervisors or government agencies in Bahrain. The CBB may also, without notifying a bank, pass on to those supervisors or agencies information that it already has in its possession.

              Added: January 2012

        • BR-6.2 BR-6.2 Access to Premises

          • BR-6.2.1

            In accordance with Article 114 of the CBB Law, all licensed banks must permit representatives of the CBB, or appointed experts, access, with or without notice, to any of its business premises in relation to the discharge of the CBB's functions under the relevant law.

            Amended: October 2011
            October 2007

          • BR-6.2.2

            A bank must take reasonable steps to ensure that its agents and providers under outsourcing arrangements permit such access to their business premises, to the CBB.

            Added: October 2011

          • BR-6.2.3

            A bank must take reasonable steps to ensure that each of its providers under material outsourcing arrangements deals in an open and cooperative way with the CBB in the discharge of its functions in relation to the bank.

            Added: October 2011

          • BR-6.2.4

            The cooperation that banks are expected to procure from such providers is similar to that expected of banks themselves.

            Added: October 2011

        • BR-6.3 BR-6.3 Accuracy of Information

          • BR-6.3.1

            Banks must take reasonable steps to ensure that all information they give the CBB is:

            (a) Factually accurate or, in the case of estimates and judgements, fairly and properly based after appropriate enquiries have been made by the bank; and
            (b) Complete, in that it should include anything of which the CBB would reasonably expect notice.
            Added: October 2011

          • BR-6.3.2

            If a bank becomes aware, or has information that reasonably suggests that it has or may have provided the CBB with information that was or may have been false, misleading, incomplete or inaccurate, or has or may have changed in a material way, it must notify the CBB immediately. The notification must include:

            (a) Details of the information which is or may be false, misleading, incomplete or inaccurate, or has or may have changed;
            (b) An explanation why such information was or may have been provided; and
            (c) The correct information.
            Added: October 2011

          • BR-6.3.3

            If the information in Paragraph BR-6.3.2 cannot be submitted with the notification (because it is not immediately available), it must instead be submitted as soon as possible afterwards.

            Added: October 2011

        • BR-6.4 BR-6.4 Methods of Information Gathering

          • BR-6.4.1

            The CBB uses various methods of information gathering on its own initiative which require the cooperation of banks:

            (a) Representatives of the CBB may make onsite visits at the premises of the bank. These visits may be made on a regular basis, on a sample basis, for special purposes such as theme visits (looking at a particular issue across a range of banks), or when the CBB has a particular reason for visiting a bank;
            (b) Appointees of the CBB may also make onsite visits at the premises of the bank. Appointees of the CBB may include persons who are not CBB staff, but who have been appointed to undertake particular monitoring activities for the CBB, such as in the case of appointed experts (refer to Section BR-6.5).
            (c) The CBB may request the bank to attend meetings at the CBB's premises or elsewhere;
            (d) The CBB may seek information or request documents by telephone, at meetings or in writing, including electronic communication;
            (e) The CBB may require banks to submit various documents or notifications, as per Chapter BR-5, in the ordinary course of their business such as financial reports or on the happening of a particular event in relation to the bank such as a change in control.
            Added: January 2012

          • BR-6.4.2

            When seeking meetings with a bank or access to the bank's premises, the CBB or the CBB appointee needs to have access to a bank's documents and personnel. Such requests will be made during reasonable business hours and with proper notice. There may be instances where the CBB may seek access to the bank's premises without prior notice. While such visits are not customary, the prospect of unannounced visits is intended to encourage banks to comply at all times with the requirements and standards imposed by the CBB as per legislation and Volume 1 of the CBB Rulebook.

            Added: January 2012

          • BR-6.4.3

            The CBB considers that a bank should:

            (a) Make itself readily available for meetings with representatives or appointees of the CBB;
            (b) Give representatives or appointees of the CBB reasonable access to any records, files, tapes or computer systems, which are within the bank's possession or control, and provide any facilities which the representatives or appointees may reasonably request;
            (c) Produce to representatives or appointees of the CBB specified documents, files, tapes, computer data or other material in the bank's possession or control as reasonably requested;
            (d) Print information in the bank's possession or control which is held on computer or otherwise convert it into a readily legible document or any other record which the CBB may reasonably request;
            (e) Permit representatives or appointees of the CBB to copy documents of other material on the premises of the bank at the bank's expense and to remove copies and hold them elsewhere, or provide any copies, as may be reasonably requested; and
            (f) Answer truthfully, fully and promptly all questions which representatives or appointees of the CBB reasonably put to it.
            Amended: July 2012
            Added: January 2012

          • BR-6.4.4

            The CBB considers that a bank should take reasonable steps to ensure that the following persons act in the manner set out in Paragraph BR-6.4.3:

            (a) Its employees; and
            (b) Any other members of its group and their employees.
            Amended: July 2012
            Added: January 2012

          • BR-6.4.5

            In gathering information to fulfill its supervisory duties, the CBB acts in a professional manner and with due regard to maintaining confidential information obtained during the course of its information gathering activities.

            Added: January 2012

        • BR-6.5 BR-6.5 Role of the Appointed Expert

          • Introduction

            • BR-6.5.1

              The content of this Chapter is applicable to all banks and appointed experts.

              Added: October 2011

            • BR-6.5.2

              The purpose of the contents of this Chapter is to set out the roles and responsibilities of appointed experts when appointed pursuant to Articles 114 or 121 of the CBB Law (see EN-7.1.1). These Articles empower the CBB to assign some of its officials or others to inspect or conduct investigations of banks.

              Added: October 2011

            • BR-6.5.3

              The CBB uses its own inspectors to undertake on-site examinations of licensees as an integral part of its regular supervisory efforts. In addition, the CBB may commission reports on matters relating to the business of licensees in order to help it assess their compliance with CBB requirements. Inspections may be carried out either by the CBB's own officials, by duly qualified appointed experts appointed for the purpose by the CBB, or a combination of the two.

              Added: October 2011

            • BR-6.5.4

              The CBB will not, as a matter of general policy, publicise the appointment of an appointed expert, although it reserves the right to do so where this would help achieve its supervisory objectives.

              Added: October 2011

            • BR-6.5.5

              Unless the CBB otherwise permits, appointed experts should not be the same firm appointed as external auditor of the bank.

              Added: October 2011

            • BR-6.5.6

              Appointed experts will be appointed in writing, through an appointment letter, by the CBB. In each case, the CBB will decide on the range, scope and frequency of work to be carried out by appointed experts.

              Added: October 2011

            • BR-6.5.7

              All proposals to appoint appointed experts require approval by an Executive Director or more senior official of the CBB. The appointment will be made in writing, and made directly with the appointed experts concerned. A separate letter is sent to the licensee, notifying them of the appointment. At the CBB's discretion, a trilateral meeting may be held at any point, involving the CBB and representatives of the licensee and the appointed experts, to discuss any aspect of the investigation.

              Added: October 2011

            • BR-6.5.8

              Following the completion of the investigation, the CBB will normally provide feedback on the findings of the investigation to the bank.

              Added: October 2011

            • BR-6.5.9

              Appointed experts will report directly to and be responsible to the CBB in this context and will specify in their report any limitations placed on them in completing their work (for example due to the bank's group structure). The report produced by the appointed experts is the property of the CBB (but is usually shared by the CBB with the firm concerned).

              Added: October 2011

            • BR-6.5.10

              Compliance by appointed experts with the contents of this Chapter will not, of itself, constitute a breach of any other duty owed by them to a bank (i.e. create a conflict of interest).

              Added: October 2011

            • BR-6.5.11

              The CBB may appoint one or more of its officials to work on the appointed experts' team for a bank.

              Added: October 2011

          • The Required Report

            • BR-6.5.12

              The scope of the required report will be determined and detailed by the CBB in the appointment letter. Commissioned appointed experts would normally be required to report on one or more of the following aspects of a bank's business:

              (a) Accounting and other records;
              (b) Internal control systems;
              (c) Returns of information provided to the CBB;
              (d) Operations of certain departments; and/or
              (e) Other matters specified by the CBB.
              Added: October 2011

            • BR-6.5.13

              Appointed experts will be required to form an opinion on whether, during the period examined, the bank is in compliance with the relevant provisions of the CBB Law and the CBB's relevant requirements, as well as other requirements of Bahrain Law and, where relevant, industry best practice locally and/or internationally.

              Added: October 2011

            • BR-6.5.14

              The appointed experts' report should follow the format set out in Appendix BR-13, in part B of the CBB Rulebook.

            • BR-6.5.15

              Unless otherwise directed by the CBB or unless the circumstances described in Section BR-6.5.19 apply, the report must be discussed with the Board of directors and/or senior management in advance of it being sent to the CBB.

              Added: October 2011

            • BR-6.5.16

              Where the report is qualified by exception, the report must clearly set out the risks which the bank runs by not correcting the weakness, with an indication of the severity of the weakness should it not be corrected. Appointed experts will be expected to report on the type, nature and extent of any weaknesses found during their work, as well as the implications of a failure to address and resolve such weaknesses.

              Added: October 2011

            • BR-6.5.17

              If the appointed experts conclude, after discussing the matter with the bank, that they will give a negative opinion (as opposed to one qualified by exception) or that the issue of the report will be delayed, they must immediately inform the CBB in writing giving an explanation in this regard.

              Added: October 2011

            • BR-6.5.18

              The report must be completed, dated and submitted, together with any comments by directors or management (including any proposed timeframe within which the bank has committed to resolving any issues highlighted by the report), to the CBB within the timeframe applicable.

              Added: October 2011

          • Other Notifications to the CBB

            • BR-6.5.19

              Appointed expertsmust communicate to the CBB, during the conduct of their duties, any reasonable belief or concern they may have that any of the requirements of the CBB, including the criteria for licensing a bank (see Module LR), are not or have not been fulfilled, or that there has been a material loss or there exists a significant risk of material loss in the concerned bank, or that the interests of customers are at risk because of adverse changes in the financial position or in the management or other resources of a bank. Notwithstanding the above, it is primarily the bank's responsibility to report such matters to the CBB.

              Added: October 2011

            • BR-6.5.20

              The CBB recognises that appointed experts cannot be expected to be aware of all circumstances which, had they known of them, would have led them to make a communication to the CBB as outlined above. It is only when appointed experts, in carrying out their duties, become aware of such a circumstance that they should make detailed inquiries with the above specific duty in mind.

              Added: October 2011

            • BR-6.5.21

              If appointed experts decide to communicate directly with the CBB in the circumstances set out in Paragraph BR-6.5.19, they may wish to consider whether the matter should be reported at an appropriate senior level in the bank at the same time and whether an appropriate senior representative of the bank should be invited to attend the meeting with the CBB.

              Added: October 2011

          • Permitted Disclosure by the CBB

            • BR-6.5.22

              Information which is confidential and has been obtained under, or for the purposes of, this chapter or the CBB Law may only be disclosed by the CBB in the circumstances permitted under the Law. This will allow the CBB to disclose information to appointed experts to fulfil their duties. It should be noted, however, that appointed experts must keep this information confidential and not divulge it to a third party except with the CBB's permission and/or unless required by Bahrain Law.

              Added: October 2011

          • Trilateral Meeting

            • BR-6.5.23

              The CBB may, at its discretion, call for a trilateral meeting(s) to be held between the CBB and representatives of the relevant bank and the appointed experts. This meeting will provide an opportunity to discuss the appointed experts' examination of, and report on, the bank.

              Added: October 2011

    • PD PD Public Disclosure

      • PD-A PD-A Introduction

        • PD-A.1 PD-A.1 Purpose

          • PD-A.1.1

            The purpose of this Module is to set out the detailed qualitative and quantitative public disclosure requirements and disclosure to shareholders that the banks should adhere to in order to enhance corporate governance and financial transparency through better public disclosure. Such disclosures also help to protect customers and facilitate market discipline.

            Amended October 2010
            April 2008

          • PD-A.1.2

            This Module provides support for certain other parts of the Rulebook, namely:

            (a) Principles of Business;
            (b) High-level Controls;
            (c) Audit Firms;
            (d) CBB Reporting Requirements;
            (e) Capital Adequacy;
            (f) Business and Market Conduct; and
            (g) Risk Management (i.e. market, credit, liquidity and operational).
            April 2008

          • PD-A.1.3

            This Module also provides support for certain aspects relating to disclosure requirements stipulated in the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006) and the Bahrain Commercial Companies Law (as amended).

            April 2008

          • PD-A.1.4

            The Central Bank of Bahrain's ('CBB') disclosure requirements (in this Module) vary according to whether the concerned bank is a Bahraini conventional bank licensee (PD-1 and PD-3) or a branch of a foreign bank (PD-2).

            Amended: July 2015
            Amended: January 2011
            April 2008

          • Legal Basis

            • PD-A.1.5

              This Module contains the CBB s Directive (as amended from time to time) relating to public disclosure and disclosure to shareholders and is issued pursuant to the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ( CBB Law ). It also incorporates the requirements of Article 62 of the CBB law with respect to the publication of financial statements. The Directive in this Module is applicable to all Bahraini conventional bank licensees (and branches of foreign banks where applicable).

              Amended: July 2015
              Amended: July 2012
              Amended: January 2011
              Amended October 2010
              April 2008

            • PD-A.1.6

              For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

              April 2008

        • PD-A.2 PD-A.2 General Requirements

          • PD-A.2.1

            All Bahraini conventional bank licensees must have a formal disclosure policy as part of their overall communications strategy approved by the Board of Directors (and supported by documented procedures) that addresses the disclosures that the bank makes and the internal controls over the disclosure process. In addition, all Bahraini conventional bank licensees must carry out a regular review of the validity of their disclosures (in terms of scope and accuracy) as outlined in Sections BR-5.2 and AU-3.2.

            Amended: July 2015
            April 2008

          • PD-A.2.2

            All Bahraini conventional bank licensees are required to publish their annual audited, and reviewed quarterly financial statements per the rules set out in this Module and the CBB Law, Bahrain Commercial Companies Law (as amended), the Rulebook of the licensed exchange and Volume 6 (Capital Markets), where applicable. Such financial statements must always be prepared in accordance with International Financial Reporting Standards (IFRS). Listed banks must refer to Paragraph PD-A.2.6.

            Amended: July 2015
            Amended: October 2011
            Amended: January 2011
            Amended October 2010
            April 2008

          • PD-A.2.3

            The CBB requires that each bank maintain an up-to-date checklist of all applicable IFRS and also the disclosure requirements set out in this Module for full compliance purposes. Such checklists should be part of the bank's public disclosure procedures.

            Amended October 2010
            April 2008

          • PD-A.2.4

            The disclosure requirements specified in Chapters 1, 3 and 6 of this Module, which are in addition to those required by applicable accounting standards, must be reviewed by the bank's external auditor based upon agreed upon procedures (unless IFRS require that the concerned disclosures are audited). See also BR-1.1, BR-2.2 and AU-3.2 for more details.

            Amended: October 2011
            Amended: October 2010
            April 2008

          • PD-A.2.4A

            The disclosure requirements in this Module may be presented as an accompanying document or appendices to the Annual Report or in the Notes to the Financial Statements at the discretion of the concerned bank.

            October 2010

          • PD-A.2.5

            The external auditor must also review other statements in the Annual Report such as the Chairman's report to ensure that such statements are consistent with the audited financial statements and the disclosures required by this Module. All qualitative or descriptive disclosures in the Annual Report must be based upon and reflective of facts and actual practice by the bank (and be subject to the above review by the bank's external auditor).

            Amended October 2010
            April 2008

          • PD-A.2.6

            If situations arise where disclosures required in this Module are in conflict with those required under IFRS and/or any listing requirements issued by the CBB or a licensed exchange, listed banks should first follow the CBB's requirements as contained in Volume 6 (Capital Markets). In such situations, banks should explain any material differences between the accounting or other disclosures and the disclosure required in this Module. This explanation does not have to take the form of a line by line reconciliation, but should provide stakeholders with sufficient detail to make an objective assessment of the bank's financial and operational health. Moreover, a formal notification to the CBB is required in such a situation.

            Amended: July 2012
            Amended: October 2011
            Amended: January 2011
            Amended October 2010
            April 2008

          • PD-A.2.7

            A bank should decide which disclosures are relevant for it based on the materiality concept and subject to the concurrence of the bank's external auditor. For the bank's guidance, information would be regarded as material if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions.

            Amended October 2010
            April 2008

          • PD-A.2.8

            Non-compliance with these disclosure requirements is likely to lead to enforcement actions as outlined in Module EN (Enforcement).

            Amended: July 2015
            April 2008

          • PD-A.2.9

            The disclosures referred to in this Module must be made at the top consolidated level of a banking group (i.e. at the level of the parent bank in Bahrain). Disclosures related to individual banks within a banking group will be required where listing requirements or differing accounting requirements necessitate such separate disclosure.

            Amended: July 2015
            Amended October 2010
            April 2008

          • PD-A.2.10

            With effect from 30th June 2015, Bahraini conventional bank licensees must follow a 3-step approach to provide a full reconciliation of all regulatory capital elements back to the published financial statements.

            Added: July 2015

          • PD-A.2.10A

            The 3-step approach is not based on a common template because the starting point for reconciliation, the bank's reported balance sheet, may vary slightly in composition from bank to bank. Full details of the reconciliation process and associated disclosures are provided in Appendix PD-2.

            Added: July 2015

          • PD-A.2.11

            With effect from 30th June 2015, Bahraini conventional bank licensees must use a common template to provide a description of the main features of regulatory capital instruments issued. Full details are provided in Appendix PD-3.

            Added: July 2015

          • PD-A.2.12

            With effect from 30th June 2015, Bahraini conventional bank licensees must disclose the full terms and conditions of all outstanding regulatory capital instruments on their website.

            Added: July 2015

          • PD-A.2.13

            With effect from 30th June 2015, Bahraini conventional bank licensees must use a modified version of the post 1 January 2019 template mentioned in Paragraph PD-A.2.15 below until 31 December 2018. This template is established to disclose the components of capital that are benefiting from the transitional arrangements. The template and accompanying notes are provided in Appendix PD- 4.

            Added: July 2015

          • PD-A.2.14

            [This Paragraph has been left blank]

            Added: July 2015

          • PD-A.2.15

            With effect from 1 January 2019, Bahraini conventional bank licensees must use a common template (set out in Appendix PD-1) to report the breakdown of their regulatory capital when the transition period for the phasing-in of deductions ends. The template is designed to disclose all regulatory adjustments, including amounts falling below thresholds for deduction, and thus enhance consistency and comparability in the disclosure of the elements of capital between banks and across jurisdictions.

            Added: July 2015

        • PD-A.3 PD-A.3 Proprietary and Confidential Information

          • PD-A.3.1

            Proprietary information encompasses information (for example on products or systems), that if shared with competitors would render a licensed bank's investment in these products/systems less valuable, and hence would undermine its competitive position. Information about customers is often confidential, in that it is provided under the terms of a legal agreement or counterparty relationship. This has an impact on what banks should reveal in terms of information about their customer base, as well as details on their internal arrangements, for instance methodologies used, parameter estimates, data etc.

            April 2008

          • PD-A.3.2

            [This Paragraph was deleted in April 2016.]

            Deleted: April 2016
            Amended: July 2015
            Amended October 2010
            April 2008

        • PD-A.4 PD-A.4 Module History

          • PD-A.4.1

            This Module was first issued in July 2004 as part of the conventional principles volume. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

            October 2010

          • PD-A.4.2

            The most recent changes made to this Module are detailed in the table below:

            Module Ref.Change DateDescription of Changes
            PD-5Jan 2005New Internet Disclosure rules.
            PD-4.1Jul 2005Small definition change to consumer loans.
            PD-2.1, PD-3.1Jan 2006Revised notification requirements for disclosures.
            PD-3.1April 2006Specific requirements to disclose changes in shareholders' equity.
            PD-1 & PD-3Jan 2008New Disclosures required by Basel II
            PD-A.2.1, 2.6, 2.9, PD-1.2.3, PD-1.3.4(b)Apr 2008Small guidance changes to assist in disclosures
            PD10/2010Various minor amendments to ensure consistency in CBB Rulebook.
            PD-1.3.810/2010Additional items for disclosure added to be in line with Corporate Governance Code.
            PD-610/2010New Chapter added to deal with corporate governance disclosure to shareholders.
            PD-A.1.501/2011Clarified legal basis.
            PD-A.2.2, PD-A.2.6, PD-1.3.36 and PD-1.4.101/2011Changes made to reflect new reference to licensed exchange.
            PD-A.4.304/2011Corrected cross reference.
            PD-1.1.104/2011Corrected reference to the Rulebook of the licensed exchange.
            PD-1.2, PD-2.1.4, PD-2.1.5, PD-3.1.4, PD-3.1.5 and PD-5.1.104/2011Clarified requirements for due date.
            PD-A.2.2, PD-A.2.6 and PD-1.3.36 (c).10/2011Reference added to Volume 6 (Capital Markets).
            PD-A.2.410/2011Clarification of existing requirement for the Agreed Upon Procedures Report and setting a deadline for the submission of the report.
            PD-1.510/2011Added a new Section on Press Release of Annual Results.
            PD-3.1.310/2011Amended Subparagraph to be consistent with other Volumes of the Rulebook.
            PD-1.301/2012Changes in respect of July 2009 and February 2011 amendments to Basel II.
            PD-1.3.801/2012Amended corporate governance disclosure in annual report.
            PD-3.1.401/2012Added requirement to include statement of comprehensive income.
            PD-6.1.101/2012Amended disclosure requirements to shareholders.
            PD-1.1.104/2012Expanded the scope of this Chapter to also apply to retail branches of foreign banks.
            PD-1.2.304/2012Clarified financial statements that must be disclosed by locally incorporated banks.
            PD-1.2A04/2012Added requirements for annual audited financial statements of retail branches of foreign banks.
            PD-1.3.8 (x)04/2012Clarified nature of disclosure in relation to Module HC.
            PD-2.1.204/2012Clarified what interim semi-annual statements are to be disclosed by retail branches of foreign banks.
            PD-3.1.404/2012Clarified quarterly disclosure requirements.
            PD-3.1.604/2012Clarified deadline for disclosing additional semi-annual disclosures.
            PD-5.1.104/2012Paragraph deleted as it repeats contents of Paragraph PD-3.1.4.
            PD-A.1.507/2012Added reference to Article 62 of the CBB Law.
            PD-A.2.607/2012Clarified priority of Rule to follow where there is a conflict.
            PD-1.3.807/2012Clarified content of disclosure on corporate governance.
            PD-4.407/2012New Section added on press release concerning financial statements.
            PD-1.3.810/2012Amended the requirement for banks to maintain a website under (bb).
            PD-4.110/2012This Section was deleted and requirements are now included in Section BC-4.3.
            PD-4.210/2012Clarified title of this Section.
            PD-1.3.2107/2013Corrected typo.
            PD-1.3.3607/2013Added reference to Volume 6 (Capital Markets).
            PD-1.3.8 to PD-1.3.8F01/2014Additional disclosure requirements related to sound remuneration practices.
            PD-1.3.8C, PD-1.3.8F and PD-1.3.8G07/2014Amended disclosure requirements pertaining to remuneration.
            PD-1.3.8B(o)04/2015Clarified that disclosure rule under this Subparagraph only applies for approved persons and material risk takers.
            PD-A.2, PD-A.3, PD-B.1, PD-1.1, PD-1.2, PD-1.3, PD-1.4, PD-3.1, PD-4.2, PD-4.307/2015New disclosures required by Basel III and alignment related changes for Deposit and URIA Protection scheme and disclosures relating to approved persons
            PD-A.3.204/2016Aligned with change made to Volume 2.
            PD-1.2.604/2016The annual report must be submitted as a soft copy to the CBB.
            PD-1.3.804/2016Paragraph restructured and clarified to eliminate certain redundancies.
            PD-1.3.33 and PD-1.3.33A04/2016Operational risk disclosure requirements aligned with Volume 2 requirements for consistency purposes.
            PD-3.1.604/2016Due date changed to 2 months to be aligned with requirements under Paragraph BR-2.2.3.
            PD-5.1.304/2016Guidance paragraph deleted as requirements included under Paragraph PD-5.1.2.
            PD-1.3.107/2017Amended paragraph cross-reference.
            PD1.2A.207/2018Amended Paragraph on 'Publication of Annual Audited Financial Statements' time frame.
            PD-1.3.3710/2019Amended Paragraph on disclosure of financial penalties of Bahraini banks.
            PD-1.3A10/2019Added a new Section on disclosures requirements pertaining to branches of foreign banks.
            PD-1.3.8(x)04/2023Deleted Subparagraph.
            PD-6.1.204/2023Added a new Paragraph on disclosure in the annual report.
            PD-6.1.304/2023Added a new Paragraph on publishing internal corporate governance policies.
            PD-1.2.5, PD-2.1.5 & PD-3.1.507/2023Amended Paragraphs on submission of newspaper extracts of financial statements.
            PD-3.305/2024Added a new Section on Open Banking Disclosures.

          • Effective Date

            • PD-A.4.3

              The contents in this Module are effective from July 2004 or from the effective date of the summary of changes as shown in the table in paragraph PD-A.4.2. Changes to Chapter PD-6 are effective 1st January 2011.

              Amended: April 2011
              Amended October 2010
              April 2008

      • PD-B PD-B General Guidance and Best Practice

        • PD-B.1 PD-B.1 [This Chapter was deleted in July 2015.]

          Deleted: July 2015

          • Basel Committee on Banking Supervision: Various papers

            [This Section was deleted in July 2015]

            Deleted: July 2015

            • PD-B.1.1

              [This Paragraph was deleted in July 2015.]

              Deleted: July 2015
              April 2008

            • PD-B.1.2

              [This Paragraph was deleted in July 2015.]

              Deleted: July 2015
              April 2008

            • PD-B.1.3

              [This Paragraph was deleted in July 2015.]

              Deleted: July 2015
              April 2008

      • PD-1 PD-1 Annual Disclosure Requirements

        • PD-1.1 PD-1.1 Introduction

          • PD-1.1.1

            The purpose of this Chapter is to set out the CBB's requirements relating to the disclosure of information in the annual audited financial statements and the Annual Report of all Bahraini conventional banks as well as for retail branches of foreign banks. This Chapter also refers to the Bahrain Commercial Companies Law (as amended) and the Rulebook of the licensed exchange relating to public disclosure and reporting requirements.

            Amended: July 2015
            Amended: April 2012
            Amended: April 2011
            Amended October 2010
            April 2008

          • PD-1.1.2

            For the purpose of this Module, the following definitions apply:

            (a) Approved person means any person occupying a controlled function as outlined in Section LR-1A.1;
            (b) 'Interest in the shares' shall include, but not be limited to, direct and/or indirect ownership of such shares, the right of voting associated with such shares, the right to receive dividends payable on such shares, and/or any right, regardless of the form thereof, to purchase (or otherwise acquire an interest in) such shares at any time;
            (c) 'Audited financial statements' refers to the financial statements required under International Financial Reporting Standards; and
            (d) 'Annual Report' refers to the document which contains the full audited financial statements and accompanying notes as well as any accompanying commentary by the senior officials of the bank.
            Amended: July 2015
            Amended October 2010
            April 2008

        • PD-1.2 PD-1.2 Requirements for Annual Audited Financial Statements and Annual Report for Bahraini Conventional Banks

  • Publication of Annual Audited Financial Statements

    • PD-1.2.3

      Banks must publish extracts from their audited annual financial statements in one Arabic and one English daily newspaper within 2 months of the end of the financial year. The newspaper disclosures may be edited, but must include at a minimum the statement of financial position (balance sheet), the statements of income, cash flow and changes in equity and where applicable, the statement of comprehensive income. The newspaper disclosures must also be placed on the bank's website within one week of publication.

      Amended: April 2012
      Amended: April 2011
      Amended October 2010
      April 2008

    • PD-1.2.4

      The newspaper disclosures should include a reference to the fact that the published figures "have been extracted from financial statements audited by XYZ auditors, who expressed an unqualified opinion on (dated report)". Banks must disclose in full any audit qualifications or matter of emphasis paragraphs contained within the auditor's opinion. The auditor's opinion must be made in accordance with the International Standards on Auditing as established by the International Federation of Accountants.

      April 2008

    • PD-1.2.5

      Banks must submit a copy of the newspaper extracts from their annual audited financial statements to the CBB within two business days of publication in the concerned newspapers clearly showing on which date and in which publications the statements were published.

      Amended: July 2023
      Amended: April 2011
      April 2008

  • Submission of Annual Report

    • PD-1.2.6

      All Bahraini conventional bank licensees must submit a soft copy (electronic) of their annual report to the CBB, including the full disclosures and appendices prescribed in this Chapter within 4 months of the end of the bank's financial year.

      Amended: April 2016
      Amended: July 2015
      Amended: April 2011
      Amended October 2010
      Amended October 2009
      April 2008

    • PD-1.2.7

      Banks are also required to place the annual report with full disclosures and appendices on their website (see also PD-1.3.8(h)) within one week of submission to the CBB.

      Amended: July 2015
      Amended: April 2011
      Amended October 2010
      April 2008

  • PD-1.2A PD-1.2A Requirements for Annual Audited Financial Statements Retail Branches of Foreign Banks

    • Submission of Annual Audited Financial Statements

      • PD-1.2A.1

        All retail branches of foreign conventional banks must submit their annual audited financial statements to the CBB within 3 months of the end of the bank's financial year (as required by Article 62 of the CBB Law).

        Added: April 2012

    • Publication of Annual Audited Financial Statements

      • PD-1.2A.2

        Banks must publish extracts from their audited annual financial statements in one Arabic and one English daily newspaper within 3 months of the end of the financial year. The newspaper disclosures may be edited, but must include at a minimum the statement of financial position (balance sheet), the statements of income, cash flow, and where applicable, of comprehensive income.

        Amended: July 2018
        Added: April 2012

  • PD-1.3 PD-1.3 Disclosures in the Annual Report for Bahraini Conventional Banks

    • Introduction

      • PD-1.3.1

        Banks (referred to under Paragraph PD-1.2.6 — hereafter referred to as "banks") should provide timely information which facilitates market participants' assessment of them. The disclosure requirements set out in this Section must be included in the Annual Report either as an Appendix or in the Notes to the Audited Financial Statements at the discretion of the concerned bank. The disclosures should be addressed in clear terms and with appropriate details to help achieve a satisfactory level of bank transparency.

        Amended: July 2017
        April 2008

      • PD-1.3.2

        The disclosure requirements listed in Paragraphs PD-1.3.4 to PD-1.3.35 below follow the requirements of Basel II Pillar 3 and are in addition to, or in some cases serve to clarify, the disclosure requirements of IFRS.

        Amended October 2010
        April 2008

      • PD-1.3.3

        If a bank is not able to achieve full compliance with the requirements stated in this Chapter, a meeting should be held with the relevant Banking Supervision Director at the CBB in the presence of the concerned external auditor to discuss the reasons for such non-compliance prior to the finalisation of the annual report. It is the responsibility of the bank to call for such meetings.

        Amended October 2010
        April 2008

    • Scope of Application — Qualitative Disclosures

      • PD-1.3.4

        The following information must be disclosed in relation to the parent bank (in Bahrain) and its banking and financial institution subsidiaries:

        (a) The full legal name of the top corporate entity in the group to which the disclosure requirements apply;
        (b) [This Paragraph has been deleted and replaced with Paragraph PD-1.3.12]; and
        (c) Any restrictions on the transfer of funds or regulatory capital within the group (e.g. large exposure or exchange control regulations or covenants over the repayment of capital or the payment of dividends).
        Amended: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

      • Scope of Application — Quantitative Disclosures

        • PD-1.3.5

          The aggregate amounts (current book value) of the bank's total interests in insurance entities, which are risk-weighted rather than deducted from capital, as well as their name, their country of incorporation or residence, and the proportion of voting power in these entities must be disclosed (in relation to the parent bank). In addition, banks must disclose the quantitative impact on regulatory capital of using this method versus the deduction method.

          Amended: July 2015
          Amended: April 2011
          Amended October 2010
          April 2008

        • PD-1.3.6

          [This Paragraph was deleted in July 2015.]

          Deleted: July 2015
          Amended October 2010
          April 2008

    • Financial Performance and Position

      • PD-1.3.7

        The following information should be included:

        (a) Discussion of the main factors that influenced the bank's financial performance for the year, explaining any differences in performance between the current year and previous years and the reasons for such differences, and discussing factors that will have a significant influence on the bank's future financial performance;
        (b) Basic quantitative indicators of financial performance (e.g. ROAE, ROAA, NIM, cost-to-income ratios) for the past 5 years;
        (c) A discussion of the impact of acquisitions of new businesses and discontinued business and unusual items; and
        (d) A discussion of any changes in the capital structure and their possible impact on earnings and dividends.
        Amended: April 2011
        Amended October 2010
        April 2008

    • Corporate Governance and Transparency

      • PD-1.3.8

        The following information relating to corporate governance must be disclosed in the annual report:

        (a) Information about the Board structure (e.g. the size of the Board, Board committees, function of committees and membership showing executive, non-executive and independent members, number and names of independent board members), and the basic organisational structure (lines of business structure and legal entity structure);
        (b) Information about the profession, business title, and experience in years of each Board member and the qualifications and experience in years of all senior managers;
        (c) Descriptive information on the managerial structure, including:
        (i) Committees (see w) below for detailed disclosure requirements relating to various types of committees);
        (ii) Segregation of duties;
        (iii) Reporting lines; and
        (iv) Responsibilities;
        (d) Descriptive information on the performance-linked incentive structure for approved persons (including but not limited to remuneration policies, executive compensation and stock options);
        (e) Nature and extent of transactions with related parties (as defined by IFRS — see also PD-1.3.23(d));
        (f) Approval process for related party transactions;
        (g) Information about any changes in the structures (as mentioned in Subparagraphs PD-1.3.8(a) to PD-1.3.8(c) above) from prior periods;
        (h) The communications strategy approved by the Board (including the use of the bank's website) which should undertake to perform at least the following:
        (i) The disclosure of all relevant information to stakeholders on a timely basis in a timely manner; and
        (ii) The provision of at least the last five years of financial data on the bank's website;
        (i) Distribution of ownership of shares by nationality;
        (j) Directors' and senior managers' trading of the bank's shares during the year, on an individual basis;
        (k) Distribution of ownership of shares by directors and senior managers, on an individual basis;
        (l) Distribution of ownership of shares by size of shareholder;
        (m) Ownership of shares by government;
        (n) The Board's functions — rather than a general statement (which could be disclosed simply as the Board's legal obligations under various laws) the 'mandate' of the Board should be set out;
        (o) The types of material transactions that require Board approval;
        (p) [This Subparagraph was deleted in April 2016 and requirements are now included in Subparagraph (a)];
        (q) Board terms and start date for each term for each director;
        (r) What the board does to induct, educate and orient new directors;
        (s) Election system of directors and any termination arrangements;
        (t) [This Subparagraph was deleted in April 2016 and requirements moved to Subparagraph (w)];
        (u) [This Subparagraph was deleted in April 2016 and requirements moved to Subparagraph (w)];
        (v) Whether the board has adopted a written code of ethical business conduct, and if so the text of that code and a statement of how the board monitors compliance;
        (w) Minimum number of Board committee meetings compared with the actual dates and number of board and committee meetings, individual attendance of each director and the work of committees and any significant issues arising during the period;
        (x) [This subparagraph was deleted in April 2023];
        (y) Review of internal control processes and procedures;
        (z) Directors responsibility with regard to the preparation of financial statements;
        (aa) Board of Directors — whether or not the board, its committees and individual directors are regularly assessed with respect to their effectiveness and contribution;
        (bb) Bahraini conventional bank licensees must maintain a website. Overseas conventional bank licensees must provide a link on their website in Bahrain to the website of their parent bank;
        (cc) Aggregate remuneration paid to board members;
        (dd) Key features and objectives of the remuneration policy of the bank for board members and senior management as well as the frequency of review of the remuneration structure and the extent to which the policy is applicable to foreign subsidiaries and branches; and
        (ee) Aggregate remuneration paid to senior management.
        Amended: April 2023
        Amended: April 2016
        Amended: July 2015
        Amended: January 2014
        Amended: October 2012
        Amended: July 2012
        Amended: April 2012
        Amended: January 2012
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-1.3.8A

        With regards to corporate governance, banks are subject to additional disclosure requirements on corporate governance, whereby such disclosure are for the benefit of shareholders (See Chapter PD-6).

        October 2010

    • Additional Disclosure Requirements Pertaining to Remuneration

      • PD-1.3.8B

        In addition to the remuneration related disclosure included under Paragraph PD-1.3.8, the following qualitative and quantitative information pertaining to remuneration practices and policies covering the following areas must be disclosed in the annual report:

        (a) The name, composition and mandate of the main body overseeing remuneration;
        (b) Whether external consultants advice has been sought and by whom in the bank and in what areas of the remuneration process the consultants have been involved;
        (c) The independence of remuneration for staff in risk management, internal audit, operations, financial controls, AML, internal shari a review/audit and compliance functions;
        (d) The risk adjustment methodologies;
        (e) The link between remuneration and performance;
        (f) The long-term performance measures (deferral, malus, clawback);
        (g) The types of remuneration (cash/equity, fixed/variable);
        (h) Whether the remuneration committee reviewed the bank s remuneration policy during the past year, and if so, an overview of any changes that were made;
        (i) A discussion of how the bank ensures that approved persons engaged in risk management, internal audit, operations, financial controls, AML, internal shari a review/audit and compliance functions are remunerated independently of the business units they oversee;
        (j) Description of the ways in which the current and future risks are taken into account in the remuneration processes. Disclosures must include:
        (i) An overview of the key risks that the bank takes into account when implementing remuneration measures;
        (ii) An overview of the nature and type of the key measures used to take account of these risks, including risks difficult to measure;
        (iii) A discussion on the ways in which these measures affect remuneration; and
        (iv) A discussion of how the nature and type of these measures have changed over the past year and reasons for the change, as well as the impact of changes on remuneration;
        (k) Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration. Disclosures must include:
        (i) An overview of main performance metrics for bank, top-level business lines and individuals;
        (ii) A discussion of how amounts of individual remuneration are linked to bank-wide and individual performance; and
        (iii) A discussion of the measures the bank will in general implement to adjust remuneration in the event that performance metrics are weak1;
        (l) Description of the ways in which the bank seeks to adjust remuneration to take account of longer term performance. Disclosures must include:
        (i) A discussion of the bank s policy on deferral and vesting of variable remuneration and, if the fraction of variable remuneration that is deferred differs across employees or groups of employees, a description of the factors that determine the fraction and their relative importance; and
        (ii) A discussion of the bank s policy and criteria for adjusting deferred remuneration before vesting and after vesting through clawback arrangements;
        (m) Description of the different forms of variable remuneration that the bank utilises and the rationale for using these different forms. Disclosures must include:
        (i) An overview of the forms of variable remuneration offered (i.e. cash, shares and share-linked instruments and other forms2); and
        (ii) A discussion of the use of the different forms of variable remuneration and, if the mix of different forms of variable remuneration differs across employees or group of employees, a description of the factors that determine the mix and their relative importance;
        (n) Number of meetings held by the main body overseeing remuneration during the financial year and aggregate remuneration paid to its members;
        (o) Number and total amount of remuneration for approved persons and material risk takers for the financial year split into fixed and variable remuneration;
        (p) Number and total amount of variable remuneration awarded during the financial year, split into cash, shares and share-linked instruments and other;
        (q) Number and total amount of guaranteed bonuses awarded during the financial year;
        (r) Number and total amount of sign-on awards made during the financial year;
        (s) Number and total amount of severance payments made during the financial year, and highest such award to a single person;
        (t) Total amount of outstanding deferred remuneration, split into cash, shares and share-linked instruments and other forms; and
        (u) Total amount of deferred remuneration awarded during the financial year, paid out and reduced through performance adjustments.

        1 This should include the bank s criteria for determining weak performance metrics.

        2 A description of the elements corresponding to other forms of variable remuneration must be provided.

        Amended: July 2015
        Amended: April 2015
        Amended: July 2014
        Added: January 2014

      • PD-1.3.8C

        The disclosure of remuneration practices must cover approved persons and material risk-takers and must be broken down as follows:

        (a) Members of the board of directors;
        (b) Approved persons in business lines;
        (c) Approved persons in risk management, internal audit, operations, financial controls, internal Shari'a review/audit, AML and compliance functions; and
        (d) Material risk-takers not falling under categories (a) to (c).
        Amended: July 2014
        Added: January 2014

      • PD-1.3.8D

        Disclosure requirements for items under Subparagraph PD-1.3.8B (n) to (u) must be provided for the current as well as for the previous financial year.

        Added: January 2014

      • PD-1.3.8E

        Disclosure requirements for items under Subparagraph PD-1.3.8B (o) and (p) may be presented in a table format split between members of the Board and other approved persons, as well as material risk-takers.

        Added: January 2014

      • PD-1.3.8F

        For purposes of Paragraph PD-1.3.8E, the table referred to should be completed separately for:

        (a) Members of the board of directors;

        Total value of remuneration awards for the current fiscal year Unrestricted
        Fixed remuneration  
             •  Sitting Fees x
             •  Other (please specify) x
        (b) Approved persons in business lines;
        (c) Approved persons in risk management, internal audit, operation, financial controls, internal Shari'a review/audit, AML and compliance functions; and
        (d) Material risk-takers not falling under categories (a) to (c).


        Total value of remuneration awards for the current fiscal year Unrestricted Deferred
        Fixed remuneration    
             •  Cash-based x x
             •  Shares and share-linked instruments x x
             •  Other x x
        Variable remuneration    
             •  Cash-based x x
             •  Shares and share-linked instruments x x
             •  Other x x
        Amended: July 2014
        Added: January 2014

      • PD-1.3.8G

        In instances where a bank has no approved persons or material risk-takers whose remuneration is in excess of BD100,000 as per Paragraph HC-5.4.2, the disclosure requirements under Subparagraphs PD-1.3.8B(f), (g), (l), (m), (t) and (u) are not required.

        Added: July 2014

    • Capital Structure — Qualitative Disclosures

      • PD-1.3.9

        All banks must disclose on their website summary information on the terms and conditions of the main features of all outstanding regulatory capital instruments listed below in Paragraphs PD-1.3.10 and PD-1.3.11, including innovative, complex or hybrid capital instruments. Full details of the required disclosures are given in Appendix PD-3.

        Amended: July 2015
        Amended October 2010
        April 2008

    • Capital Structure — Quantitative Disclosures

      • PD-1.3.10

        From 30th June 2015 until 31st December 2018, all banks must disclose with separate disclosures of individual items as detailed in Appendix PD-4 the following items:

        (a) The amount of Tier One Capital;
        (b) The amount of Tier Two Capital; and
        (c) Required capital ratios and buffers
        Amended: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-1.3.11

        From 1st January 2019, the disclosures referred to under Paragraph PD-1.3.10, must be made in accordance with Appendix PD-1.

        Amended: July 2015
        April 2008

      • PD-1.3.12

        From 30th June 2015, all banks must disclose a full reconciliation of all regulatory capital elements back to the balance sheet in the audited financial statements as required under Appendix PD-2.

        Amended: July 2015
        Amended October 2010
        April 2008

      • PD-1.3.13

        [This Paragraph was deleted in July 2015.]

        Amended: July 2015
        April 2008

    • Capital Adequacy

      • PD-1.3.14

        All banks must present a summary discussion of the bank's approach to assessing the adequacy of capital to support current and future activities both on a risk-based capital basis (i.e. as in Chapters CA-1 and CA-2).

        Amended: July 2015
        April 2008

      • PD-1.3.15

        All banks must disclose the regulatory capital requirements for credit risk by the following categories:

        (a) Standard portfolios subject to the standardised approach, disclosed separately for each standard portfolio (see Paragraph PD-1.3.20); and
        (b) Securitisation exposures.
        Amended: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-1.3.16

        [This Paragraph has been left blank].

        Amended: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-1.3.17

        All banks must disclose their capital requirements for market risk under:

        (a) The standardised approach; or
        (b) The internal models approach (trading book) as applicable.
        Amended: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-1.3.18

        All banks must disclose their capital requirements for operational risk under:

        (a) The basic indicator approach; or
        (b) The standardised approach (as applicable).
        Amended: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-1.3.19

        All banks must disclose their total and Tier One Capital Ratios on the following basis:

        (a) For the top consolidated group in Bahrain; and
        (b) For all significant bank subsidiaries (i.e. whose regulatory capital amounts to over 5% of group consolidated regulatory capital whether on a stand-alone or sub-consolidated basis).
        Amended: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-1.3.20

        In Paragraphs PD-1.3.15 and PD-1.3.26, the expression "standard portfolio" refers to the major categories of credit portfolios (a to i below) identified in Sections CA-3.2, CA-3.3 and CA-5.2 (standardised approach only):

        (a) Sovereign portfolio (including claims on international organisations and claims on multilateral development banks (MDBs);
        (b) Public Sector Entities (PSEs) Portfolio;
        (c) Banks Portfolio (including claims on securities/investment business firms eligible for treatment as banks — such firms are not eligible for the concessionary risk weighting treatment for certain claims under 3 months maturity);
        (d) Corporate Portfolio;
        (e) Regulatory retail portfolio (including claims on small business eligible for 75% risk weight);
        (f) Residential Retail Portfolio (qualifying for 35% risk weight only); and
        (g) Equity portfolio (contains all equities held in the banking book. Portfolios a – f must not contain any holdings of equities. The equity portfolio contains all holdings of equities which are risk-weighted at 100% or 150% and which are not consolidated in or deducted from the Tier One and Two capital of the bank).
        Amended: April 2011
        Amended October 2010
        April 2008

    • Risk: General Qualitative Disclosure Requirements

      • PD-1.3.21

        All banks must describe their risk management objectives and policies for each separate risk area below and provide information on whether or not strategies used have been effective throughout the reporting period. The strategies, processes and internal controls (including internal audit) must be described for each area below including the structure and organisation of the relevant risk management function, and the scope and nature of risk reporting systems and policies for hedging/mitigating risk and strategies for monitoring the continuing effectiveness of hedges/mitigants. There are also certain specific disclosures for each of these areas in addition to the general qualitative disclosures required by this Paragraph:

        (a) Credit Risk (see also PD-1.3.22PD-1.3.27);
        (b) Securitisation (see also PD-1.3.28PD-1.3.29);
        (c) Market Risk (see also PD-1.3.30PD-1.3.31);
        (d) Operational Risk (see also PD-1.3.32PD-1.3.33);
        (e) Equity Risk in the Banking Book (see also PD-1.3.34); and
        (f) Banking Book interest rate risk (see also PD-1.3.35).
        Amended: July 2013
        Amended: April 2011
        Amended October 2010
        April 2008

    • Credit Risk — Qualitative Disclosures

      • PD-1.3.22

        All banks must make the general qualitative disclosures outlined in PD-1.3.21 above, as well as those below:

        (a) Definition of past due and impaired credit facilities (for accounting purposes);
        (b) Description of the approaches for specific and collective impairment provisions and statistical methods used (where applicable);
        (c) The names of External Credit Assessment Institutions (ECAIs) used for the purpose of assigning risk weights to assets;
        (d) The types of exposure for which each ECAI is used; and
        (e) The process used to transfer ECAI public issue ratings onto comparable (loan) assets in the banking book.
        Amended: April 2011
        Amended October 2010
        April 2008

    • Credit Risk — Quantitative Disclosures

      • PD-1.3.23

        All banks must disclose the following:

        (a) Total gross credit exposures (gross outstanding before any risk mitigation) plus average gross exposures over the period broken down by major types of credit exposure (as outlined under IFRS) into funded and unfunded exposures. Where the period end position is representative of the risk positions of the bank during the period, average gross exposures need not be disclosed. Banks must state that average gross exposures have not been disclosed for this reason. Where average amounts are disclosed in accordance with an accounting standard or other requirement which specifies the calculation method to be used, that method should be followed. Otherwise, the average exposures should be calculated using the most frequent interval that an entity's systems generate for management, regulatory or other reasons, provided that the resulting averages are representative of the licensed bank's operations. The basis used for calculating averages needs to be stated;
        (b) Geographic distribution of exposures, broken down into significant areas by major types of credit exposure. Geographical areas may be individual countries, or groups of countries. Banks may define the geographical area according to how they manage the concerned areas internally. The criteria used to allocate exposures to particular geographical areas should be specified;
        (c) Distribution of exposures by industry or counterparty type, broken down by major types of credit exposure, broken down by funded and unfunded exposure;
        (d) Intra-group transactions including exposures to related parties, and whether such transactions have been made on an arm's length basis;
        (e) Lending to highly leveraged and other high risk counterparties (as defined in PD-1.3.24) must be separately disclosed as an individual category;
        (f) Banks must disclose concentrations of risk to individual counterparties where the exposure is in excess of the 15% individual obligor limit. These disclosures do not require the disclosure of the name of the counterparty;
        (g) Residual contractual maturity breakdown (see PD-1.3.24(a)) of the whole credit portfolio, broken down by major types of credit exposure;
        (h) By major industry or counterparty type:
        •   Amount of impaired loans/facilities and past due loans/facilities (see PD-1.3.24);
        •   Specific and collective impairment provisions (see PD-1.3.24);
        •   Charges for specific impairment provisions and charge-offs (write-offs) during the period; and
        •   Reconciliation of changes in provisions for loan impairment.
        (i) Amount of past due loans, separately broken down by significant geographic areas, including the amounts of specific and collective impairment provisions related to each geographical area (see PD-1.3.23(b) for definition of geographical area);
        (j) Aggregate quantitative information about all outstanding credit facilities at year end not included in h) above that have been restructured (according to the definition in the PIR instructions) during the period including:
        •   The balance of any restructured credit facilities;
        •   The magnitude of any restructuring activity;
        •   The impact of restructured credit facilities on provisions and present and future earnings; and
        •   The basic nature of concessions on all credit relationships that are restructured, including loans, derivatives and other on- and off-balance sheet activities.
        If full repayment is expected, the restructured credit need not be disclosed in this section after satisfactory performance for a period of six months in accordance with the modified terms; and
        (k) Quantitative information concerning obligations with respect to recourse transactions (i.e. where the asset has been sold, but the bank retains responsibility for repayment if the original counterparty defaults or fails to fulfil their obligations). Information must include the amount of assets sold and any expected losses.
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-1.3.24

        For Paragraph PD-1.3.23, the following notes are provided for interpretative guidance:

        a) Banks must follow the residual maturity groupings currently followed under IFRS 7 (Guidance application B11), but they must also extend the periods to include 5-10 years, 10-20 years, and 20 years and over (where the banks have exposures or liabilities of such maturity);
        b) In PD-1.3.23(h), banks must provide an ageing of past due loans on the following basis:
        •   Ageing schedule (over 3 months, over 1 year and over 3 years) of past due loans and other assets; and
        •   Breakdown by relevant counterparty type and geographic area;
        c) For specific, collective and other impairment provisions, the portion of collective impairment provisions not allocated to specific geographical areas should be shown separately;
        d) The reconciliation of changes in provisions should show specific and collective impairment provisions separately; and
        e) "Highly leveraged and other high risk counterparties" follow the categorisation given in the Basel Committee Paper of March 2001, entitled "Review of issues relating to Highly Leveraged Institutions (HLIs)" which described HLIs as having the following characteristics:
        •   They are subject to little or no regulatory oversight;
        •   They are generally subject to very limited disclosure requirements and are not subject to rating by credit reference agencies; or
        •   HLIs often take on significant leverage, where leverage is the ratio between risk, expressed in some common denominator, and capital.
        Amended: January 2011
        Amended October 2010
        April 2008

    • Credit Risk Disclosures for Portfolios Subject to the FIRB Approach

      • PD-1.3.25

        [This Paragraph was deleted in July 2015.]

        Deleted: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

    • Credit Risk Mitigation: Disclosure Requirements

      • PD-1.3.26

        (a) For credit Risk Mitigation, all banks must make the qualitative disclosures required by PD-1.3.21 and PD-1.3.22, and also the following disclosures (with regard to credit risk mitigation):
        (i) Policies and processes for, and an indication of the extent to which, the bank makes use of on- and off-balance sheet netting;
        (ii) Policies and processes for collateral valuation and management;
        (iii) A description of the main types of collateral taken by the bank;
        (iv) The main types of guarantor/credit derivative counterparty and their credit worthiness; and
        (v) Information about (market or credit) risk concentrations within the credit risk mitigation taken;
        (b) All Bahraini conventional bank licensees must disclose for each standard portfolio described in PD-1.3.20 or PD1.3.25(g), the total exposure (after on- or off-balance sheet netting) that is covered by eligible financial collateral after the application of haircuts;
        (c) All Bahraini conventional bank licensees must disclose the total exposure (after on- or off-balance sheet netting where applicable) that is covered by eligible guarantees or credit derivatives (see CA-4) for each separately disclosed standard portfolio (Standardised approach banks see PD-1.3.20); and
        (d) For exposures after risk mitigation subject to the standardised approach, banks must disclose the amount of exposure (rated and unrated) in each standard portfolio after risk mitigation, as well as any exposures which are deducted.
        Amended: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

    • Disclosures Related to Counterparty Credit Risk (CCR)

      • PD-1.3.27

        All Bahraini conventional bank licensees must make the following disclosures regarding counterparty credit risk:

        (a) The general qualitative disclosures (PD-1.3.21 and PD-1.3.22) with respect to derivatives and CCR, including:
        •   Discussion of methodology used to assign economic capital and credit limits for counterparty credit exposures;
        •   Discussion of policies for securing collateral and establishing credit reserves; and
        •   Discussion of the impact of the amount of collateral the bank would have to provide if given a credit rating downgrade.
        (b) Gross positive fair value of contracts, netting benefits, netted current credit exposures, collateral held (including type: e.g. cash, government securities, etc.), and net derivatives credit exposure. Also measures for exposure at default or exposure amount under the Standard Method or Current Exposure Method, whichever is applicable, and the notional value of credit derivative hedges, and the distribution of current credit exposure by type of credit exposure (e.g. interest rate contracts, FX contracts, equity contracts, commodity contracts, etc.); and
        (c) Credit derivative transactions which create exposures to CCR (notional value), segregated between use for the institution's own credit portfolio, as well as in its intermediation activities, including the distribution of the credit derivative products used, broken down further by protection bought and sold within each product group.
        Amended: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

    • Securitisation — Qualitative Disclosure Requirement

      • PD-1.3.28

        All Bahraini conventional bank licensees must disclose the following qualitative information with respect to securitisation activities:

        (a) The general qualitative disclosure requirement (PD-1.3.21) with respect to securitisation (including synthetics), including a discussion of:
        •   The bank s objectives in relation to its securitisation activities, including the extent to which these activities transfer credit risk of the underlying securitised exposures away from the bank to other parties, and including the type of risks assumed and retained with re-securitisation activity. For example, where a bank is particularly active in the market of a senior tranche of re-securitisations of mezzanine tranches related to securitisations of residential mortgages, it should describe the structure of re-securitisations (e.g. senior tranche of mezzanine tranche of residential mortgage); this description should be provided for the main categories of re-securitisation products in which the bank is active;
        •   The nature of other risks (e.g. liquidity risk) inherent in securitised assets;
        •   The roles played by the bank in the securitisation process (for example, is the bank the originator of the underlying risks, is it an investor, is it a servicer, is it a provider of credit enhancement, is it a sponsor of an asset-backed commercial paper facility, is it a liquidity provider, or is it a swap provider?) and an indication of the bank s involvement in each of them; and
        •   A description of the processes in place to monitor changes in the credit and the market risk of securitisation exposures (for example how the behaviour of the underlying assets impacts securitisation exposures) including how these processes differ for re-securitisation exposures;
        •   A description of the bank s policy governing the use of credit risk mitigation to mitigate the risks retained through securitisation and re-securitisation exposures; and
        •   The regulatory capital approaches (e.g. Ratings Based Approach, Internal Assessment Approach or Supervisory Formula Approach) that the bank follows in its securitisation activities, including the types of securitisation exposures to which each approach applies;
        (b) A list of:
        •   The types of SPVs that the bank, as a sponsor, uses to securitise third-party exposures. The bank must indicate whether it has exposure to these SPVs, either on or off-balance sheet;
        •   Affiliated entities that the bank manages or advises and that invest in the securitisation exposures that the bank has securitised or in SPVs that the bank sponsors.
        (c) A summary of the bank s accounting policies for securitisation activities, including:
        •   Whether transactions are treated as sales or financings;
        •   Recognition of gain on sale;
        •   Methods and key assumptions (including inputs) applied in valuing retained interests, including any changes since the last report and the impact of such changes differentiating between securitisation and re-securitisation exposures; and
        •   Changes in methods and key assumptions from the previous period and the impact of the changes;
        •   Treatment of synthetic securitisations if not covered by other accounting policies (e.g. derivatives);
        •   How exposures intended to be securitised (e.g. in subsidiary, associate or SPV or on balance sheet) are valued and whether they are recorded in the banking book or the trading book; and
        •   Policies for recognising liabilities on the balance sheet for arrangements that could require the bank to provide financial support for securitised assets;
        (d) In the banking book, the names of ECAIs used for securitisations and the type of securitisation exposure for which each agency is used.
        (e) Description of the IAA process. The description should include:
        •   Structure of the internal assessment process and relation between internal assessment and external ratings, including information on ECAIs referenced in PD-1.3.28(d) above;
        •   Use of internal assessments other than for IAA capital purposes;
        •   Control mechanisms for the internal assessment process including discussion of independence, accountability, and internal assessment process review;
        •   The exposure type (such as credit cards, home equity , auto and securitisation exposures detailed by underlying type and security type (e.g. RMBS, CMBS, ABS, CDOs) to which the internal assessment process is applied; and
        •   Stress factors used for determining credit enhancement levels, by exposure type (see above for description of "exposure type").
        (f) An explanation of significant changes to any of the quantitative information (e.g. amounts of assets intended to be securitised, movement of assets between banking book and trading book) since the last reporting date.
        Amended: July 2015
        Amended: January 2012
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-1.3.28A

        Securitisation exposures include, but are not restricted to securities, liquidity facilities, protection provided to securitisation positions, other commitments and credit enhancements such as I/O strips, cash collateral accounts and other subordinated assets. A bank would generally be considered a sponsor if it, in fact or substance, manages or advises a securitisation programme, places securities into the market, or provides liquidity and/ or credit enhancements. The programme may include, for example, ABCP Conduit Programmes and structured investment vehicles. SPVs may include money market mutual funds, and personal and private trusts.

    • Securitisation — Quantitative Disclosure Requirement for Banking Book

      • PD-1.3.29

        All Bahraini conventional bank licensees must disclose the following quantitative information with respect to securitisation activities:

        (a) The total outstanding exposures securitised by the bank and subject to the securitisation framework (broken down into traditional and synthetic), by exposure type. These should be categorised under bands such as credit cards, home equity, etc. Also banks must separately report any securitisation transactions for the year of inception where they do not retain any exposure. Banks should also clearly identify securitisations where they are acting purely as sponsors;
        (b) Securitisations broken down by exposure type showing:
        •   The amount of impaired or past due assets securitised; and
        •   Losses recognised by the bank during the current period by exposure type;
        (c) The total amount of outstanding exposures intended to be securitised, by exposure type. The aggregate amount of securitisation exposures retained or purchased, broken down by exposure type;
        (d) Summary of current year's securitisation activity, including the amount of exposures securitised (by exposure type) and recognised gain or loss on sale by asset type;
        (e) Aggregate amount of:
        •   On- balance sheet securitisation exposures retained or purchased broken down by exposure type; and
        •   Off- balance sheet securitisation exposures broken down by exposure type;
        (f) •   Aggregate amount of securitisation exposures retained or purchased and the associated capital charges, broken down between securitisation and re-securitisation exposures and further broken down into a meaningful number of risk weight bands for each regulatory capital approach used (e.g. SA, RBA, IAA and SFA);
        •   Exposures that have been deducted entirely from Tier 1 capital, credit enhancing I/Os deducted from total capital, and other exposures deducted from total capital should be disclosed separately by exposure type;
        (g) For securitisations subject to the early amortisation treatment, the following items should be disclosed by underlying asset type:
        •   The aggregate drawn exposures attributed to the seller's and investors' interests;
        •   The aggregate (standardised) capital charges incurred by the bank against its retained shares of the drawn balances and undrawn lines; and
        •   The aggregate (standardised) capital charges incurred by the bank against the investors. shares of drawn balances and undrawn lines; and
        (h) Aggregate amount of re-securitisation exposures retained or purchased broken down according to:
        •  Exposures to which credit risk mitigation is applied and those not applied; and
        •   Exposures to guarantors broken down according to guarantor credit worthiness categories or guarantor name.
        Amended: July 2015
        Amended: January 2012
        Amended: April 2011
        Amended October 2010
        April 2008

    • Securitisation – Quantitative Disclosure for Trading Book

      • PD-1.3.29A

        (a) The total amount of outstanding exposures securitised by the bank and defined under the securitisation framework (broken down into traditional/synthetic) by exposure type, separately for securitisations of third-party exposures for which the bank acts only as sponsor;
        (b) The total amount of outstanding exposures intended to be securitised broken down by exposure type;
        (c) Summary of current period's securitisation activity, including the total amount of exposures securitised (by exposure type), and recognised gain or loss on sale by exposure type;
        (d) Aggregate amount of exposures securitised by the bank for which the bank has retained some exposures and which is subject to the market risk approach (broken down into traditional/synthetic), by exposure type;
        (e) Aggregate amount of:
        •   On-balance sheet securitisation exposures retained or purchased broken down by exposure type; and
        •   Off-balance sheet securitisation exposures broken down by exposure type;
        (f) Aggregate amount of securitisation exposures retained or purchased separately for:
        •   Securitisation exposures retained or purchased subject to Comprehensive Risk Measure for specific risk; and
        •   Securitisation exposures subject to the securitisation framework for specific risk broken down into a meaningful number of risk weight bands for each regulatory capital approach (e.g. SA, RBA, SFA and concentration ratio approach).
        (g) Aggregate amount of:
        •   The capital requirements for the securitisation exposures subject to Comprehensive Risk Measure, broken down into appropriate risk classifications (e.g. default risk, migration risk and correlation risk).
        •   The capital requirements for the securitisation exposures (re-securitisation or securitisation), subject to the securitisation framework broken down into a meaningful number of risk weight bands for each regulatory capital approach (e.g. SA, RBA, SFA and concentration ratio approach).
        •   Securitisation exposures that are deducted entirely from Tier 1 capital, credit enhancing I/Os deducted from total capital, and other exposures deducted from total capital should be disclosed separately by exposure type.
        (h) For securitisations subject to the early amortisation treatment, the following items by exposure type for securitised facilities:
        •   The aggregate drawn exposures attributed to the seller's and investors' interests;
        •   The aggregate capital charges incurred by the bank against its retained (i.e. the seller's) shares of the drawn balances and undrawn lines; and
        •   The aggregate capital charges incurred by the bank against the investor's shares of drawn balances and undrawn lines.
        (i) Aggregate amount of re-securitisation exposures retained or purchased broken down according to:
        •   Exposures to which credit risk mitigation is applied and those not applied; and
        •   Exposures to guarantors broken down according to guarantor credit worthiness categories or guarantor name.
        Amended: July 2015
        Added: January 2012

    • Market Risk Disclosures for Banks using the Standardised Approach

      • PD-1.3.30

        Banks using the standardised approach must disclose the following items:

        (a) The general qualitative disclosure requirements for market risk (PD-1.3.21), identifying the portfolios covered by the standardised approach;
        (b) The capital requirements for:
        •   Interest rate risk (separate disclosures are required for securitisation exposures in PD-1.3.29 and PD-1.3.29A);
        •   Equity position risk;
        •   Foreign exchange risk; and
        •   Commodity risk;
        on an end period basis, as well as showing the maximum and minimum values during the period for each category of market risk shown above; and
        (c) The disclosures under PD-1.3.30 (b) above must be followed by detailed quantitative information about the nature and extent of interest-rate sensitive assets and liabilities and off-balance sheet exposures (e.g. breakdown of fixed and floating rate items and the net interest margin earned, and the duration and effective interest rate of assets and liabilities). These disclosures should be by each portfolio identified in PD-1.3.30 (a), showing their related gains and losses. Also, the effect on the value of assets, liabilities and capital for a 200bp change in interest rates should be disclosed.
        Amended: July 2015
        Amended: January 2012
        Amended: April 2011
        Amended October 2010
        April 2008

    • Market Risk Disclosures for Banks Using the Internal Models Approach (IMA) for Trading Portfolios

      • PD-1.3.31

        All banks using internal models for their trading portfolios must disclose the following:

        (a) The general qualitative disclosure requirement (PD-1.3.21) for market risk identifying the portfolios covered by the IMA. In addition, a discussion of the extent of, and methodologies for, compliance with the "Prudent valuation guidance" for positions held in the trading book (see Section CA-8.2);
        (b) An explanation and articulation of the internal criteria on which the bank's internal capital adequacy assessment is based. It should include a description of the methodologies used to achieve a capital adequacy assessment that is consistent with the soundness standards;
        (c)
        •   A description of the models used for each portfolio covered by the IMA, including assumptions used in calculating (e.g. confidence level, holding period, etc.);
        •   A description of stress testing applied to each IMA portfolio; and
        •   A description of the approach used for back-testing/validating the accuracy and consistency of the internal models and modelling processes;
        (d) A disclosure of the scope of model acceptance by the CBB;
        (e) For the incremental risk capital charge and the comprehensive risk capital charge the methodologies used and the risks measured through the use of internal models. Included in the qualitative description should be:
        • The approach used by the bank to determine liquidity horizons;
        • The methodologies used to achieve a capital assessment that is consistent with the required soundness standard; and
        • The approaches used in the validation of the models;
        (f) Summarised quantitative information about price-related market risk to equity and commodity markets where banks use the IMA. These disclosures should include the magnitude of the exposure on a weekly or monthly basis (during the reporting period);
        (g) For trading portfolios under the IMA:
        •   The high, mean and low VaR values over the reporting period and period-end;
        •   The high, mean and low stressed VaR values over the reporting period and period-end;
        •   The high, mean and low incremental and comprehensive risk capital charges over the reporting period and period-end; and
        •   A comparison of VaR estimates with actual gains/losses experienced by the bank, with analysis of important "outliers" in back-test results;
        (h) A presentation of the overall daily profits or exposures for aggregate market risk over the reporting period. At an absolute minimum, summarised aggregate quantitative information relating to monthly VaR results should be presented, giving an overview of the extent of market risk-related activities;
        (i) Information showing the actual performance of the VaR models for the period, giving the number of times actual losses exceeded VaR estimates; and
        (j) Summarised quantitative information for significant concentrations of foreign exchange exposure by currency, broken down by hedged and unhedged exposures.
        Amended: July 2015
        Amended: January 2012
        Amended: April 2011
        Amended October 2010
        April 2008

    • Operational Risk Disclosures

      • PD-1.3.32

        All banks must disclose the general qualitative disclosures (PD-1.3.21) and also the approach(es) for operational risk which the bank employs to control such risk, and disclosures of any issues considered to be individually significant.

        April 2008

    • Operational Risk Qualitative Disclosures

      • PD-1.3.33

        The following additional qualitative disclosures (to Paragraph PD-1.3.21) should be made for operational risk:

        (a) Policies to incorporate operational risk measures into the management framework — for example budgeting, target-setting, and performance review and compliance;
        (b) Policies and processes:
        (i) To help track loss events and potential exposures;
        (ii) To report to these losses, indicators and scenarios on a regular basis; and
        (iii) To review the reports jointly by risk and line managers;
        (c) Policies on the loss mitigation process via contingency planning, business continuity planning, staff training and enhancement of internal controls, as well as business processes and infrastructures; and
        (d) A statement of how banks manage and control operational risks arising from pending legal actions.
        Amended: April 2016
        April 2008

    • Operational Risk Quantitative Disclosures

      • PD-1.3.33A

        The following quantitative disclosures should be made for operational risk:

        (a) The calculation of the capital charge or RWA equivalent for operational risk;
        (b) Indicators of operational risk exposures, such as gross income; and
        (c) Material legal contingencies including pending legal actions and a discussion and estimate of the potential liabilities.
        Added: April 2016

    • Disclosure Requirements for Equity Positions in the Banking Book

      • PD-1.3.34

        All banks must make the following disclosures for any equities held in the Banking Book:

        (a) The general qualitative disclosure requirement (PD-1.3.21) with respect to equity risk, including:
        •   Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons; and
        •   Discussion of important policies covering the valuation and accounting of equity holdings in the banking book. This includes the accounting policies and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices;
        (b) The types and nature of investments, including the amount that can be classified as quoted on an active market or privately held;
        (c) The cumulative realised gains (or losses) arising from sales or liquidations in the reporting period;
        (d) Total unrealised gains and losses recognised in the balance sheet but not through the P&L;
        (e) Any unrealised gains and losses included in Tier One and Tier Two capital; and
        (f) Capital requirements broken down by appropriate equity groupings, consistent with the methodology, as well as the aggregate amounts and type of equity investments subject to any supervisory transition or grandfathering provisions regarding regulatory capital requirement.
        Amended: April 2011
        Amended October 2010
        April 2008

    • Disclosures Concerning Interest Rate Risk in the Banking Book (IRRBB)

      • PD-1.3.35

        All banks must make the following disclosures concerning interest rate risk in the banking book:

        (a) The general qualitative disclosure requirement (PD-1.3.21), outlining the nature of IRRBB and key assumptions, including assumptions concerning loan prepayments and the behaviour of deposits without a fixed maturity, and the frequency of IRRBB measurement; and
        (b) The increase (or decline) in earnings or economic value (or relevant measure used by management) for upward and downward rate shocks according to management's method for measuring IRRBB, broken down by currency (where applicable).
        Amended: April 2011
        Amended October 2010
        April 2008

    • Compliance

      • PD-1.3.36

        The Annual Report must include a declaration by the external auditor that it did not come across any violations of the requirements below during the course of its audit work that would have any material negative impact on the financial position of the bank:

        (a) The Bahrain Commercial Companies Law (as amended);
        (b) The CBB Law where a violation might have had a material negative effect on the business of the bank or on its financial position;
        (c) The Regulations and Directives issued by the CBB, including Volume 6 (Capital Markets); and
        (d) The Rulebook of the licensed exchange and associated Resolutions, Rules and Procedures.
        Amended: July 2013
        Amended: January 2012
        Amended: October 2011
        Amended: April 2011
        Amended: January 2011
        Amended October 2010
        April 2008

      • PD-1.3.37

        The Annual Report must disclose the amount of any penalties paid to the CBB during the period of the report together with a factual description of the reason(s) given by the CBB for the penalty (see Section EN-1.3). Bahraini conventional bank licensees which fail to comply with this requirement will be required to make the disclosure in the annual report of the subsequent year and will be subject to an enforcement action for non-disclosure.

        Amended: October 2019
        Amended: October 2010
        April 2008

  • PD-1.3A PD-1.3A Disclosures in the Annual Audited Financial Statements Report for Branches of Foreign Banks

    • PD-1.3A.1

      All branches of foreign bank licensees must disclose in their annual audited financial statements the amount of any penalties paid to the CBB during the period of the report together with a factual description of the reason(s) given by the CBB for the penalty (see Section EN-1.3). Branches which fail to comply with this requirement will be required to make the disclosure in the annual audited financial statements of the subsequent year and will be subject to an enforcement action for nondisclosure.

      Added: October 2019

  • PD-1.4 PD-1.4 Additional Disclosure in the Annual Audited Financial Statements of Banks Listed on a Licensed Exchange

    • PD-1.4.1

      The content of this Section is applicable only to Bahraini conventional bank licensees listed on a licensed exchange.

      Amended: July 2015
      Amended: January 2011
      April 2008

    • PD-1.4.2

      The disclosure requirements set out in this Section for banks referred to under Paragraph PD-1.4.1 are in addition to those set out in Section PD-1.3.

      April 2008

    • — Interests of Approved Persons

      • PD-1.4.3

        Without prejudice to any other requirement of Bahrain law (or any other direction of the CBB), the Directors' Report Section of the annual report of banks should contain details of the interests of approved persons in the shares of such banks. Such details should include:

        (a) Total interests in the shares of such banks by individual persons mentioned above; and
        (b) Changes in such interests from the previous financial year to the current financial year.
        Amended: July 2015
        Amended October 2010
        April 2008

      • PD-1.4.4

        For the purpose of the disclosure required under Paragraph PD-1.4.3, any interests in the shares of a bank held by the spouse(s) or children of an approved person, or any other person the control of whose interests in such shares lies ultimately with the approved person, shall be deemed to be the interests of the relevant approved person. For a definition of 'interest in the shares', see Paragraph PD-1.1.2(d).

        Amended: July 2015
        April 2008

  • PD-1.5 PD-1.5 Press Release on Annual Results

    • PD-1.5.1

      Where a bank chooses to issue a narrative press release in conjunction with or in relation to the publication of its audited annual financial statements as required under Paragraph PD-1.2.3, the press release must indicate the net income for the last quarter.

      Added: October 2011

  • PD-2 PD-2 Semi-Annual Disclosure Requirements

    • PD-2.1 PD-2.1 Disclosure by Retail Branches of Foreign Banks

      • PD-2.1.1

        The content of this Section is applicable only to retail bank branches (licensed by the CBB) of foreign banks.

        Amended October 2010
        April 2008

      • PD-2.1.2

        Banks (referred to under Paragraph PD-2.1.1) are required by the CBB to prepare and disclose to the public the following reviewed information (in the same format as their Annual Audited Accounts) for their Bahrain operations on a semi-annual (interim) basis:

        (a) A statement of financial position (balance sheet),
        (b) A statement of income;
        (c) A statement of cash flow; and
        (d) Where applicable, a statement of comprehensive income.
        Amended: April 2012
        Amended: October 2010
        April 2008

      • PD-2.1.3

        The statements referred to under Paragraph PD-2.1.2 must be reviewed by the bank's external auditor, in accordance with International Standards on Auditing (ISA) applicable to Review engagements.

        Amended October 2010
        April 2008

      • PD-2.1.4

        The statements referred to under Paragraph PD-2.1.2 must be published in one local newspaper within 2 months from the statements' date.

        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-2.1.5

        Banks must submit a newspaper copy of the statements (referred to under Paragraph PD-2.1.2) to the CBB within two business days of publication clearly showing on which date and in which publication(s) the statements were published.

        Amended: July 2023
        Amended: April 2011
        Amended October 2010
        April 2008

  • PD-3 PD-3 Quarterly Disclosure Requirements

    • PD-3.1 PD-3.1 Publication of Reviewed (Unaudited) Quarterly Financial Statements for Bahraini Conventional Banks

      • PD 3.1.1

        The content of this section is only applicable to Bahraini conventional bank licensees licensed by the CBB.

        Amended: July 2015
        Amended October 2010
        April 2008

      • PD 3.1.2

        Banks must prepare reviewed (unaudited) quarterly financial statements in accordance with IFRS for the first three quarters of their financial year.

        April 2008

      • PD 3.1.3

        Banks' unaudited quarterly financial statements must be reviewed by their external auditor who must also make a statement regarding the results of such review. Such review and statement should be made in accordance with the applicable International Standard on Review Engagements.

        Amended: October 2011
        Amended: October 2010
        April 2008

      • PD 3.1.4

        Extracts from the reviewed quarterly financial statements (including at a minimum the statement of financial position (balance sheet), the statements of income, cash flow, and changes in equity and, where applicable the statement of comprehensive income must be published in one Arabic and one English daily newspaper widely available in Bahrain and on the bank's website within 45 calendar days of the end of the quarter to which such statements relate. (See Paragraph PD-5.1.2 for non-listed Bahraini conventional wholesale banks).

        Amended: July 2015
        Amended: April 2012
        Amended: January 2012
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD 3.1.5

        Banks must submit a newspaper copy of the statements (referred to under Paragraph PD-3.1.4) to the CBB within two business days of publication clearly showing on which date and in which publication(s) the statements were published.

        Amended: July 2023
        Amended: July 2015
        Amended: April 2011
        Amended October 2010
        April 2008

      • PD-3.1.5A

        Banks must publish the disclosures required by Appendices PD-1 to PD-4 (as mentioned in Section PD-A.2) on their website in accordance with the deadline required under Paragraph PD-3.1.4.

        Added: July 2015

      • Additional Requirements for Semi Annual Disclosures

        • PD 3.1.6

          In addition to the requirements of paragraphs PD-3.1.1 to PD-3.1.5 above, banks must make all the quantitative disclosures required by section PD-1.3 with their half-yearly financial statements on their website, within 2 months of the end of the half-yearly financial statements, but the qualitative disclosure requirements of the Paragraphs listed below may be dispensed with at the option of the bank in their half-yearly statements:

          (a) PD-1.3.7 (a) to (b);
          (c) PD-1.3.14;
          (d) PD-1.3.21PD-1.3.22;
          (e) PD-1.3.26 (a);
          (f) PD-1.3.27 (a);
          (g) PD-1.3.28 (a) to (c);
          (h) PD-1.3.30 (a);
          (i) PD-1.3.31 (a) to (d);
          (j) PD-1.3.34 (a); and
          (k) PD-1.3.35 (a).
          Amended: April 2016
          Amended: July 2015
          Amended: April 2012
          Amended: January 2011
          Amended October 2010
          April 2008

        • PD-3.1.7

          Banks must retain an ongoing archive of all applicable public disclosures required by Sections PD-1 and PD-3, including the required appendices on their website. This archive must contain historical data (as required depending upon implementation date) for a minimum period of five years.

          Added: July 2015

    • PD-3.2 PD-3.2 Special Arrangements for Newly-Established Banks

      • PD 3.2.1

        Newly-established banks are not required to follow the publication requirements of section PD-3.1 for the first three quarters of their operation or until the commencement of their second financial year of operation (whichever period is the longer).

        April 2008

      • PD 3.2.2

        After the above period has expired, all newly-established Bahraini conventional bank licensees must follow the publication requirements of Section PD-3.1. Newly-established banks must follow the requirements for annual reporting.

        Amended: July 2015
        April 2008

    • PD-3.3 Open Banking Disclosures

      • PD-3.3.1

        Conventional retail bank licensees must disclose open banking API performance statistics in accordance with Appendix PD-6 on their websites within one month of each quarter end.

        Added: September 2024

  • PD-4 PD-4 Other Public Disclosure Requirements

    • PD-4.1 PD-4.1 [This Section was deleted in October 2012 and requirements are now included in Section BC-4.3]

      • PD-4.1.1

        [This Paragraph was deleted in October 2012]

        Deleted: October 2012

      • [Deleted]

        • PD-4.1.2

          [This Paragraph was deleted in October 2012]

          Deleted: October 2012

        • PD-4.1.3

          [This Paragraph was deleted in October 2012]

          Deleted: October 2012

        • PD-4.1.4

          [This Paragraph was deleted in October 2012]

          Deleted: October 2012

        • PD-4.1.5

          [This Paragraph was deleted in October 2012]

          Deleted: October 2012

      • [Deleted]

        • PD-4.1.6

          [This Paragraph was deleted in October 2012]

          Deleted: October 2012

        • PD-4.1.7

          [This Paragraph was deleted in October 2012]

          Deleted: October 2012

    • PD-4.2 PD-4.2 Disclosure to Commercial Customers of Base Rate of Interest on Overdrafts and Short-Term Loans

      • PD-4.2.1

        The content of this Section is applicable to all retail banks licensed by the CBB.

        Amended October 2010
        April 2008

      • PD-4.2.2

        The CBB requires all retail banks to display, by a conspicuous notice, their base rate of interest on BD overdrafts and short-term revolving facilities (see also Paragraph BC-4.3.14).

        Amended: July 2015
        Amended October 2010
        April 2008

      • PD-4.2.3

        Retail banks are left free to decide their own base rate and to make changes to it as they consider appropriate.

        April 2008

      • PD-4.2.4

        Retail banks must display a list of current charges including any standard charges and commissions that will be applied by the bank to individual services and transactions. See Section BC-4.3 for further details.

        Amended: July 2015
        April 2008

    • PD-4.3 PD-4.3 Disclosure Relating to Deposit Protection Scheme

      • PD-4.3.1

        The content of this Section is applicable to all retail banks licensed by the CBB.

        Amended October 2010
        April 2008

      • PD-4.3.2

        The CBB requires all retail banks referring (directly or indirectly) to the protection of deposits in related marketing materials and in general notices featured within banking halls and in account documentation, including the annual report, to prominently disclose the following statement:

        •   'Deposits held with [name of conventional bank licensee] in the Kingdom are covered by the Regulation Protecting Deposits and Unrestricted Investment Accounts issued by the Central Bank of Bahrain in accordance with Resolution No (34) of 2010'.
        Amended: July 2015
        Amended October 2010
        April 2008

      • PD-4.3.3

        Retail banks must, in discussions and/or correspondence with new and prospective customers, bring the Deposit Protection Scheme and the protection afforded by it to the customer's notice.

        Amended October 2010
        April 2008

      • PD-4.3.4

        The CBB welcomes the introduction by the banks, at their discretion, of other appropriate means to promote the Deposit Protection Scheme as prominently as possible.

        Amended October 2010
        April 2008

      • PD-4.3.5

        For detailed guidance on the Deposit Protection Scheme's documentation requirements, see Chapter CP-2.

        April 2008

    • PD-4.4 PD-4.4 Press Releases Concerning Financial Statements

      • PD-4.4.1

        The content of this Section is applicable to all Bahraini conventional bank licensees.

        Amended: July 2015
        Added: July 2012

      • PD-4.4.2

        Conventional bank licensees must obtain the CBB's prior approval before issuing any press releases regarding interim or annual financial statements. Conventional bank licensees must not publish or cause to be published, any media statements until such times as CBB approval has been granted.

        Added: July 2012

      • PD-4.4.3

        In implementing Rule PD-4.4.2, the CBB will provide the conventional bank licensee with a written decision within two business days of the receipt of request for approval.

        Added: July 2012

  • PD-5 PD-5 Public Disclosure via the Internet

    • PD-5.1 PD-5.1 Publication and Disclosure of Financial Results

      • Existing Requirements

        • PD-5.1.1

          [This Paragraph was deleted in April 2012].

          Deleted: April 2012

      • Criteria for Application for Disclosure via the Internet

        • PD-5.1.2

          Non-listed Bahraini conventional wholesale banks may apply to the CBB to disclose their quarterly financial statements via the internet. If a bank wishes to cease disclosure of quarterly financial statements via the local press, it must satisfy the following criteria:

          (a) The bank has no shareholders resident in Bahrain;
          (b) The bank has no customers resident in Bahrain. Customers include borrowers, depositors, investment account holders or persons from whom the bank earns fees or commissions. 'Customers' in this context would not include other banks, but would include Bahraini corporations, the Government of Bahrain and its agencies, and private individuals (whether high net worth or not); and
          (c) The bank does not market itself in any way to residents of Bahrain. In particular, the bank should not market funds or other financial products to residents, even if the bank has no on balance sheet assets or liabilities arising from Bahraini residents.
          Amended: July 2015
          Amended October 2010
          April 2008

        • PD-5.1.3

          [This Paragraph was deleted in April 2016.]

          Deleted: April 2016
          Amended October 2010
          April 2008

  • PD-6 PD-6 Corporate Governance Disclosure to Shareholders

    • PD-6.1 PD-6.1 General Requirements

      • PD-6.1.1

        In addition to the corporate governance disclosure required under Paragraph PD-1.3.8, banks must also disclose to their shareholders the following information:

        (a) Names of shareholders owning 5% or more and, if they act in concert, a description of the voting, shareholders' or other agreements among them relating to acting in concert, and of any other direct and indirect relationships among them or with the bank licensee or other shareholders;
        (b) Information on the directorships held by the directors on other boards;
        (c) [This Subparagraph was deleted in January 2012];
        (d) [This Subparagraph was deleted in January 2012];
        (e) [This Subparagraph was deleted in January 2012];
        (f) Audit fees charged by the external auditor;
        (g) Non-audit services provided by the external auditor and fees;
        (h) Reasons for any switching of auditors and reappointing of auditors; and
        (i) Conflict of Interest — any issues arising must be reported, in addition describe any steps the board takes to ensure directors exercise independent judgment in considering transactions and agreements in respect of which a director or executive officer has a material interest.
        Amended: January 2012
        October 2010

      • PD-6.1.2

        Conventional bank licensees must disclose in the annual report any abstention from voting motivated by a conflict of interest and must disclose to its shareholders any authorisation of a conflict of interest contract or transaction in accordance with the Company Law.

        Added: April 2023

      • PD-6.1.3

        Conventional bank licensees must publish a summary of their internal corporate governance policies on their website.

        Added: April 2023

  • Enforcement & Redress

    • CP CP Compensation

      • CP-A CP-A Introduction

        • CP-A.1 CP-A.1 Purpose

          • Executive Summary

            • CP-A.1.1

              The purpose of this Module is to set out a summary of rules and regulations establishing a Deposits and Unrestricted Investment Accounts Protection Scheme (the 'Scheme') for compensating Eligible Depositors (as defined under Section CP-2.1) when the banks (referred to under Section CP-2.1) are unable, or are likely to be unable, to satisfy claims against them.

              October 2012

            • CP-A.1.2

              The body established to operate and administer the compensation scheme is the Deposits and Unrestricted Investment Accounts Protection Board (the 'Board'). This Module describes the rules that would allow the Board to:

              (a) Administer and implement the scheme; and
              (b) Establish rules of operation.
              October 2012

            • CP-A.1.3

              This Module also describes:

              (a) Who is eligible for receiving compensation;
              (b) How the scheme will be funded;
              (c) Who the contributing banks are; and
              (d) What are contributing banks' responsibilities regarding the implementation of the scheme.
              October 2012

          • Legal Basis

            • CP-A.1.4

              The legal basis for this Module is the Regulation issued pursuant to CBB Resolution No.(34) for the year 2010 with respect to promulgating a regulation protecting deposits and unrestricted investment accounts, which in turn was issued pursuant to Article 188 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Regulation is applicable to all retail banks, conventional and Islamic.

              October 2012

            • CP-A.1.5

              For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

              October 2012

        • CP-A.2 CP-A.2 Key Requirements

          • CP-A.2.1

            The Board is, subject to and in accordance with the terms and conditions of the Regulation, responsible for the activities set out under Paragraph CP-1.1.4.

            October 2012

          • CP-A.2.2

            The Board will convene and be ready to carry out its duties if either of the events set out in Section CP-1.2 arise.

            October 2012

          • CP-A.2.3

            The Scheme will apply to Eligible Accounts (as defined in Paragraph CP-2.1.2) held with the Bahrain offices of retail banks which are licensed by the CBB.

            October 2012

          • CP-A.2.4

            Upon the convening of the Board in accordance with Section CP-1.2, the Board calculates the total amount of compensation to be paid under the Scheme in the case of the relevant bank, as well as the amount of compensation payable under the Scheme to each Eligible Depositor of such relevant bank.

            October 2012

          • CP-A.2.5

            Upon receipt by the Board of confirmation from the (Lead) Mandated bank that the actions referred to in Section CP-2.4 have been completed, each Eligible Depositor is sent a certificate in duplicate (included under Part B, Supplementary Information as Appendix CP-1A) by the Board informing such Eligible Depositor of the amount of compensation payable to him/her under the Scheme in respect of his/her Eligible Account(s) with the relevant bank.

            October 2012

          • CP-A.2.6

            The CBB requires all conventional retail bank licensees referring (directly or indirectly) to the protection of Deposits in related marketing materials and in general notices featured within banking halls and in account documentation, including Annual Reports, to prominently disclose the statement set out under Paragraph CP-2.5.1.

            October 2012

        • CP-A.3 CP-A.3 Module History

          • CP-A.3.1

            This Module was first issued in July 2004 by the BMA and updated in October 2007 to reflect the transfers of responsibilities to the CBB. Following the issuance of the Resolution No.(34) in respect of protecting Deposits and Unrestricted Investment Accounts in December 2010, the Module was amended in October 2012 to be in line with the new Regulation and to include previous requirements that were in place in the originally issued Module CP. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

            October 2012

          • CP-A.3.2

            The most recent changes made to this Module are detailed in the table below:

            Summary of Changes

            Module Ref. Change Date Description of Changes
            CP-A to CP-2 10/2012 Amendments due to the introduction of Resolution No.(34) of 2010.
            CP-2.3 04/2014 Added requirement for eligible accounts report for the deposits protection scheme.
            CP-2.1.4 10/2014 Corrected sentence structure.
                 
                 

          • Evolution of the Module

            • CP-A.3.3

              Prior to the development of the Rulebook, the CBB had issued various circulars representing regulations covering the operations and establishment of the Deposit Protection Scheme and the Deposit Protection Board. These circulars have now been consolidated into the Compensation Module. These circulars and their evolution into this Module are listed below:

              Circular Ref. Date of Issue Module Ref. Circular Subject
              OG/423/93 28 Nov 1993 CP-1–CP-2 Deposit Protection Scheme (the "Scheme")
              OG/425/94 21 Dec 1994 CP-2.4 Deposit Protection
                     
              October 2012

          • Effective Date

            • CP-A.3.4

              The contents of this Module were effective from their date of issuance.

              October 2012

            • CP-A.3.5

              Capitalised terms used in this Module shall, save as the context requires otherwise, have the meanings ascribed to them in the Regulation.

              October 2012

            • CP-A.3.6

              In the event of an inconsistency between the rules of this Module and the rules of the Regulation, the rules of the Regulation shall prevail.

              October 2012

      • CP-B CP-B Scope of Application

        • CP-B.1 CP-B.1 Scope of Application

          • CP-B.1.1

            The contents of this Module — unless otherwise stated — apply to all conventional retail bank licensees and their retail operations in Bahrain.

            October 2012

      • CP-1 CP-1 Deposits and Unrestricted Investment Accounts Protection Board

        • CP-1.1 CP-1.1 Constitution of the Board

          • CP-1.1.1

            The contents of this Chapter set out the details of the constitution, authority and administration of the Board.

            October 2012

          • CP-1.1.2

            The Board is, subject to and in accordance with the terms and conditions of the Regulation, responsible for the protection of Eligible Accounts, including determining:

            (a) What contributions conventional retail bank licensees should make to the Conventional Fund;
            (b) The amount of compensation to be paid out to Eligible Depositors; and
            (d) Any additional rules under which the Board will operate.
            October 2012

          • CP-1.1.3

            The Board consists of eleven persons appointed by the Governor of the CBB, whose period of membership must be for a three-year renewable period:

            (a) Two representatives of the CBB, one of whom should be Chairman and the other the Deputy Chairman of the Board;
            (b) Four representatives of retail banks in Bahrain, who should be appointed by the Governor;
            (c) Two representatives of Government, the first representing the Ministry of Finance, the second representing the Ministry of Industry and Commerce, both should be nominated by their respective Ministers; and
            (d) Three independent persons, not from the above categories, appointed by the Governor.
            October 2012

          • CP-1.1.4

            The Board administers the two Funds established in accordance with Article 13 of the Regulation, and is responsible for all decision-making and accounting treatment in respect of the two Funds. No liability attaches to the CBB as a result of the Board managing the two Funds.

            October 2012

        • CP-1.2 CP-1.2 Convening of the Board

          • CP-1.2.1

            The Board must be convened and must commence its responsibilities by following the compensation process for the Eligible Depositors upon:

            (a) Any conventional retail bank licensee being put under administration by the CBB; or
            (b) Any conventional retail bank licensee being put into liquidation.

            In each case, such bank hereinafter referred to as a "defaulting bank".

            October 2012

        • CP-1.3 CP-1.3 Voting by the Board

          • CP-1.3.1

            The Board meets as often as is necessary to carry out its duties under the Regulation referred to in this Module and takes decisions by a simple majority vote of those present at any meeting thereof provided that, in the event of a tie, the Chairman will have the casting vote.

            October 2012

          • CP-1.3.2

            Decisions of the Board are binding and are not subject to appeal.

            October 2012

      • CP-2 CP-2 Deposits and Unrestricted Investment Accounts Protection Scheme

        • CP-2.1 CP-2.1 Application of the Scheme

          • CP-2.1.1

            The Scheme will apply to Eligible Accounts (as defined in Paragraph CP-2.1.2) held with the Bahrain offices of conventional retail bank licensees which are licensed by the CBB. For the avoidance of doubt, "Eligible Accounts" do not include any Unrestricted Investment Accounts that may be held with conventional retail banks.

            October 2012

          • CP-2.1.2

            For conventional retail bank licensees, Eligible Accounts means any Deposit Account (as defined in Paragraph CP-2.1.3), and any other deposits or accounts similar in nature and which have similar characteristics which are approved by the CBB, regardless of currency, with the exception of bearer certificates of deposit.

            October 2012

          • CP-2.1.3

            For the purpose of Paragraph CP-2.1.2, Deposit Account means the account that is defined being a deposit in accordance with the CBB Resolution No.(23) of 2009 in respect of Definition of Deposit.

            October 2012

          • CP-2.1.4

            Without prejudice to Paragraph CP-2.1.1, the Board may, at its discretion, exclude (in whole or in part) from compensation payments to any Eligible Depositor of the defaulting bank in Bahrain who is entitled to claim in a similar scheme established in another jurisdiction, where such scheme covers the deposit liabilities of the Bahrain offices of such relevant bank.

            Amended: October 2014
            October 2012

          • CP-2.1.5

            For conventional retail bank licensees, Eligible Depositor means any natural person, (resident or non-resident), holding an Eligible Account(s) with a conventional retail bank in the Kingdom. It does not include Deposits and Unrestricted Investments Accounts held with a conventional retail bank's foreign branches operating outside the Kingdom.

            October 2012

          • CP-2.1.6

            Without prejudice to Paragraph CP-2.1.1, the Board may, at its discretion, exclude (in whole or in part) from the requirement to contribute to the conventional Fund, any conventional retail bank licensee in Bahrain whose Eligible Accounts (in whole or in part) covered by a similar scheme established in another jurisdiction provided that evidence of such coverage is provided to the Board to its satisfaction.

            October 2012

          • CP-2.1.7

            Without prejudice to the provisions of Paragraph CP-2.1.2, the Scheme will not apply to Deposits which have, in the opinion of the Board, been illegally gained and/or relate to illicit or illegal matters. The Scheme will also not apply to:

            (a) Accounts of shareholders with 10% or more shareholding (ordinary or preference), board members and senior managers of the defaulting bank; and/ or
            (b) Accounts of persons whose identity cannot be ascertained.
            October 2012

        • CP-2.2 CP-2.2 Coverage of the Scheme

          • CP-2.2.1

            Each Eligible Depositor shall be entitled under the Regulation to claim an amount equivalent to the amount deposited by him in an Eligible Account save that no Eligible Depositor shall be entitled to receive more than BD20,000 (Twenty Thousand Bahraini Dinars) from the total amount of his Eligible Account held with the defaulting bank regardless of the number of Deposits and their currency. Other currencies shall be converted into Bahraini Dinars at the exchange rate on the date on which the CBB determines that the conventional retail bank licensee is a defaulting bank.

            October 2012

          • CP-2.2.2

            In calculating the amount payable to an Eligible Depositor, the Board shall have the right to set-off the debts of the Eligible Depositor with the defaulting bank and deduct any expenses incurred by the Board in paying out such amounts.

            October 2012

          • CP-2.2.3

            A joint Eligible Account should be treated as a single Eligible Account.

            October 2012

          • CP-2.2.4

            If the Board is satisfied that a person is a trustee of an Eligible Account with a defaulting bank, and that the beneficial owner of any such Account has no other Eligible Account with the defaulting bank, the Board shall deem such beneficial owner as a separate Eligible Depositor. However, in the event that a beneficial owner of any of such Eligible Account held in the name of the trustee is the same owner of other Eligible Account at the defaulting bank, such accounts, including the account(s) registered in the name of trustee, shall be treated as a single Eligible Account.

            October 2012

          • CP-2.2.5

            No transfer of any part of an Eligible Account shall be considered valid if, in the opinion of the Board, the purpose of such transfer is to enable any person, including an Eligible Depositor, to gain an advantage that is not permitted or intended by this Module.

            October 2012

        • CP-2.3 CP-2.3 The Deposits and Unrestricted Investment Accounts Protection Funds

          • CP-2.3.1

            For the purpose of the Scheme, the Board administers two separate funds referred to as the "Conventional Banks Fund" and the "Islamic Banks Fund" as defined under Article 1 of the Regulation. Each Fund shall constitute a separate legal entity and shall have an independent balance sheet from the CBB.

            October 2012

          • CP-2.3.2

            Conventional retail bank licensees collectively contribute an initial aggregate amount of BD60 million (Sixty Million Bahraini Dinars) over a period of fifteen years and title to such monies once contributed shall legally belong to the Conventional Banks Fund.

            October 2012

          • CP-2.3.3

            The Board periodically assesses the size of the Conventional Fund in relation to liabilities to be covered and, where appropriate, makes recommendations to the CBB for increasing or decreasing the amount of the Conventional Fund. No such adjustments to the aggregate amount BD80 million (Eighty Million Bahraini Dinars) for both Funds shall be made without the express approval of the CBB.

            October 2012

          • CP-2.3.4

            The contribution of each conventional retail bank licensee in the total amount of the Fund is determined on an annual pro-rata basis of the total Eligible accounts of all conventional retail bank licensees in Bahrain.

            Amended: April 2014
            October 2012

          • CP-2.3.4A

            The CBB provides the Board with the necessary data to allow it to determine the amounts of contributions each conventional retail bank licensee must make. The Board may allow the conventional retail bank licensees to make its contribution in the form of quarterly installments which shall be charged against the profit & loss account of the banks.

            Added: April 2014

          • CP-2.3.4B

            Each conventional retail bank licensee must submit to the CBB within 2 months of the financial year end a report on all eligible accounts in accordance with Section BR-1.4.

            Added: April 2014

          • CP-2.3.5

            No contribution (or part thereof) is refundable to a conventional retail bank licensee in any circumstance.

            October 2012

          • CP-2.3.6

            Conventional retail bank licensees pay the contributions referred to in Paragraph CP-2.3.4 within the periods specified by the Board. Each conventional retail bank licensee is notified of the amount of its calculated contribution as well as the date of payment thereof.

            October 2012

          • CP-2.3.7

            In the event of failure of any conventional retail bank licensee in the payment of the full contribution during the periods specified by the Board, the CBB may take enforcement action against that bank, including the imposition of administrative fines in accordance with Article 129 of the CBB Law and, in cases of repeated violation, withdrawal of the licence granted by the CBB.

            October 2012

          • CP-2.3.8

            In the event that a new conventional retail bank licensee joins the Conventional Fund during any year, the Board determines the contribution of that bank to the Fund on the basis of the minimum payment made by other participating banks during that year for the remaining period of the year after dividing the full contribution amount over the number of months of a year. At the beginning of the following year, there will be an assessment of that bank's contribution based on the size of its Eligible Accounts base.

            October 2012

          • CP-2.3.9

            The Board determines the investment policy of the Funds and the CBB is responsible for implementing such policy without receiving any commission or charges in return.

            October 2012

        • CP-2.4 CP-2.4 Procedures for Making Claims under the Scheme

          • CP-2.4.1

            Upon the Board following the compensation process in accordance with Article 4 of the Regulation, the Board calculates the total amount of compensation payable thereunder to each Eligible Depositor of the defaulting bank. The total amount of compensation payable shall be remitted to the Bank(s) designated by the Board to act as a Lead Mandated Bank and/ or Mandated Bank(s) for processing compensation payments to Eligible Depositors of the defaulting bank.

            October 2012

          • CP-2.4.2

            For the purposes of this Module, Lead Mandated Bank means the bank appointed by the Deposits and Unrestricted Investment Accounts Protection Board to administer the procedures to make compensation payments.

            October 2012

          • CP-2.4.3

            For the purposes of this Module, Mandated Bank(s) means such other banks mandated by the Lead Mandated Bank to assist and/ or participate in the processing of compensation payments.

            October 2012

          • CP-2.4.4

            In the event of the amounts of the Conventional Fund being insufficient to cover the total compensation payable in accordance with the Regulation, the Board may cover the shortfall by borrowing (upon such terms and conditions as it considers appropriate) and such borrowings shall be reimbursed by future contributions from the conventional retail bank licensees as the case may be.

            October 2012

          • CP-2.4.5

            Following the completion of the calculation referred to in Paragraph CP-2.4.1, the Lead Mandated Bank and/ or Mandated Bank(s) pays, into a special account to be held by it/them, the total amount allocated to compensate the Eligible Depositors with the defaulting bank.

            October 2012

          • CP-2.4.6

            Upon receipt by the Board of confirmation from the Lead Mandated Bank that the requirements of Paragraphs CP-2.4.1 to CP-2.4.3 have been satisfied, the Board sends to each Eligible Depositor a certificate in the form set out in Appendix CP-1A, informing each Eligible Depositor of the amount of compensation due to him/her hereunder in respect of his/her Eligible Account(s) with the defaulting bank.

            October 2012

          • CP-2.4.7

            Appendix CP-1A contains instructions as to the method by which, and time within which, the compensatory amount referred to therein may be collected by the Eligible Depositor from the Lead Mandated Bank or Mandated Bank(s). No amounts of compensation shall be payable hereunder after the expiry of the period referred to in such certificate, which period shall not be more than 12 months.

            October 2012

          • CP-2.4.8

            Appendix CP-1B, "Customer Acknowledgment and Waiver" form is signed by an Eligible Depositor, and constitutes a waiver of any claims he (or his successors or assigns) may wish to make against the Lead Mandated Bank and/ or the Mandated Bank(s) and/or the Board in the future in respect of the amount being paid to him, and, a waiver to the Board of all his rights and interests related to that proportion of his claim against the defaulting bank.

            October 2012

          • CP-2.4.9

            Upon receipt of the signed Customer Acknowledgment and Waiver from an Eligible Depositor, the Lead Mandated Bank and/ or the Mandated Bank(s) shall pay the amount referred to in the certificate to such Eligible Depositor.

            October 2012

          • CP-2.4.10

            Once an Eligible Depositor has waived his right to claim against the defaulting bank to the Board (pursuant to the Customer Acknowledgment and Waiver referred to above), no bank may deny the rights of the Board to recover the debt so waived by way of action against the bank in liquidation.

            October 2012

          • CP-2.4.11

            The Lead Mandated Bank must reimburse the conventional Fund for any excess monies it has received during the mandate period.

            October 2012

          • CP-2.4.12

            The liquidator of the defaulting bank must, in making any payments to Eligible Depositors thereof in liquidation of such bank, be responsible for ensuring that Eligible Depositors shall not receive any payments in liquidation for any amount that constitutes a duplicate reimbursement that they have been compensated in accordance with the terms of the Regulation.

            October 2012

        • CP-2.5 CP-2.5 Disclosure of Scheme's Applicability

          • CP-2.5.1

            All advertisements or other promotional publications issued by conventional retail bank licensees in the Kingdom which contain an invitation to make deposits with such banks and refer, directly or indirectly, to the Regulation Protecting Deposits and Unrestricted Investment Accounts hereunder, shall contain the following statement:

            "Deposits held with [name of conventional retail bank licensee] in the Kingdom are covered by the Regulation Protecting Deposits and Unrestricted Investment Accounts issued by the Central Bank of Bahrain in accordance with Resolution No. (34) of 2010."

            October 2012

        • CP-2.6 CP-2.6 Other Provisions

          • CP-2.6.1

            Save as otherwise set out above, nothing in this Module shall affect the rights of Eligible Depositors of a defaulting bank to claim the remaining proportion of their total claims as creditors in the liquidation of the defaulting bank, regardless of the basis on which such claim is made.

            October 2012

          • CP-2.6.2

            The provisions of Article 119 of the CBB Law relating to confidential information shall apply to all matters discussed, decisions reached and records kept by the Board in accordance with the terms of this Regulation.

            October 2012

          • CP-2.6.3

            The Board is entitled to make subsidiary rules for the proper and regular enforcement of the Regulation, and must be empowered to hear any dispute in relation to the application of the Regulation, without prejudicing the right of the person concerned to take judicial proceedings.

            October 2012

          • CP-2.6.4

            The Regulation does not apply retrospectively to banks operating in the Kingdom which are already under administration or are being liquidated prior to the effective date of the Regulation.

            October 2012

    • EN EN Enforcement

      • EN-A EN-A Introduction

        • EN-A.1 EN-A.1 Application

          • EN-A.1.1

            This Module sets out the Central Bank of Bahrain's ('CBB') approach to enforcement, and the mechanisms used by the CBB to address failures by licensees to comply with its regulatory requirements. The purpose of such measures is to encourage a high standard of compliance by the CBB licensees, thus reducing risk to their customers and the rest of the financial system.

            Amended: January 2011
            Amended: October 2010
            Added: October 2007

          • EN-A.1.2

            This Module provides support for all other Modules in the Rulebook.

            Added: October 2007

          • Legal Basis

            • EN-A.1.3

              This Module contains the CBB's Directive (as amended from time to time) relating to enforcement and penalties and administrative provisions under Articles 125 to 132 of the Central Bank of Bahrain and Financial Institutions Law 2006 and its amendments ('CBB Law'). It is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable as follows. Chapters EN-1 to EN-4 and EN-6 to EN-9 inclusive apply to all conventional bank licensee. Chapters EN-2 to EN-5 and EN-10 apply to the Directors and employees of all conventional bank licensees.

              Amended: April 2016
              Amended: January 2011
              Amended: October 2010
              Added: October 2007

            • EN-A.1.4

              For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

              Added: October 2007

        • EN-A.2 EN-A.2 Module history

          • EN-A.2.1

            This Module was first issued in July 2004 as part of the conventional principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.

            Added: October 2007

          • EN-A.2.2

            A list of the most recent changes made to this Module are detailed in the table below:

            Module Ref. Change Date Description of Changes
            EN-7 07/2006 Addition of procedures for "Appointed Experts" (relocated from AU-4.)
            EN A 10/2007 New references to the CBB Law and new rule categorising this Module as a Directive
            EN-1, 3, 4, 6-10 10/2007 Administrative changes to sections as a result of the new CBB Law.
            EN-7.1 and 7.2 01/2009 Minor amendments due to new Role of Reporting Accountants chapter in Module AU
            EN 10/2010 Various minor amendments to ensure consistency in CBB Rulebook.
            EN-6.2A 10/2010 Added new Section on financial penalties for date sensitive requirements
            EN-A.1.3 01/2011 Clarified legal basis.
            EN-6.2A.7 04/2011 Clarified guidance on payment of annual fees.
            EN-6.2A.7(a) 07/2011 Clarified due date when a weekend is involved.
            EN-7 10/2011 Chapter has been streamlined and repetitive information has been eliminated and reference is now made to Section BR-6.5. The term 'appointed experts' has been substituted for the previously used 'investigators'.
            EN-10.3.1A 01/2013 Paragraph added to refer to Article 161 of the CBB Law.
            EN-6.2A.2(c) 10/2013 Corrected cross reference.
            EN-A.1.3 04/2016 Reference added to amendments to the CBB Law and to the broader scope of financial penalties also applicable to persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law.
            EN-6 04/2016 Amended to be in line with amendments to Article 129 of the CBB Law.
            EN-6.3.5 04/2016 Added Rule regarding anticipated late submission of date sensitive requirements.
            EN-6.2A.3 04/2017 Adjustment to Financial Penalties for Date Sensitive Requirements.
            EN-6.2A.1 and 6.2A.2 07/2017 Added the requirement of HC-7.2 as part of date sensitive requirements.
            EN-4.1 07/2018 Amended Section title.
            EN-5.2.2 07/2018 Amended Paragraph.
            EN-5.2.4 07/2018 Added new Paragraph on re-assessment tests.
            EN-6.1.1 07/2018 Amended Paragraph
            EN-6.1.2 07/2018 Amended Paragraph
            EN-6.1.2A 07/2018 Added a new Paragraph on maximum financial penalty.
            EN-6.1.5 07/2018 Added reference to new Appendix A.
            EN-6.2.1 07/2018 Deleted Paragraph.
            EN-6.2.2 07/2018 Deleted Paragraph.
            EN-6.2.3 07/2018 Deleted Paragraph.
            EN-6.2A.5 07/2018 Deleted Paragraph.
            EN-6.3.4 07/2018 Amended Paragraph
            Appendix A 07/2018 Added new Appendix.
            EN-3.2.3 04/2019 Moved guideline to Section EN-1.1.
            EN-8 04/2019 Deleted Chapter.
            EN-6.1.3 10/2019 Amended Paragraph to refer to Bahraini banks.
            EN-6.1.3A 10/2019 Added a new Paragraph on disclosure of financial penalties of branches of foreign banks.
            EN-6.2A.4 04/2020 Amended Paragraph.
            EN-6.2B 04/2021 Added a new Section on ‘Financial Penalties for Non-Compliance with Blocking/Unblocking Requirements.
            EN-6.2B 10/2022 Section moved to EN-6.5.
            EN-6.5 10/2022 Added a new Section on Other Financial Penalties.

          • Evolution of the Module

            • EN-A.2.3

              The Module incorporates the requirements set out under Circular No. ODG/249/2004 dated 22 July 2004 relating to the CBB's approach to enforcement.

              Amended: October 2010
              Added: October 2007

          • Effective Date

            • EN-A.2.4

              The contents in this Module are effective from 1st September 2004 or from the date given at the footer of the page where changes to Enforcement have occurred as a result of the issuance of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006). However, the contents of other Modules referred to herein are effective from the dates specified in those respective Modules.

              Added: October 2007

      • EN-1 EN-1 General Procedures

        • EN-1.1 EN-1.1 The CBB's Approach to Enforcement

          • EN-1.1.1

            The CBB favours an open, pragmatic and collaborative relationship with its licensees, within the boundaries set by the CBB Law and Rulebook. Whilst the CBB wishes to avoid a legalistic and confrontational style of supervision, it believes that effective supervision requires effective enforcement of its requirements. Should licensees fail to cooperate, then the CBB will use the means described in this Module to achieve compliance.

            Amended: October 2010
            Added: October 2007

          • EN-1.1.2

            In the CBB's view, it is generally neither practical nor effective to prescribe in detail the exact regulatory response for each and every potential contravention. There are a large number of potential contraventions. Moreover, individual circumstances are unlikely to be identical in all cases, and may warrant different responses.

            Amended: October 2010
            Added: October 2007

          • EN-1.1.3

            In deciding any given regulatory response, the CBB will nonetheless consistently assess the individual circumstance of each contravention against the principles described in this Module. The CBB's overall approach is to take into account:

            (a) The seriousness of the contravention concerned (including the risks posed to the licensee's customers and other market participants);
            (b) The compliance track record of the licensee concerned (including the extent to which the contravention reflects systemic weaknesses or reckless behaviour); and
            (c) Which measures are most likely to achieve the desired result of remedying the contravention.
            Amended: October 2010
            Added: October 2007

          • EN-1.1.4

            Such an approach reduces the risk of inappropriate enforcement actions, by allowing regulatory measures to be tailored to individual circumstances. By taking into account a licensee's compliance record and attitude, it also creates positive incentives and encourages an open and collaborative approach. By assessing individual cases against the same broad principles, the CBB also aims to achieve an overall consistency in its regulatory actions.

            Amended: October 2010
            Added: October 2007

          • EN-1.1.5

            Underlying the CBB's approach outlined in Paragraph EN-1.1.3 is the fundamental principle of proportionality. The enforcement measures contained in this Module are of varying severity, and will be used accordingly in keeping with the CBB's assessment of the contravention. Thus, the CBB will reserve its most serious enforcement measures – such as cancellation of license or withdrawal of "fit and proper" status – for the most serious contraventions.

            Amended: October 2010
            Added: October 2007

          • EN-1.1.6

            In keeping with the proportionality principle, and to the extent consistent with the CBB's enforcement approach in Paragraph EN-1.1.3, the CBB will usually opt for the least severe of appropriate enforcement measures. In most cases, the CBB expects to use a Formal Notice before resorting to more severe measures; the need for further measures will then usually be dependent on the response of the licensee or individual concerned.

            Amended: October 2010
            Added: October 2007

          • EN-1.1.7

            Where a significant element of judgment is required to assess compliance with a requirement, then the CBB will usually discuss the matter with the licensee or individual concerned, before using one of this Module's enforcement mechanisms. This is likely to be the case, for example, with respect to requirements for adequate systems and controls. Conversely, where there are clear-cut contraventions of the CBB requirements, then the CBB will usually move immediately to one or more of the enforcement mechanisms outlined in this Module. This is more likely to occur in cases where quantitative requirements - such as those relating to capital and/or large exposures – are concerned. In most such cases, though, the CBB also expects to continue an active dialogue with the licensee or individual concerned, aimed at remedying the contravention.

            Amended: October 2010
            Added: October 2007

          • EN-1.1.8

            Except in the limited circumstances outlined below, the CBB will usually only apply an enforcement measure after the licensee or person concerned has been given a suitable opportunity to make representations. In the case of measures described in Chapters EN-7 to EN-10, certain procedures are set out in the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).

            Amended: October 2010
            Added: October 2007

          • EN-1.1.9

            In extreme circumstances, where the CBB believes that immediate action is required to prevent real damage to Bahrain's financial markets, its users or to customers of the licensee concerned, it may cancel or amend a license, as specified in Article 48(g) of the CBB Law, or place a licensee under administration according to Article 130(2) of the CBB Law, or suspend a license according to Article 131 of the pre-mentioned Law. These measures may be used in conjunction with directions.

            Added: April 2019

        • EN-1.2 EN-1.2 Prohibition on Insurance

          • EN-1.2.1

            To help the CBB achieve the purpose of this Module, licensees may not enter into or make a claim under a contract of insurance that is intended to, or has the effect of, indemnifying them from the fines provided for in this Module.

            Amended: October 2010
            Added: October 2007

        • EN-1.3 EN-1.3 Publicity

          • EN-1.3.1

            The CBB will not as a matter of general policy publicise individual cases when it uses the measures set out in Chapters EN-2 to EN-7. However, in such cases the CBB may inform the licensee's external auditor and – in the case of licensees with overseas operations – relevant overseas regulators.

            Amended: October 2010
            Added: October 2007

          • EN-1.3.2

            In exceptional circumstances, as allowed by Article 132 of the CBB Law, the CBB may decide to publicise individual cases when the measures set out in Chapters EN-2 to EN-7 are used, where there is a strong case that doing so would help achieve the CBB's supervisory objectives. In such instances, the CBB will usually allow the licensee or individual concerned the opportunity to make representations to the CBB before a public statement is issued.

            Amended: October 2010
            Added: October 2007

          • EN-1.3.3

            With respect to the financial penalties provided for in Chapter EN-6, licensees are required to disclose in their annual report the amount of any such penalties paid to the CBB, together with a factual description of the reason(s) given by the CBB for the penalty.

            Amended: October 2010
            Added: October 2007

          • EN-1.3.4

            Without prejudice to the above policy, the CBB may from time to time publish aggregate information on its use of measures set out in Chapters EN-2 to EN-7, without identifying the licensees or individuals concerned, unless their identities have previously been disclosed as provided for in Paragraphs EN-1.3.2 or EN-1.3.3.

            Amended: October 2010
            Added: October 2007

          • EN-1.3.5

            By their nature, the penalties in Chapters EN-8 to EN-10 inclusive are public acts, once applied. The CBB will in these instances generally issue a public statement explaining the circumstances of the case.

            Amended: October 2010
            Added: October 2007

      • EN-2 EN-2 Formal Warnings

        • EN-2.1 EN-2.1 CBB Policy

          • EN-2.1.1

            Formal warnings are clearly identified as such and represent the CBB's first level formal enforcement measure. They are intended to clearly set out the CBB's concerns to a licensee or an individual regarding an issue, and should be viewed by the recipient with the appropriate degree of seriousness.

            Amended: October 2010
            Added: October 2007

          • EN-2.1.2

            As indicated in Section EN-1.1, the CBB will usually discuss concerns prior to resorting to a formal enforcement measure, especially where a significant element of judgment is required in assessing compliance with a regulatory requirement.

            Amended: October 2010
            Added: October 2007

          • EN-2.1.3

            Where such discussions fail to resolve matters to the CBB's satisfaction, then it may issue a formal warning. Failure to respond adequately to a formal warning will lead the CBB to consider more severe enforcement measures. However, more severe measures may not require the prior issuance of a formal warning – depending on its assessment of the circumstances, the CBB may decide to have immediate recourse to other measures. Similarly, there may be circumstances where the CBB issues a formal warning without prior discussion with the licensee or person concerned: this would usually be the case where a clear-cut compliance failing has occurred.

            Amended: October 2010
            Added: October 2007

          • EN-2.1.4

            When considering whether to issue a formal warning, the criteria taken into consideration by the CBB therefore include the following:

            (a) The seriousness of the actual or potential contravention, in relation to the requirement(s) concerned and the risks posed to the licensee's customers, market participants and other stakeholders;
            (b) In the case of an autual contravention, its duration and/or frequency of the contravention; the extent to which it reflects more widespread weaknesses in controls and/or management; and the extent to which it was attributable to deliberate or reckless behaviour; and
            (c) The extent to which the CBB's supervisory objectives would be better served by issuance of a formal warning as opposed to another type of regulatory action.
            Amended: October 2010
            Added: October 2007

        • EN-2.2 EN-2.2 Procedure for Issuing Formal Warnings

          • EN-2.2.1

            Proposals to issue formal warnings are carefully considered against the criteria listed in Section EN-2.1. They require the approval of a Director or more senior CBB official, and include the statement "This is a formal warning as defined in Chapter EN-2 of the CBB Rulebook".

            Amended: October 2010
            Added: October 2007

          • EN-2.2.2

            Depending on the issue in question, recipients of a formal warning may be required to respond to the contents of the warning. In any case, recipients have the right to object to or challenge a formal warning as specified under Articles 125(c) and 126 of the CBB Law.

            Amended: October 2010
            Added: October 2007

      • EN-3 EN-3 Directions

        • EN-3.1 EN-3.1 CBB Policy

          • EN-3.1.1

            The CBB may issue Directions to licensees or individuals under supervisory powers granted to it by the CBB Law. These powers are broad in nature, and effectively allow the CBB to issue whatever Directions it reasonably believes are required to achieve its statutory objectives.

            Amended: October 2010
            Added: October 2007

          • EN-3.1.2

            The types of Directions that the CBB may issue in practice vary and will depend on the individual circumstances of a case. Generally, however, Directions require a licensee or individual to undertake specific actions in order to address or mitigate certain perceived risks. They may also include restrictions on a licensee's activities until those risks have been addressed – for instance, a ban on the acceptance of new customers.

            Amended: October 2010
            Added: October 2007

          • EN-3.1.3

            The CBB is conscious of the powerful nature of a Direction and, in the case of a licensee, the fact that it subordinates the role of its Board and management on a specific issue. The CBB will carefully consider the need for a Direction, and whether alternative measures may not achieve the same end. Where feasible, the CBB will try to achieve the desired outcome through persuasion, rather than recourse to a Direction.

            Amended: October 2010
            Added: October 2007

          • EN-3.1.4

            In considering whether to issue a Direction, the criteria taken into consideration by the CBB include the following:

            (a) The seriousness of the actual or potential contravention, in relation to the requirement(s) concerned and the risks posed to the licensee's customers, market participants and other stakeholders ;
            (b) In the case of an actual contravention, its duration and/or frequency of the contravention; the extent to which it reflects more widespread weaknesses in controls and/or management; and the extent to which it was attributable to deliberate or reckless behaviour; and
            (c) The extent to which the CBB's supervisory objectives would be better served by issuance of a Direction as opposed to another type of regulatory action.
            Amended: October 2010
            Added: October 2007

        • EN-3.2 EN-3.2 Procedure for Issuing Directions

          • EN-3.2.1

            Proposals to issue Directions are carefully considered against the criteria listed in Section EN-3.1. They require the approval of an Executive Director or more senior official of the CBB, and include the statement "This is a formal Direction as defined in Chapter EN-3 of the CBB Rulebook".

            Amended: October 2010
            Added: October 2007

          • EN-3.2.2

            The subject of the Direction will normally be given 30 days from the Direction's date of issuance in which to make objections to the CBB concerning the actions required. This must be done in writing, and addressed to the issuer of the original notification. Should an objection be made, the CBB will make a final determination, within 30 days of the date of the objection, as specified in Articles 125(c) and 126 of the CBB Law.

            Amended: October 2010
            Added: October 2007

          • EN-3.2.3

            [This Paragraph was moved under Section EN-1.1 in April 2019].

            Amended: April 2019
            Amended: October 2010
            Added: October 2007

      • EN-4 EN-4 Formal Requests for Information

        • EN-4.1 EN-4.1 Procedure for requests of information

          Amended: July 2018

          • EN-4.1.1

            As part of its on-going supervision, under Articles 111, 113, 114, and 123 of the CBB Law, the CBB the may specifically request information or temporary reporting from a licensee or individual. Recipients of such requests are bound to respond to such requests under the terms of their license.

            Amended: October 2010
            Added: October 2007

          • EN-4.1.2

            Henceforward, to clearly identify such requests, they will always be made in writing, under signature of a Director or more senior official of the CBB; will include the statement "This is a formal request for information as defined in Chapter EN 4 of the CBB Rulebook"; and will state the deadline by which the information is to be communicated to the CBB.

            Amended: October 2010
            Added: October 2007

          • EN-4.1.3

            Failure to respond to such formal requests within the deadline set will be viewed as a significant breach of regulatory requirements and will incur a formal warning or other enforcement measure, specified under Articles 163 and 170 of the CBB Law, as decided by the CBB depending on the circumstances of the case.

            Amended: October 2010
            Added: October 2007

          • EN-4.1.4

            The deadline set in the request will vary depending on individual circumstances, but will in all cases be reasonable. A recipient may submit a case for an extension to the deadline, providing the request is made before the original deadline has passed. The CBB will respond before the original deadline has passed; if it fails to do so, then the requested extension will apply. Whilst waiting for a reply, the recipient must assume that the original deadline will apply.

            Amended: October 2010
            Added: October 2007

          • EN-4.1.5

            The above procedures do not prevent individual CBB supervisors making oral requests for information as part of their day-to-day interaction with licensees. The CBB expects licensees to maintain their cooperative response to such requests; however, in the interests of clarity, the CBB will not view failures to respond to oral requests as a breach of regulatory requirements.

            Amended: October 2010
            Added: October 2007

      • EN-5 EN-5 Adverse "Fit and Proper" Findings

        • EN-5.1 EN-5.1 Requirements for Individuals

          • EN-5.1.1

            Article 65 of the CBB Law, allows the CBB to determine the level of qualifications, experience, and training of a bank's board members, officers or employees.

            Added: October 2007

          • EN-5.1.2

            In addition, Chapter LR-1A specifies that all persons wishing to hold or holding the position of Director, Chief Executive/General Manager or Manager in a licensee must be assessed by the CBB as "fit and proper" to hold such a position. The Chapter specifies various factors that the CBB takes into account when reaching such a decision.

            Amended: October 2010
            Added: October 2007

          • EN-5.1.3

            Any Director, manager or official responsible for the direction or management of a licensee, is to be considered removed from office should he be convicted by a court for a crime affecting his honesty; is declared bankrupt by a court; or if a court rules that his legal capacity is totally or partially impaired.

            Added: October 2007

          • EN-5.1.4

            In interpreting the term "manager", the CBB uses the definition given in Chapter LR-1A. The same definition applies when the term "manager" is used in other Modules, unless a different definition is explicitly provided for in the Module concerned.

            Amended: October 2010
            Added: October 2007

        • EN-5.2 EN-5.2 CBB Policy

          • EN-5.2.1

            The CBB is conscious of the impact that assessing someone as not "fit and proper" may have on an individual. Such assessments are carefully reviewed in the light of all relevant facts. The criteria used in reaching a decision include the following:

            (a) The extent to which the factors set out in Chapter LR-1A have not been met;
            (b) The extent to which the person has deliberately or recklessly breached requirements of the CBB Law or Volume 1 (Conventional Banks);
            (c) The person's past compliance record and conduct following any such contravention;
            (d) The length of time since factors indicating a lack of fitness or propriety occurred; and
            (e) The risk the person poses to licensees and their customers.
            Amended: October 2010
            Added: October 2007

          • EN-5.2.2

            In assessing evidence, the CBB applies a lower threshold than is applied in a criminal court of law, reflecting generally, the administrative nature of the sanction. The CBB may also take into account the cumulative effect of factors which, when considered individually, may not in themselves be sufficient to justify an adverse "fit and proper" finding.

            Amended: July 2018
            Amended: October 2010
            Added: October 2007

          • EN-5.2.3

            The CBB may also take into account the particular function being undertaken in the licensee by the individual concerned, and the size and nature of the licensee itself, particularly when assessing the suitability of a person's experience or qualifications. Thus, the fact that a person was deemed "fit and proper" for a particular position in a particular firm does not necessarily mean he would be suitable in a different position or in a different firm.

            Amended: October 2010
            Added: October 2007

          • EN-5.2.4

            The CBB may carry out re-assessment tests in case of individuals deemed to be responsible for serious or repeated violations. See Appendix A.

            Added: July 2018

        • EN-5.3 EN-5.3 Procedure for Issuing an Adverse Finding

          • EN-5.3.1

            All proposals for issuing an adverse "fit and proper" finding are subject to a thorough review by the CBB of all relevant facts, assessed against the criteria outlined in Section EN-5.2. In some instances, it may be appropriate for the CBB to request the licensee or person concerned to provide further information, in order to help reach a decision.

            Amended: October 2010
            Added: October 2007

          • EN-5.3.2

            All adverse findings have to be approved by an Executive Director of the CBB. A notice of intent is issued to the person concerned, and copied to the Board/senior management of the licensee as appropriate, setting out the circumstances and the basis for the CBB's proposed adverse finding. The person has 30 calendar days from the date of the notice in which to make written representations, addressed to the Executive Director concerned, failing which a final notice is issued by the CBB.

            Amended: October 2010
            Added: October 2007

          • EN-5.3.3

            If representations are made, then the CBB has 30 calendar days from the date of the representation in which to consider any mitigating evidence submitted and make a final determination.

            Amended: October 2010
            Added: October 2007

      • EN-6 EN-6 Financial Penalties

        • EN-6.1 EN-6.1 CBB Policy

          • EN-6.1.1

            Under Chapter 2 "Procedures to be taken before penalties or administrative proceedings are applied" and Chapter 3 "Penalties and administrative proceedings" of Part 9 of the CBB Law, the CBB may impose financial penalties on licensees or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law and its amendments (in particular Article 129). The CBB shall use judgement and will take into account relevant facts in determining the need to impose financial penalties. Financial penalties are thus normally preceded by the issuance of a written formal notice and/or Direction.

            Amended: July 2018
            Amended: April 2016
            Amended: October 2010
            Added: October 2007

          • EN-6.1.2

            The level of financial penalty applied is determined by the nature of the contravention and the amount of additional supervisory attention and resources taken up by a licensee's or persons' referred to in paragraph (b) of Article (68 bis 1) of the CBB Law behaviour and by limits set in the CBB Law. The CBB will apply the methodology set out in Appendix A to determine the size of the penalty. The CBB intends that the impact of a penalty should derive more from its signaling effect than from the actual amount of money involved.

            Amended: July 2018
            Amended: April 2016
            Amended: October 2010
            Added: October 2007

          • EN-6.1.2A

            In accordance with Article 129 of the amendment to the CBB Law, the maximum financial penalty levied for failing to comply with CBB Law, Regulations, Directives and other requirements is BD 100,000 per violation. The CBB may opt to limit the amount of the financial penalty and use other enforcement measures as outlined in this Module, such as imposing restrictions on a conventional bank licensee limiting the scope of operations.

            Added: July 2018

          • EN-6.1.3

            As indicated in Paragraph EN-1.3.3, the CBB requires disclosure by Bahraini conventional bank licensees in their annual report of any financial penalties served on them, together with a factual description of the reasons given by the CBB for applying the penalty. In addition, the CBB may publicise the issuance of a financial penalty notice, where there is a strong case that doing so would help achieve the CBB's supervisory objectives, as mentioned in Article 132 of the pre-mentioned Law.

            Amended: October 2019
            Amended: October 2010
            Added: October 2007

          • EN-6.1.3A

            As indicated in Paragraph EN-1.3.3, the CBB requires disclosure by branches of foreign bank licensees in their annual audited financial statements of any financial penalties served on them, together with a factual description of the reasons given by the Central Bank for applying the penalty. In addition, the CBB may publicise the issuance of a financial penalty notice, where there is a strong case that doing so would help achieve the CBB's supervisory objectives, as mentioned in Article 132 of the pre-mentioned Law.

            Added: October 2019

          • EN-6.1.4

            Examples of the types of compliance failings that may lead to the serving of a financial penalty notice are outlined in Part 11 of the CBB Law and may include (but are not limited to):

            (a) Failures to address persistent delays and/or significant inaccuracies in regulatory reporting to the CBB;
            (b) Repeated failures to respond to formal requests for information from the CBB, within the deadlines set;
            (c) The submission of information to the CBB known to be false or misleading; and
            (d) Major failures in maintaining adequate systems and controls in accordance with the CBB's requirements, subjecting depositors and other customers to significant risk of financial loss.
            Amended: October 2010
            Added: October 2007

          • EN-6.1.5

            In assessing whether to serve a financial written penalty notice, the CBB takes into account the following criteria:

            (a) the seriousness of the contravention, in relation to the requirement(s) concerned;
            (b) the duration and/or frequency of the contravention, and the extent to which it reflects more widespread weaknesses in controls and/or management; the extent to which the contravention was deliberate or reckless;
            (c) the licensee's past compliance record and conduct following the contravention; and
            (d) the scope of any other action taken by the CBB or other regulators against the licensee, in response to the compliance failures in question.
            Additional criteria are set out in Appendix A.
            Amended: July 2018
            Amended: October 2010
            Added: October 2007

          • EN-6.1.6

            The imposition of a financial penalty does not preclude the CBB from also using other enforcement measures to remedy the same violation (for instance, a Direction).

            Added: October 2007

          • EN-6.1.7

            A written notice of a financial penalty must be issued before imposing any financial penalty. The written notice must contain the following information:

            (a) The violations committed by the licensee with respect to CBB Law; or the prudential Rulebook; or any Directions, warnings or formal requests for information; or violations of the terms and conditions of the license issued to the licensee;
            (b) Evidence or proof to support the above;
            (c) The level of financial penalty to be imposed; and
            (d) The grace period to be allowed to the licensee for challenging the intended penalty (which will not be less than 30 days).
            Amended: October 2010
            Added: October 2007

          • EN-6.1.8

            The licensee may either pay the penalty or object within the above period. The CBB will consider any objection and make a formal resolution within 30 days of receiving the objection. Thereafter, the formal resolution and any accompanying penalties are final and must be paid within 30 days.

            Amended: October 2010
            Added: October 2007

        • EN-6.2 EN-6.2 Module FC (Financial Crime)

          • EN-6.2.1

            [This Paragraph was deleted in July 2018].

            Deleted: July 2018

          • EN-6.2.2

            [This Paragraph was deleted in July 2018].

            Deleted: July 2018

          • EN-6.2.3

            [This Paragraph was deleted in July 2018].

            Deleted: July 2018

          • EN-6.2.4

            Any financial penalties applied by the CBB as regards the implementation of its requirements set out under Module FC, are without prejudice to the criminal sanctions available to the Bahraini courts under the Decree – Law No. 4 of 2001, with respect to the prevention and prohibition of the laundering of money. As with other financial penalties, the imposition of a financial penalty with regards to breaches of the requirements in Module FC does not prevent the CBB from also using other enforcement measures to remedy the same violation (for instance, a Direction).

            Amended: October 2010
            Added: October 2007

        • EN-6.2A EN-6.2A Financial Penalties for Date Sensitive Requirements

          • EN-6.2A.1

            Modules LR, FC, BR, HC and PD contain specific requirements where conventional bank licensees must comply with, by a precise date. Where a specific due date is involved, the CBB's financial penalties are based on a per diem basis.

            Amended: July 2017
            Added: October 2010

          • EN-6.2A.2

            This Section applies to date sensitive requirements for:

            (a) Reporting requirements included in Module BR;
            (b) Public disclosure requirements included in Module PD;
            (c) The report of the external auditor or a consultancy firm approved by the CBB required as per Paragraph FC-4.3.1B (d);
            (d) Annual licensing fees required as per Section LR-4.2, and
            (e) Conduct of Shareholders' Meetings requirements included in Section HC-7.2.
            Amended: July 2017
            Amended: October 2013
            Added: October 2010

          • EN-6.2A.3

            Financial penalties related to late filing or other date sensitive requirements are calculated as per the following per diem basis:

            (a) Where the conventional bank licensee's total consolidated assets are less than or equal to BD 50 million, the financial penalty for late filing is BD 100 per day;
            (b) Where the conventional bank licensee's total consolidated assets are greater than BD 50 million but less than BD 250 million, the financial penalty for late filing is BD 200 per day;
            (c) Where the conventional bank licensee's total consolidated assets are greater than BD 250 million but less than or equal to BD 5 billion, the financial penalty is BD 400 per day;
            (d) Where the conventional bank licensee's total consolidated assets are greater than BD 5 billion, the financial penalty is BD 800 per day; and
            (e) For new licensees who have yet to provide audited financial statements, the financial penalty is BD 100 per day.
            Amended: April 2017
            Added: October 2010

          • EN-6.2A.4

            For branches of foreign bank licensees, only those assets reported as part of the filing for their Bahraini operations, shall be considered in determining the per diem financial penalty.

            Amended: April 2020
            Added: October 2010

          • EN-6.2A.5

            [This Paragraph was deleted in July 2018].

            Deleted: July 2018

          • EN-6.2A.6

            The various deadlines for submission of reports and annual fees referred to in Modules BR, FC, PD and LR are defined:

            (a) In terms of a specified number of days or months following a given date, such as the last date of a calendar quarter;
            (b) A specified number of days or months after the occurrence of a specific event; or
            (c) A specific date.
            Amended: April 2011
            Added: October 2010

          • EN-6.2A.7

            In imposing financial penalties for date sensitive requirements, the following criteria apply:

            (a) Where the due date falls on a weekend or a holiday as designated by the CBB, the first business day following the weekend or holiday will be considered as being the due date;
            (b) Where a due date is not complied with by the end of the day on which it is due, holidays and weekend days are included in the number of days the item is considered late;
            (c) For returns and other filings, the date received is the date recorded by the CBB's systems in case of returns filed electronically;
            (d) In the case of returns filed in hard copy, the CBB stamp is the date received;
            (e) All returns are to be sent to the respective Supervision Directorate and the annual fees to the Accounts Directorate, on or before the due date, to be considered filed on time;
            (f) A day ends at midnight in the case of returns that must be filed electronically, or at the close of CBB business day, in the case returns are filed in hard copy; and
            (g) An incomplete return, where completeness is determined in relation to the requirements of the relevant instructions and Module BR, is considered 'not filed' until the CBB receives all necessary elements of the return.
            Amended: July 2011
            Amended: April 2011
            Added: October 2010

          • EN-6.2A.8

            The CBB does not require any particular method of delivery for returns and filings that are filed in hard copy. The use of the Bahrain postal services, private courier services or other methods of delivery is entirely at the discretion and risk of the licensee. For the payment of annual fees, licensees must follow the requirements of Form ALF, included under Part B of Volume 1.

            Amended: April 2011
            Added: October 2010

          • EN-6.2A.9

            A decision to impose a financial penalty for date sensitive requirements is unrelated to whether the CBB issues a reminder; it is the licensee's responsibility to file and disclose on time as per the requirements of Volume 1 (Conventional Banks) Rulebook.

            Amended: April 2011
            Added: October 2010

        • EN-6.2B EN-6.2B [This Section was moved to EN-6.5 in October 2022]

          • EN-6.2B.1

            [This Paragraph was moved to EN-6.5.1].

            Amended: October 2022
            Added: April 2021

        • EN-6.3 EN-6.3 Procedures for Financial Penalties

          • EN-6.3.1

            A written financial penalty notice will be addressed to the Chief Executive Officer or General Manager of the licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law concerned. This written notification will describe the contravention concerned, the CBB's evidence supporting a financial penalty, and the factors justifying the level of penalty proposed. Only an Executive Director or more senior member of the CBB's management may sign the notification.

            Amended: April 2016
            Amended: October 2010
            Added: October 2007

          • EN-6.3.2

            The licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law has 30 days from the notification's date of issuance to submit any objections it wishes to make to the CBB, in writing and addressed to the issuer of the original notification. If the licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law decides not to submit objections, it has 30 calendar days from the notification's date of issuance in which to pay the penalty.

            Amended: April 2016
            Amended: October 2010
            Added: October 2007

          • EN-6.3.3

            Should the licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law make representations challenging the proposed penalty, the CBB has 30 days from the issuance of those representations in which to re-examine the facts of the case and its conclusions. If the CBB confirms application of a penalty, payment is required within 30 calendar days of a final notice being issued.

            Amended: April 2016
            Amended: October 2010
            Added: October 2007

          • EN-6.3.4

            Failure to pay penalties within the required deadlines will be considered a breach of the CBB's regulatory requirements, and will also result in other measures being considered, as described elsewhere in this Module.

            Amended: July 2018
            Amended: October 2010
            Added: October 2007

          • EN-6.3.5

            In instances where a bank anticipates that it will be unable to meet any date sensitive requirements prescribed by the Rulebook, it must provide a written notification to the CBB at least one week prior to the prescribed due date outlining the date sensitive requirements which it will be unable to comply with, along with a well justified reason for the non-compliance.

            Added: April 2016

        • EN-6.4 EN-6.4 Remedying a Compliance Failure

          • EN-6.4.1

            Payment of a financial penalty does not by itself absolve a licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law from remedying the compliance failure concerned. The CBB will expect the licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law to address the contravention within a reasonable timescale, to be agreed on a case-by-case basis. Failure to do so will result in other measures being considered.

            Amended: April 2016
            Amended: October 2010
            Added: October 2007

        • EN-6.5 Other Financial Penalties

          • Financial Penalties for Non-compliance with Blocking / UnBlocking Requirements

            • EN-6.5.1

              The financial penalty for late execution of blocking/unblocking orders issued by the Court/Public Prosecution is BD 100 per day per customer account. Such financial penalties will be deducted directly from the conventional bank licensee’s clearing account at the CBB or charged through billing on a weekly basis.

              Added: October 2022

          • ATM Physical Security Measures

            • EN-6.5.2

              The financial penalty for non-compliance with the ATM physical security measures stipulated in Module OM is BD 5,000 on each violation.

              Added: October 2022

      • EN-7 EN-7 Investigations

        • EN-7.1 EN-7.1 Legal Source

          • EN-7.1.1

            Articles 121 to 123 of the CBB Law empower the CBB to order investigations of licensees, in order to help it assess a licensee's compliance with the provisions of the CBB Law. Such investigations may be carried out either by its own officials or by appointed experts. Articles 111 and 124 require licensees to make available to the CBB's inspectors and appointed experts their books and other records, and to provide all relevant information within the time limits deemed reasonable by the inspectors and/or appointed experts.

            Amended October 2011
            Amended October 2010
            Amended January 2009
            Added October 2007

          • EN-7.1.2

            Articles 163 and 170 of the CBB Law provide for criminal sanctions where false or misleading statements are made to the CBB, or an investigation by the CBB is otherwise obstructed (see Section EN-10.3).

            Amended: October 2010
            Added: October 2007

        • EN-7.2 EN-7.2 CBB Policy

          • EN-7.2.1

            The CBB uses its own inspectors to undertake on-site examinations of licensees as an integral part of its regular supervisory efforts. In addition, the CBB may commission special investigations of licensees in order to help it assess their compliance with CBB requirements, as contained in Article 121 of the CBB Law. Such investigations may be carried out either by the CBB's own officials, by duly qualified experts appointed for the purpose by the CBB (appointed experts), or a combination of the two.

            Amended: October 2011
            Added: October 2007

          • EN-7.2.2

            Failure by licensees to cooperate fully with the CBB's inspectors or appointed experts, or to respond to their examination reports within the time limits specified, will be treated as demonstrating a material lack of cooperation with the CBB which will result in other enforcement measures being considered, as described elsewhere in this Module. This Rule is supported by Article 124(a) of the CBB Law.

            Amended October 2011
            Amended October 2010
            Amended January 2009
            Added October 2007

          • EN-7.2.3

            The CBB may appoint an individual or a firm as an appointed expert. Examples of appointed experts are lawyers, audit firms and expert witnesses. The appointment of appointed experts is not necessarily indicative of a contravention of CBB requirements or suspicion of such a contravention. For instance, an appointed expert may be commissioned to provide an expert opinion on a technical matter.

            Amended October 2011
            Amended January 2009
            Added October 2007

          • EN-7.2.4

            Appointed experts report in a form and within a scope defined by the CBB, and are solely responsible to the CBB for the work they undertake in relation to the investigation concerned. The report produced by the appointed experts is the property of the CBB (but is usually shared by the CBB with the firm concerned). The cost of the appointed experts' work must be borne by the licensee concerned.

            Amended: October 2011
            Added: October 2007

          • EN-7.2.5

            In selecting an appointed expert, the CBB will take into account the level of fees proposed and aim to limit these to the lowest level consistent with an adequate review of the matters at hand, given the qualifications, track record and independence of the persons concerned. Because the cost of such investigations are met by the licensee, the CBB makes only selective use of appointed experts when essential to supplement CBB's other supervisory tools and resources.

            Amended: October 2011
            Added: October 2007

          • EN-7.2.6

            The CBB may commission reports, which require appointed experts to review information from another company within the reporting bank's group even where that other company is not itself subject to any CBB requirements.

            Amended: October 2011
            Added: October 2007

          • EN-7.2.7

            [This paragraph was deleted in October 2011]

            Deleted: October 2011

          • EN-7.2.8

            Further details on the required report and other aspects related to the role of the appointed expert are contained in Section BR-6.5.

            Amended: October 2011
            Added: October 2007

          • EN-7.2.9

            [This paragraph was deleted in October 2011]

            Deleted: October 2011

          • EN-7.2.7

            Banks must provide all relevant information and assistance to appointed experts on demand. This rule is based on Article 123 of the CBB Law.

            Amended: October 2011
            Amended January 2009
            Added October 2007

          • EN-7.2.11

            [This Paragraph was moved to Section BR-6.5 in October 2011].

        • EN-7.3 EN-7.3 The Required Report

          [The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].

          • EN-7.3.1

            The scope of the required report will be determined and detailed by the CBB in the appointment letter. Commissioned Investigators will normally be required to report on one or more of the following aspects of a bank's business:

            a) Accounting and other records;
            b) Internal control systems;
            c) Returns of information provided to the CBB;
            d) Operations of certain departments; and/or
            e) Other matters specified by the CBB.
            Amended: October 2010
            Added: October 2007

          • EN-7.3.2

            Investigators will be required to form an opinion on whether, during the period examined, the bank is in compliance with the relevant provisions of the CBB Law and the CBB's relevant requirements, as well as other requirements of Bahrain Law and, where relevant, industry best practice locally and/or internationally.

            Amended: October 2010
            Added: October 2007

          • EN-7.3.3

            The Investigators report should follow the format set out in Appendix EN-1.

            Added: October 2007

          • EN-7.3.4

            Unless otherwise directed by the CBB or unless the circumstances described in Section EN-7.3 apply, the report should be discussed with the Board of Directors and/or senior management in advance of it being sent to the CBB.

            Amended: October 2010
            Added: October 2007

          • EN-7.3.5

            Where the report is qualified by exception, the report must clearly set out the risks which the bank runs by not correcting the weakness, with an indication of the severity of the weakness should it not be corrected. Investigators will be expected to report on the type, nature and extent of any weaknesses found during their work, as well as the implications of a failure to address and resolve such weaknesses.

            Added: October 2007

          • EN-7.3.6

            If the Investigators conclude, after discussing the matter with the bank, that they will give a negative opinion (as opposed to one qualified by exception) or that the issue of the report will be delayed, they must immediately inform the CBB in writing giving an explanation in this regard.

            Amended: October 2010
            Added: October 2007

          • EN-7.3.7

            The report must be completed, dated and submitted, together with any comments by Directors or management (including any proposed timeframe within which the bank has committed to resolving any issues highlighted by the report), to the CBB within the timeframe applicable.

            Amended: October 2010
            Added: October 2007

        • EN-7.4 EN-7.4 Other Notifications to the CBB

          [The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].

          • EN-7.4.1

            Investigators must communicate to the CBB, during the conduct of their duties, any reasonable belief or concern they may have that any of the requirements of the CBB, including the criteria for licensing a bank (see Module LR), are not or have not been fulfilled, or that there has been a material loss or there exists a significant risk of material loss in the concerned bank, or that the interests of customers are at risk because of adverse changes in the financial position or in the management or other resources of a bank. Notwithstanding the above, it is primarily the bank's responsibility to report such matters to the CBB.

            Amended: October 2010
            Added: October 2007

          • EN-7.4.2

            The CBB recognises that Investigators cannot be expected to be aware of all circumstances which, had they known of them, would have led them to make a communication to the CBB as outlined above. It is only when Investigators, in carrying out their duties, become aware of such a circumstance that they should make detailed inquiries with the above specific duty in mind.

            Amended: October 2010
            Added: October 2007

          • EN-7.4.3

            If Investigators decide to communicate directly with the CBB in the circumstances set out in Paragraph EN-7.4.1 above, they may wish to consider whether the matter should be reported at an appropriate senior level in the bank at the same time and whether an appropriate senior representative of the bank should be invited to attend the meeting with the CBB.

            Amended: October 2010
            Added: October 2007

      • EN-8 EN-8 [This Chapter was deleted in April 2019].

        • EN-8.1 EN-8.1 [This Section was deleted in April 2019].

          • EN-8.1.1

            [This Paragraph was deleted in April 2019].

            Deleted: April 2019
            Amended: October 2010
            Added: October 2007

          • EN-8.1.2

            [This Paragraph was deleted in April 2019].

            Deleted: April 2019
            Amended: October 2010
            Added: October 2007

          • EN-8.1.3

            [This Paragraph was deleted in April 2019].

            Deleted: April 2019
            Added: October 2007

        • EN-8.2 EN-8.2 [This Section was deleted in April 2019].

          • EN-8.2.1

            [This Paragraph was deleted in April 2019].

            Deleted: April 2019
            Amended: October 2010
            Added: October 2007

          • EN-8.2.2

            [This Paragraph was deleted in April 2019].

            Deleted: April 2019
            Amended: October 2010
            Added: October 2007

          • EN-8.2.3

            [This Paragraph was deleted in April 2019].

            Deleted: April 2019
            Amended: October 2010
            Added: October 2007

        • EN-8.3 EN-8.3 [This Section was deleted in April 2019].

          • EN-8.3.1

            [This Paragraph was deleted in April 2019].

            Deleted: April 2019
            Amended: October 2010
            Added: October 2007

          • EN-8.3.2

            [This Paragraph was deleted in April 2019].

            Deleted: April 2019
            Added: October 2007

          • EN-8.3.3

            [This Paragraph was deleted in April 2019].

            Deleted: April 2019
            Amended: October 2010
            Added: October 2007

      • EN-9 EN-9 Cancellation or Amendment of License

        • EN-9.1 EN-9.1 Legal Source

          • EN-9.1.1

            Article 48 of the CBB Law empowers the CBB to cancel or amend a license under certain circumstances. These include cases where a licensee has:

            (a) Failed to satisfy its license conditions;
            (b) Violated the terms of the CBB Law, or CBB Regulations or Volume 1 (Conventional Banks) Rulebook; or
            (c) Failed to start business witin six months from the date of the license;
            (d) Ceased to carry out the licensed activities permitted; or
            (e) Not acted in the legitimate interest of its customers or creditors.
            Amended: October 2010
            Added: October 2007

          • EN-9.1.2

            Article 48(d) of the CBB Law also requires the CBB to give the licensee concerned reasonable time to object to any proposed cancellation or amendment of its license.

            Amended: October 2010
            Added: October 2007

        • EN-9.2 EN-9.2 CBB Policy

          • EN-9.2.1

            The CBB generally views canceling a license as appropriate only in extreme circumstances, when faced with the gravest of contraventions or when left with no other reasonable means of successfully addressing the regulatory failings in question. Cancellation or amendment of a license, however, may also be required in circumstances outside of an enforcement context, for instance because of a change in the business profile of a licensee.

            Amended: October 2010
            Added: October 2007

          • EN-9.2.2

            The criteria used by the CBB in assessing whether to seek cancellation or amendment of a license include:

            (a) the extent to which the interests of the market, its users and those who have a claim on the licensee would be best served by the cancellation or amendment of the license;
            (b) the extent to which other regulatory penalties could reasonably be expected to achieve the CBB's desired supervisory objectives;
            (c) the extent to which the licensee has contravened the conditions of its license and/or the CBB Law, including the seriousness, duration and/or frequency of the contravention(s) concerned, and the extent to which the contraventions reflect more widespread or systemic weaknesses in controls and/or management;
            (d) the extent to which the licensee has been involved in financial crime or other criminal conduct; and
            (e) the licensee's past compliance record and conduct following the contravention(s).
            Amended: October 2010
            Added: October 2007

          • EN-9.2.3

            When the CBB issues a notice of cancellation or amendment as an enforcement tool, it will only implement the actual change once it is satisfied that there are no longer any regulated activities for which it is necessary to keep the current authorisation in force. Until such time as these activities have been run off or moved to another licensee, the CBB will control these activities through other means (such as taking the licensee into administration or through issuing Directions).

            Added: October 2007

        • EN-9.3 EN-9.3 Procedure for Cancellation or Amendment of License

          • EN-9.3.1

            All proposals for canceling or amending a license are subject to a thorough review by the CBB of all relevant facts, assessed against cases and the criteria outlined in Sections EN-9.1 and EN-9.2. After being assessed at the Executive Director level, proposals are submitted to H.E. The Governor for approval.

            Amended: October 2010
            Added: October 2007

          • EN-9.3.2

            Once approved within the CBB, a formal notice of cancellation or amendment is issued to the licensee concerned. The notice of cancellation or amendment will describe the factual circumstances of the contraventions concerned, and the CBB's rationale for the proposed cancellation or amendment, as measured against the criteria outlined in Sections EN-9.1 and EN-9.2.

            Amended: October 2010
            Added: October 2007

          • EN-9.3.3

            The licensee has 30 calendar days from the date of the notice in which to lodge an appeal. The appeal should be addressed to the Board of the CBB, and copied to H.E. the Governor of the CBB.

            Added: October 2007

          • EN-9.3.4

            If an appeal is lodged, the Board of the CBB will make a final ruling within 60 calendar days of its date of issuance.

            Added: October 2007

          • EN-9.3.5

            A licensee may appeal to a competent court within 60 calendar days of the above final ruling for a decision. The court's decision will then be final.

            Amended: October 2010
            Added: October 2007

      • EN-10 EN-10 Criminal Sanctions

        • EN-10.1 EN-10.1 Overview

          • EN-10.1.1

            The CBB Law provides for a number of criminal sanctions in cases where certain of its provisions are contravened. This Section provides a summary of those sanctions most relevant to licensees, their Directors and employees. What follows is not a complete list of all sanctions provided for in the CBB Law, nor is it a substitute for reading the Law and being fully aware of its provisions.

            Amended: October 2010
            Added: October 2007

          • EN-10.1.2

            Licensees, their Directors and employees should also be aware of the criminal sanctions provided for under other relevant Bahraini laws, such as the Decree – Law No. 4 of 2001, with respect to the prevention and prohibition of the laundering of money.

            Added: October 2007

          • EN-10.1.3

            In all cases to do with criminal sanctions, the CBB can only refer the matter to the Office of Public Prosecutor. The CBB has no authority to apply such sanctions directly without recourse to the courts.

            Amended: October 2010
            Added: October 2007

        • EN-10.2 EN-10.2 CBB Policy

          • EN-10.2.1

            Because of their criminal status, and their provision for custodial sentences, the sanctions provided for under the CBB Law are viewed by the CBB as very powerful measures, to be pursued sparingly. In most situations, the CBB will seek to address regulatory failures through administrative sanctions, as outlined in preceding Chapters, rather than by pursuing the criminal sanctions outlined here.

            Amended: October 2010
            Added: October 2007

          • EN-10.2.2

            Where, however, the nature of the offence is such that there is strong evidence of a reckless or intentional breach of the CBB Law relevant to the following Articles, then the CBB will usually refer the matter to the Office of Public Prosecutor.

            Amended: October 2010
            Added: October 2007

        • EN-10.3 EN-10.3 Articles of CBB Law

          • Article 161

            • EN-10.3.1A

              Article 161 of the CBB Law provides for a penalty of up to BD 1 million, without prejudice to any other penalty prescribed in any other law, in case of any person who breaches the provisions of Resolution No.(16) for the year 2012 issued pursuant to Article 42 of the CBB Law. The Court may also confiscate the proceeds resulting from breaching the Resolution.

              Added: January 2013

          • Article 163

            • EN-10.3.1

              Article 163 of the CBB Law provides for a term of imprisonment and/or a fine of up to BD 20,000, without prejudice to any other penalty prescribed in any other law, in case of conviction of a Director, manager, official, agent or representative of any licensee who:

              (a) Conceals any records, information or documents requested by the CBB (or any person appointed by the CBB to conduct an investigation or inspection);
              (b) Provides statements or information in bad faith which do not reflect the actual financial position of the licensee;
              (c) Conceals from an external auditor any records, information or documents necessary for auditing the accounts of the licensee ; and
              (d) Provides in bad faith any misleading or inaccurate statements to an external auditor which do not reflect the actual financial position of the licensee.
              Amended: October 2010
              Added: October 2007

          • Article 169

            • EN-10.3.2

              Article 169 provides for a term of imprisonment, and/or a fine of up to BD 20,000 for any Director, manager, official or employee, who acts or permits an act in violation of Article 134 of the CBB Law where he knows (or should have known) that the licensee is insolvent.

              Amended: October 2010
              Added: October 2007

          • Article 170

            • EN-10.3.3

              Part 2 of Article 170 of the CBB Law provides for term of imprisonment and/or a fine not exceeding BD3,000 if any Director, manger, official or employee intentionally obstructs an investigation by the CBB or an investigator appointed by the CBB.

              Added: October 2007

          • Article 171

            • EN-10.3.4

              Article 171 of the CBB Law provides for a term of imprisonment and/or a fine not exceeding BD10,000, if any Director, manager, official or employee discloses in bad faith any confidential information relating to a customer of the concerned bank.

              Amended: October 2010
              Added: October 2007

      • Appendix

        • Appendix A Methodology for calculating financial penalties

          I. Introduction

          This appendix sets out the Central Bank of Bahrain's ("CBB") approach on assessing and calculating/determining financial penalties.

          The purpose of the financial penalties is to encourage a high standard of conduct and compliance by CBB licensees, thereby reducing risk to their customers and the rest of the financial sector.

          The imposition of a financial penalty does not preclude the CBB from also using other enforcement measures to remedy the same violation.

          II. The Scope of application

          In assessing whether to serve a financial penalty upon a licensee the CBB shall consider the following additional criteria:

          (a) The assessment of gain/benefit made or cost avoided and/or the level of risks posed to customers, financial position of the licensee, shareholders, stability of the financial sector and/or the reputation of the Kingdom.
          (b) If the licensee made any gain/benefit or avoided any costs by violating the CBB rules then the gain/benefit and/or the cost avoided will be used as a benchmark for calculating the fine amount subject to BD 100,000 cap for each violation. In addition, the customers impacted must be compensated in full. The scope of this section does not cover penalties for non-compliance with date sensitive requirements of Section EN-6.2A.
          (c) Fit and proper reassessment tests would take place for the approved persons deemed to be responsible for serious or repeated violations at the discretion and judgment of the CBB. The relevant approved person/(s) will be identified based on a review of relevant information including but not limited to the bank's records before the final decision is made.
          (d) Each incident of breaching a rule (CBB Law, regulations, resolutions, and Rulebook directives) will be considered a stand-alone violation. For e.g. if a large exposure limit of 15% is breached by a licensee multiple times for a single customer each of these breaches will be considered a separate violation.
          (e) If the CBB discovers that one or more breaches had been committed by the licensee in the past and had gone un-detected, then the CBB has the right, at the point of detection, to impose penalties for each of these past breaches.
          (f) If the gain/benefit made and/or cost avoided cannot be quantified then the table below will be used to determine the penalty amount based on the seriousness of violations as determined by the CBB.
          (g) The factors used to determine the seriousness of the violation include, but are not limited to, the level of risks posed to the licensee's customers, financial position of the licensee, shareholders, stability of the financial sector and/or the reputation of the Kingdom. The CBB may consider other factors or circumstances as well.

          Table 1: Risk Rating of Violation and Related Penalty

          Risk Rating Fine Amount (BD)
          1 Low 1,000 to 10,000
          2 Moderate 10,001 to 50,000
          3 Serious 50,001 to 100,000

          III. Internal Assessment by the CBB

          In deciding which level of risk is most appropriate (which will then determine the size of the penalty amount in relation to the violation), various factors will undergo comprehensive assessment including but not limited to the following:

          1) Impact of the violation;
          2) Nature of the violation;
          3) Factors showing whether the violation was deliberate; and
          4) Mitigating and aggravating factors.

          1) Impact of the violation

          Factors relating to assessment of the impact of a violation licensee include:

          (a) The level of benefit gained or loss avoided, or intended to be gained or avoided, by the licensee as a result of the violation, either directly or indirectly;
          (b) The loss or risk of loss, as a whole, caused to customers, investors or other market users in general;
          (c) The loss or risk of loss caused to individual customers, investors or other market users;
          (d) Whether the violation had an effect on particularly vulnerable people, whether intentionally or otherwise;
          (e) The inconvenience or distress caused to customers; and
          (f) Whether the violation had an adverse effect on the financial sector and, if so, how serious that effect was. This may include its impact on the confidence in or damage caused to the financial sector. A violation is generally more serious when it causes or may cause extensive financial damage, or when it is likely to be particularly detrimental to investor or customer confidence.

          2) Nature of the violation

          Factors relating to assessment of the nature of the violation include:

          (a) Whether the violation revealed serious or systemic weaknesses in the licensee's procedures or in the management systems or internal controls relating to all or part of the licensee's business;
          (b) Whether the licensee's senior management was aware of the violation;
          (c) The nature and extent of any financial crime facilitated, occasioned or otherwise attributable to the violation;
          (d) The scope for any potential financial crime to be facilitated, occasioned or otherwise occurred as a result of the violation;
          (e) Whether the licensee failed to conduct its business with integrity; and
          (f) Whether the licensee, in committing the violation, took any steps to comply with CBB Law, regulations, resolutions, Rulebook directives, and the adequacy of such steps.

          3) Factors showing whether the violation was deliberate

          Factors relating to assessment of whether the violation was deliberate include:

          (a) The violation was intentional, in that the licensee's approved person(s), intended or foresaw that the likely or actual consequences of their actions or inaction would result in a violation and they failed to adequately mitigate that risk;
          (b) The licensee's approved person(s) knew that their actions were not in accordance with the licensee's internal policies and procedures;
          (c) The licensee's approved person(s) sought to conceal their misconduct;
          (d) The licensee's approved person(s) committed the violation in such a way as to avoid or reduce the risk that the violation would be discovered;
          (e) The licensee's approved person(s) were influenced to commit the violation by the belief that it would be difficult to detect;
          (f) The violation was repeated; and
          (g) In the context of a contravention of any rule or requirement imposed by or under CBB law, regulations, resolutions, Rulebook directives, the licensee obtained reasonable professional advice before the contravention occurred and failed to follow that advice. Obtaining professional advice does not remove a person's responsibility for compliance with applicable rules and requirements.

          4) Mitigating and aggravating factors

          Mitigation and aggravating factors include:

          (a) the conduct of the licensee in bringing (or failing to bring) quickly, effectively and completely the violation to the CBB's attention;
          (b) the degree of cooperation the licensee showed during the investigation of the violation. Correspondingly, if the licensee takes a passive stance towards the matter or avoids investigating the matter properly with the CBB, it is likely to increase the penalty payment and/or imposing other enforcement measures.
          (c) where the licensee's approved person(s) were aware of the violation or of the potential for a violation, whether they took any steps to stop the violation, and when these steps were taken;
          (d) any remedial steps taken by the licensee prior to the discovering of such violation by the CBB; for example, identifying whether customers or investors or other market users suffered loss and compensating them where they have; correcting any misleading statement or impression; taking disciplinary action against staff involved (if appropriate); and taking steps to ensure that similar problems do not arise in the future;
          (e) whether the licensee had previously been told about the CBB's concerns in relation to the issue, either by means of a written formal warning/notice and/or Direction;
          (f) whether the licensee had previously undertaken not to perform a particular act or engage in a particular behavior;
          (g) the previous disciplinary record and general compliance history of the licensee;
          (h) action taken against the licensee by other domestic or international regulatory authorities that is relevant to the violation in question.
          Added: July 2018

  • Part B

     

    Table of Contents
     
    Glossary of Defined TermsGlossary of TermsJun 2025PDF Version
    List of Circulars
    CBB Reporting FormsLicensing RequirementsLR
    Annual License Fee Form (ALF)Appendix LR-1
    Direct Debit Authorisation FormAppendix LR-2
    Business and Market ConductBC
    List of Dishonoured ChequesAppendix BC 1
    Financial CrimeFC
    STR Form [Deleted: July 2016]Appendix FC 2
    MLRO Form [Deleted: July 2016]Appendix FC 4
    CBB Reporting Requirements
    Appendix BR 5: — PIR Bahraini Conventional Banks [Updated: 29 August 2016]
    Appendix BR 5A: — PIR Overseas Conventional Banks [Updated: August 2016]
    Appendix BR 6: — PIR Overseas Conventional Banks [Updated: August 2016]
    Appendix BR 20: — Guidelines for Completion of Supplementary Information Form by Conventional Banks [Updated: July 2021]
    Appendix BR 21: — Information Required for Annual and Interim Financial Review [Updated: April 2021]
    Appendix BR 22: — Continuous Professional Development Form (CPD) [Added: April 2017]
    Appendix BR 23: — Liquidity Coverage Ratio (LCR) [Added: July 2019]
    Appendix BR 24: — Net Stable Funding Ratio (NSFR) [Added: January 2020]
    BR
    Investigators' ReportAppendix EN 1EN
    Cyber Security Incident ReportAppendix OM 1OM
    CBB Authorisation FormsLicensing and Authorisation RequirementsLR
    Form 1 (Application for a License) [Updated: July 2018]Form 1
    Form 2 (Application for Authorisation of Controller) [Updated: January 2022]Form 2
    Form 3 (Application for Approved Person Status) [Updated: July 2022]Form 3
    Supplementary InformationHigh-level Controls [Updated Appendix HC-(i): Agreed-upon Procedures re Compliance with HC-5 (Remuneration): January 2017]HC
    General RequirementsGR
    Business and Market Conduct
    Appendix BC 6: — Proposed Scale of Brokerage Fees [Updated: January 2019]
    Appendix BC 7: — Caps on Fees and Charges for Standard Services Provided to Individuals Applicable to Retail Banks From 01/May/2018 [Updated: January 2022]
    BC
    Capital AdequacyCA
    Credit Risk ManagementCM
    Sovereign Debt Provisioning Matrix [Deleted: January 2023]Appendix CM 1
    Code of Best Practice on Consumer Credit and ChargingAppendix CM 2
    Credit Reference Bureau Code of Best PracticeAppendix CM 3
    Regulation in respect of Close-Out Netting under a Market ContractAppendix CM 4
    Financial Crime
    Appendix FC 8: — Agreed Upon Procedures [Updated: July 2019]
    FC
    CBB Reporting RequirementsBR
    Instructions for completion of statistical returnsAppendix BR 1
    Guidelines for Overseas Conventional BanksAppendix BR 3
    Guidelines for completion of the PIR [Updated: July 2021]Appendix BR 4
    Guidelines for completion of Exposures to Connected CounterpartiesAppendix BR 12
    Instructions for Completion of the Eligible Accounts Report for the Deposits Protection SchemeAppendix BR 17
    Requirements for Report on Private PlacementsAppendix BR 18
    Public DisclosurePD
    Composition of Capital Disclosure RequirementsAppendices PD-1 to PD-4
    Instructions for Publication of Press ReleasesAppendix PD-5
    Disclosure by ASPSPsAppendix PD-6
    CompensationCP
    Certificate of CompensationAppendix CP 1A
    Customer Acknowledgement and WaiverAppendix CP 1B
    Resolution No. [23] of 2009 in respect of Definition of DepositAppendix CP 2
    Open BankingOB
    Reporting by AISP/PISPAppendix OB-1

     

    • Glossary of Defined Terms

      • Glossary History

        Version DateDescription of Changes
        July 2004Initial Launch Version.
        July 2006Updated version, including new defined terms of retail bank and wholesale bank license sub-categories, and definitions of regulated banking services.
        April 2010Updated Definition of Deposit in accordance with Resolution No. (23) of 2009 in respect of Definition of Deposit.
        October 2010Amended definition for Chief Executive Officer; added definition of Executive director, Independent director; Non-executive director; Remuneration, and; senior manager/management.
        January 2011Minor corrections and amendments for consistency purposes; Amended definition for approved person(s), collective investment undertaking, exposure(s), security(ies);
        Added definition for accredited investor(s), acquisition(s), bond(s); capital instrument(s), close links, connected person(s), future(s), investment(s), investment analyst, investment research, licensed exchange(s); market, option(s), participant(s), personal account transaction, public offering(s), qualifying holding(s), real time promotion, retail customer(s), self-regulatory organisation(s) or SROs, soft dollar agreement, swap(s), warrants;
        Deleted definition of independent non-executive director.
        April 2011Amended definition of executive director.
        October 2011Clarified definition of independent director;
        Added definition for appointed expert(s), qualified by exception.
        Amended definition of trilateral meeting.
        January 2012Amended definition of independent director.
        Added definition for underwriting.
        April 2012Corrected cross reference for the definition of director;
        Corrected typo in the definition of conflict of interest;
        Updated definition of qualifying holdings to be in line with Module CM.
        July 2012Added definition for Bahrain domiciled CIU(s);
        Amended definition of controller to be in line with Module GR.
        October 2012Added definition for conspicuous notice, eligible account(s), eligible depositor(s), framework, principal, transferee and transferor.
        Amended definition of Basel Committee and deposit(s) or deposit account(s).
        January 2013Added definition for financial services.
        Amended definition of deposit-taking, providing credit, public offering(s).
        October 2013Updated definition of controllers to be in line with Module GR.
        January 2014Added definition for clawback, malus, material risk-takers.
        Amended definition of remuneration.
        July 2014Amended definition for clawback.
        October 2014Amended definition of Authorised money or value transfer service provider(s).
        Amended definition for financial instruments trader.
        Corrected cross reference for relevant authorities.
        January 2015Added definition of affiliate, banking group, credit risk, financial entity, market risk, minority interest, operational risk, securities financing transactions, subsidiary and trigger event.
        Amended definition for control and price risk.
        Corrected cross reference for acquisition(s).
        April 2015Amended definition of overseas conventional retail bank licensee(s) and subsidiary(ies).
        Deleted the definition of head of function and qualifying holding(s).
        January 2016Amended the definition of approved person(s).
        April 2016Added definition for disabled customer(s).
        Amended the definition of controlled function(s).
        July 2016Amended definition of Politically Exposed Persons (PEPs).
        October 2016Added definition of major investment.
        April 2017Added definition of Bahraini retail bank licensee(s).
        April 2017Added definition of Bahraini wholesale bank licensee(s).
        July 2017Deleted Bahraini retail bank licensee(s).
        July 2017Deleted Bahraini wholesale bank licensee(s).
        July 2017Added definition of branches of foreign bank licensee(s).
        July 2017Added definition of conventional retail bank licensee(s).
        July 2017Added definition of conventional wholesale bank licensee(s).
        July 2017Added definition of country risk.
        July 2017Deleted definition of overseas conventional bank licensee(s).
        July 2017Deleted definition of overseas conventional retail bank licensee(s).
        July 2017Added definition of transfer risk.
        July 2017Deleted the definition of wholesale banks.
        October 2017Added definition of beneficial owner.
        October 2018Added definitions of Module LM.
        December 2018Added definitions of Account Information Service, Account Information Service Provider 'AISPs', Originator Information, Payment Initiation Service, Payment Initiation Service Provider 'PISPs'.
        December 2018Amended definition of Ancillary Service Provider.
        April 2019Definition of Digital Financial Advice.
        October 2019Added definition of without delay.
        July 2020Amended definition of Independent Director.
        October 2020Amended definition of accredited investor(s).
        October 2020Added point (f) to definition of Independent Director.
        January 2021Deleted definition of Framework (as used in Module OM).
        July 2022Amended definition of accredited investor(s).
        January 2023Deleted definition of Exposures.
        June 2025Amended definition of Beneficial Owner.
        June 2025Amended definition of Politically Exposed Persons (PEPs).

      • [ A ]

        • Accepting Shari'a money placements

          The acceptance of sums of money for safe-keeping ('al-wadia') in a Shari'a compliant framework, under which it will be repaid, either on demand or in circumstances agreed by the parties involved, and which is not referable to the giving of security.

        • Account Information Service

          An 'account information service' is an online service which provides consolidated information to a payment service user on one or more payment accounts held by that payment service user with other account servicing payment service provider.

          Added: December 2018

        • Account Information Service Provider or AISP(s)

          A person licensed by the CBB to undertake the activity of providing account information services online.

          Added: December 2018

        • Accredited investor(s)

          Accredited investors are defined as investors meeting the following criteria:

          (a) Individuals who have a minimum net worth (or joint net worth with their spouse) of USD 1,000,000, excluding that person’s principal place of residence;
          (b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 1,000,000; or
          (c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).
          Individuals and commercial undertakings may elect in writing to be treated as accredited investors subject to meeting at least two of the following conditions:
          (a) The investor has carried out trading/investing transactions, in significant size (i.e. value of transactions aggregating USD 200,000) over the last 12-month period;
          (b) The size of the investor's financial assets portfolio including cash deposits and financial instruments is USD 500,000 or more; and/or
          (c) The investor works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged (i.e. the position was professional in nature and held in a field that allowed the client to acquire knowledge of transactions or services that have comparable features and a comparable level of complexity to the transactions or services envisaged).
          Amended: July 2022
          Amended: October 2020
          Added: January 2011

        • Acquisition(s)

          The acquiring by a bank of beneficial or legal ownership of capital instruments issued by another entity. This would not include securities underwriting until the expiry of the underwriting period (where separate arrangements apply elsewhere in Module CM). Acquisition may also be in the form of exercising of rights to take control of capital instruments pledged as collateral. The pledging of capital instruments by a customer to a bank as collateral (e.g. for the purpose of obtaining credit) does not in itself mean that an "acquisition" has taken place. Acquisition also does not include the establishment of new subsidiaries by the bank. Regulatory requirements for the establishment of SPVs and subsidiaries are contained in Chapter CA-5.2.

          Amended: January 2015
          Added: January 2011

        • Administrators

          Persons who administer financial instruments and related services such as cash/collateral management. Such persons need to be registered by the BMA/CBB (cf. Volume 4, AU-1.3.2).

        • Affiliate

          An affiliate of a bank is defined as a company that controls, or is controlled by, or is under common control with, the bank. Control has the same meaning as when used in IFRS.

          Added: January 2015

        • Agency based contract for investments

          Holders of investment accounts appoint the Islamic bank to invest their funds on the basis of an agency contract in return for a specified fee or a specified fee and share of the profit if the realised profit exceeds a certain level, the latter being an incentive for the Islamic bank to achieve a return higher than expected.

        • AML

          Anti-Money Laundering

        • Ancillary service provider

          A person licensed under Volume 5 of the CBB Rulebook to undertake regulated ancillary services. These licensees are referred to as 'financial sector support institutions' under Article 1 of the CBB Law.

          Amended: December 2018

        • Appointed expert(s)

          A duly qualified individual or firm appointed by the CBB to carry out inspections in accordance with Article 114 of the CBB Law or special investigations of licensees in accordance with Article 121 of the CBB Law. Appointed experts may be appointed in addition to the CBB's own officials. Examples of appointed experts include reporting accountants, lawyers, private investigators, expert witnesses and independent actuaries.

          Added: October 2011

        • Approved person(s)

          Persons undertaking certain functions in relation to CBB licensees require prior CBB approval. These functions (called controlled functions) include board members and those occupying executive positions. The controlled functions regime supplements the licensing regime by ensuring that key persons involved in the running of licensees are fit and proper. Those authorised by the CBB to undertake controlled functions are called approved persons (see Paragraph LR-1A.1.2).

          Amended: January 2016
          Amended: January 2011

        • Articles of association

          Legal document establishing a corporation, outlining its structure and purpose.

        • Asset revaluation reserves

          An asset revaluation reserve is an accounting concept and represents a reassessment of the value of a capital asset as at a particular date.

        • Associate(d)

          A company or other enterprise, which is not a subsidiary or joint venture, over which the bank licensee has significant influence. Significant influence means the power to participate in financial and operating policy decisions. Such influence is presumed to exist if the bank licensee owns more than 20 percent of the associate.

        • Auditor

          The firm/partnership charged with carrying out the audit of a licensee and its partners, directors and managers (see Module AU).

        • Authorised Money or Value Transfer Service (MVTS) Provider(s)

          Any bank or other licensee (such as a money changer) specifically authorised to effect money or value transfers.

          Amended: October 2014

      • [ B ]

        • Bahrain domiciled CIU(s)

          Bahrain domiciled CIUs are undertakings where:

          (a) The legal form of the CIU is established under the laws of the Kingdom of Bahrain; and
          (b) The CIU documents and contractual agreements are governed by the Laws of the Kingdom of Bahrain.
          Added: July 2012

        • Bahraini Conventional bank licensee(s)

          As defined in LR-A.1.8.

        • Bahraini Conventional retail banks

          Banks which undertake the regulated banking services of (a) to (n) in Paragraph LR-1.3.1 for both residents and non-residents of the Kingdom of Bahrain.

          Added: July 2017

        • Bahraini retail bank licensee(s)

          [Deleted in July 2017]

          Deleted: July 2017
          Added: April 2017

        • Bahraini Conventional wholesale banks

          Banks which undertake the regulated banking services of (a) to (n) in Paragraph LR-1.3.1 for both residents and non-residents of the Kingdom of Bahrain, with certain restrictions for residents as defined under Paragraphs LR-1.2.13, LR-1.2.16 and LR-1.2.19.

          Added: July 2017

        • Bahraini wholesale bank licensee(s)

          [Deleted in July 2017]

          Deleted: July 2017
          Added: April 2017

        • Bahraini conventional retail bank licensee

          A Bahraini conventional bank licensee, licensed as a retail bank (see Volume 1, Section LR-1.2)

        • Bahraini conventional wholesale bank licensee

          A Bahraini conventional bank licensee, licensed as a wholesale bank (see Volume 1, Section LR-1.2.)

        • Bank

          Any bank fully recognized as such by the relevant regulator of the country in which it is registered, except such a bank which:

          a. In the opinion of the central bank, is not adequately supervised by the relevant banking supervisory authority;
          b. The license or other authorization of which to carry on banking business is, for the time being, suspended.
          Added: October 2018

        • Banking group

          Groups that engage predominantly in banking activities and are registered as banks in the relevant jurisdiction.

          Amended: October 2018
          Added: January 2015

        • Base rate

          The interest rate that underpins lending to bank customers. Banks lend to their customers at basis points over base rates. Not to be confused with prime rate which is the rate at which a bank will lend to its most creditworthy customers.

        • Basel Capital Accord

          Issued initially in July 1988 by the Basel Committee on Banking Supervision, the Basel Capital Adequacy Accord is a risk based capital adequacy methodology that defines the components of capital and applies a series of risk weights and capital charges to banks' assets and holdings of financial instruments. The Accord aims to increase the stability of the international financial system through having a single internationally acknowledged measurement of a bank's capital expressed as a percentage of its financial risks. It also serves to put internationally active banks on an equal competitive footing in respect of the measurement of their capital adequacy.

        • Basel Committee

          The Basel Committee was founded in 1974 by the Bank for International Settlements (BIS). It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promote common understanding.

          Amended: October 2012

        • Beneficial Owner

          (a) In the context of legal persons, beneficial owner refers to the natural person(s) who ultimately owns or controls a customer, and/or the natural person on whose behalf a transaction is being conducted. It also includes those natural persons who exercise ultimate effective control over a legal person. Only a natural person can be an ultimate beneficial owner, and more than one natural person can be the ultimate beneficial owner of a given legal person.
          (b) In the context of legal arrangements, beneficial owner includes: (i) the settlor(s); (ii) the trustee(s); (iii) the protector(s) (if any); (iv) each beneficiary, or where applicable, the class of beneficiaries and objects of a power; and (v) any other natural person(s) exercising ultimate effective control over the arrangement. In the case of a legal arrangement similar to an express trust, beneficial owner refers to the natural person(s) holding an equivalent position to those referred above. When the trustee and any other party to the legal arrangement is a legal person, the beneficial owner of that legal person should be identified.
          (c) Reference to “ultimately owns or controls” and “ultimate effective control” refer to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control.
          (d) Reference to “ultimate effective control” over trusts or similar legal arrangements includes situations in which ownership/control is exercised through a chain of ownership/control.
          Added: October 2017
          Amended: June 2025

        • Branch

          A place of business which forms a legally dependent part of a bank and which carries out directly all or some of the transactions inherent in the business of the relevant bank. Conventional bank licensees operating as a branch are called overseas conventional bank licensees for the purposes of Volume 1 (see LR-A.1.8).

        • Branches of foreign bank licensees

          Foreign banks branches operating in the Kingdom of Bahrain.

          Added: July 2017

        • Bonds

          An instrument creating or acknowledging a present or future indebtedness (i.e. debentures, debenture stock, loan stock, bonds, certificates of deposit and any other instruments creating or acknowledging a present or future indebtedness), but excluding:

          (a) An instrument creating or acknowledging indebtedness for, or for money borrowed to defray, the consideration payable under a contract for the supply of goods and services;
          (b) A cheque or other bill of exchange, a bankers draft or a letter of credit (but not a bill of exchange accepted by a banker);
          (c) A banknote, a statement showing a balance on a bank account, or a lease or other disposition of property; and
          (d) A contract of insurance.
          Amended: January 2011

      • [ C ]

        • Capital adequacy

          A measure of the financial strength of a bank or securities firm, usually expressed as a percentage ratio of its capital to its assets.

        • Capital instrument(s)

          This includes all components of equity capital including ordinary equity, both voting and non-voting, and preference shares. It also includes convertible or hybrid financial instruments which are debt-like in character and which may be converted into equity. Also for financial institutions and insurance companies, any other financial instruments (such as subordinated debt) which are eligible as regulatory capital should also be included as capital instruments. Sukuk or senior debt instruments would not normally be regarded as "capital instruments" unless they have convertibility features. Equity-like contracts such as joint venture musharaka contracts (investments but not financing) are also included in this definition. The musharaka stake is classified as a capital instrument at onset. Shari'a compliant investment notes would be considered capital instruments if convertibility option/clause is available.

          Added: January 2011

        • Capital redemption reserves

          Where shares of a company are redeemed or purchased wholly out of the company's profits, or by a fresh issue, the amount by which the company's issued share capital is diminished on cancellation of the shares shall be transferred to this reserve.

        • Central Counterparty (CCP)

          The party that intermediates in the settlement process between counterparties to contracts related to financial instruments, becoming the buyer to every seller, and the seller to every buyer in the market.

          Added: October 2018

        • Certificate of commercial registration

          A certificate issued by the Ministry of Commerce to businesses for carrying out specified activities as legal entities in the Kingdom of Bahrain.

        • Certificate of deposits

          This is a certificate issued by a bank or thrift that indicates a specified sum of money has been deposited with it for a specified period at a defined rate. A CD shows a maturity date and a specified interest rate, and can be issued in any denomination. The duration can be up to five years.

        • Certificate of incorporation

          A document granted by the Ministry of Commerce giving an entity its legal existence and right to function as an entity.

        • Certificates representing certain securities

          Certificates or other instruments which confer contractual or property rights:

          (a) in respect of any investment held by someone other than the person on whom the rights are conferred by the certificate or other instrument; and
          (b) the transfer of which may be effected without requiring the consent of that person.

        • CFT

          Combating the financing of terrorism.

        • Chief Executive, Chief Executive Officer or CEO

          Chief executive, chief executive officer or CEO. The board shall determine that person's actual title, which may be 'CEO', 'Chief Executive Officer', 'President', 'Managing Director', or another title.

        • Clawback

          A clawback requires that an employee (or ex-employee) return to the bank the variable remuneration that was previously paid out to him/her.

          Amended: July 2014
          Added: January 2014

        • Close links

          A bank is defined as "closely linked" with:

          (a) Any person/entity which qualifies as a "controller" of the concerned bank as defined in Module GR-5 of the Rulebook;
          (b) Any entity which is a subsidiary of the bank;
          (c) Any entity which is an associate company of the bank.
          Added: January 2011

        • Collateral

          Any form of property, security, guarantee or indemnity provided as security for a borrower.

        • Collective Investment Undertaking

          As defined in LR-1.3.34.

          Amended: January 2011

        • Commodity(ies)

          Raw materials or primary products, usually sold in bulk on an exchange (other than a financial instrument or cash) which are capable of delivery. Gold is therefore a commodity, but a gold ring or a gold future is not.

          Amended: January 2015

        • Compliance Directorate

          The unit within the Agency responsible for verifying licensees' compliance with the requirements of the BMA Law, the AML Law, this Module and other BMA/CBB Regulations relating to terrorist financing and money laundering, and for collating and monitoring suspicious transaction reports from licensees.

        • Conflict of interest

          A situation when a person or an entity has competing professional or personal obligations to other parties in a financial transaction (e.g. underwriting a securities transaction and simultaneously advising clients whether to buy the security or not) or in ongoing financial relationships (e.g. when a bank has a director of one of its major borrowers on its board), or personal or financial interests that would make it difficult to fulfil his duties fairly.

        • Connected person(s)

          (a) The individual's spouse and his/her son, adopted son, stepson, daughter, adopted daughter, step-daughter, father, step-father, mother, step-mother, brother, step-brother, sister or step-sister, under his/her guardianship or control; or
          (b) A firm or corporation in which the individual or any persons mentioned in (a) has control of not less than 10% of the voting power in the firm or corporation, whether such control is exercised individually or jointly; or
          (c) Connected persons in relation to a firm or corporation means another firm or corporation in which the first-mentioned firm or corporation has control of not less than 10% of the voting power in that other firm or corporation.
          Amended: October 2012
          Added: January 2011

        • Conspicuous notice

          Means a written statement in both Arabic and English languages which is easily visible and legible and displayed in all credit institutions' premises open to the public, such as websites, newspapers and other press notices.

          Added: October 2012

        • Contingency plans

          A plan maintained to ensure the availability of critical resources and to facilitate the continuity of operations in an emergency situation.

        • Contingent liabilities

          In context of liabilities, those liabilities that do not yet appear on the balance sheet (ie. guarantees, supports, lawsuit settlements). For support or recourse, the trigger may occur at any time in the future, and the loss or expenditure is highly uncertain. Once timing and the quantification of expenditure becomes clearer, provisions should be raised in respect of the contingent liability. When the amount or the timing of the contingent item becomes certain, then it ceases to be a contingent item and should be entered into the balance sheet.

        • Control

          Has the same meaning as when used in IFRS.

          Amended: January 2015

        • Control environment

          The control environment means the overall attitude, awareness and actions of directors and management regarding the internal control system and its importance in the entity.

        • Controlled function(s)

          Functions of board members and those persons undertaking executive positions at CBB conventional bank licensees (see LR-1A.1.2).

          Amended: April 2016
          Amended: January 2011

        • Controller

          A controller is a natural or legal person who either alone, or with his associates:

          (a) Holds 10% or more of the shares in the licensee ("L"), or is able to exercise (or control the exercise) of 10% or more of the voting power in L; or
          (b) Holds 10% or more of the shares in a parent undertaking ("P") of L, or is able to exercise (or control the exercise) of 10% or more of the voting power in P; or
          (c) Is able to exercise significant influence over the management of L or P.
          Amended: October 2013
          Amended: July 2012
          Amended: January 2011

        • Conventional bank license

          A license issued under Volume 1 of the CBB Rulebook.

        • Conventional bank licensee

          A bank licensed by the BMA/CBB under Volume 1 of the BMA/CBB Rulebook, and generally operating according to conventional finance principals (as opposed to operating in accordance with Islamic finance principles).

        • Conventional retail banks licensees(s)

          Banks which undertake the regulated banking services of (a) to (n) in Paragraph LR-1.3.1 for both residents and non-residents of the Kingdom of Bahrain.

          Added: July 2017

        • Conventional wholesale banks licensees(s)

          Banks which undertake the regulated banking services of (a) to (n) in Paragraph LR-1.3.1 for both residents and non-residents of the Kingdom of Bahrain, with certain restrictions for residents as defined under Paragraphs LR-1.2.13, LR-1.2.16 and LR-1.2.19.

          Added: July 2017

        • Conventional retail bank licensee

          Conventional bank licensees which undertake the regulated banking services of in Paragraph LR-1.3.1 for both residents and non-residents of the Kingdom of Bahrain.

          Amended: December 2018

        • Conventional wholesale bank licensee

          A conventional bank licensee, licensed as a wholesale bank (see Volume 1, Section LR-1.2)

        • Correspondent Bank

          A bank which offers another bank (the respondent bank) an account through which the respondent bank may make payments for its own account and that of its clients. In brief, the correspondent bank acts as agent for the respondent bank. Correspondent relationships do not include transactions between banks as principals (e.g. in the wholesale market).

        • Counterparty

          A counterparty is the other person in a contract. Therefore, if bank A buys a security issued by company B from broker C, bank A has counterparty risk to broker C and Issuer Risk in respect of company B. A counterparty may include any legal person or arrangement, but generally would mean the following:

          (a) Any individual;
          (b) Any unincorporated body of persons;
          (c) Any company which is not a member of a group;
          (d) Any group of companies; or
          (e) Any government of a State or any public bodies, local authorities or nationalised industries of a State.
          Amended: January 2011

        • Country Risk

          The risk of exposure to loss caused by events in a foreign country. The concept is broader than sovereign risk as all forms of lending or investment activity whether to/with individuals, corporates, banks or governments are covered.

          Added: July 2017

        • Credit derivatives

          The OTC derivatives instruments for the transfer of credit risk.

        • Credit risk

          Is defined as the potential that a bank's borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk exists throughout the activities of a bank in the banking book and in the trading book and includes on- and off-balance sheet exposures.

          Added: January 2015

        • Custody

          In relation to clients' assets, this refers to the safeguarding and administering of a client's investments.

        • Customer

          A customer is:

          Groups or individuals who have a business relationship with the organization — those who receive and use or are directly affected by the products and services of the organization.

      • [ D ]

        • Dealing in financial instruments as agent

          Dealing in financial instruments as agent means buying, selling, subscribing for or underwriting any financial instrument on behalf of a client (see LR-1.3.25 ff).

        • Dealing in financial instruments as principal

          Dealing in financial instruments as principal means buying, selling, subscribing for or underwriting any financial instrument on one's own account (see LR-1.3.22 ff).

        • Default

          Failure to service a credit in accordance with agreed terms, e.g. late or incomplete payments of principal or interest, or infringement of any other material provision of the credit documentation.

        • Default Funds

          Also known as clearing deposits or guarantee fund contributions (or any other names), are clearing members' funded or unfunded contributions towards, or underwriting of, a CCP's mutualized loss-sharing arrangements.

          Added: October 2018

        • Deposit(s) or deposit account(s)

          For the purposes of the CBB Law, refer to Resolution No. (23) of 2009 in respect of Definition of Deposit (see Appendix CP-2).

          Amended: October 2012

        • Deposit-taking

          The activity of accepting deposits (see LR-1.3.16).

          Amended: January 2013

        • Derivative(s)

          A generic term for a financial instrument whose value is dependent on, or derived from, the changes in the absolute or relative value of some underlying asset or market index or rate. Often used for futures, options and swaps.

          Amended: January 2015

        • Derivative contracts relating to commodities settled in cash

          Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event).

        • Derivative contracts relating to commodities that can be physically settled

          Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF.

        • Designated market

          Any of the following investment exchanges:

          •  American Stock Exchange
          •  Australian Stock Exchange
          •  Bolsa Mexicana de Valores
          •  Bourse de Montreal Inc
          •  Channel Islands Stock Exchange
          •  Chicago Board of Trade
          •  Chicago Board Options Exchange
          •  Chicago Stock Exchange
          •  Coffee, Sugar and Cocoa Exchange, Inc
          •  Euronext Amsterdam Commodities Market
          •  Hong Kong Exchanges and Clearing Limited
          •  International Securities Market Association
          •  Johannesburg Stock Exchange
          •  Kansas City Board of Trade
          •  Korea Stock Exchange
          •  MidAmerica Commodity Exchange
          •  Minneapolis Grain Exchange
          •  New York Cotton Exchange
          •  New York Futures Exchange
          •  New York Stock Exchange
          •  New Zealand Stock Exchange
          •  Osaka Securities Exchange
          •  Pacific Exchange
          •  Philadelphia Stock Exchange
          •  Singapore Exchange Market
          •  South African Futures Exchange
          •  Tokyo International Financial Futures Exchange
          •  Tokyo Stock Exchange
          •  Toronto Stock Exchange

        • Digital Financial Advice

          Digital financial advice, also commonly known as robo-advice or automated advice is the advising on financial instruments as defined under LR-1.3.48 using algorithms and technology and with limited or no human financial advisor involvement.

          Added: April 2019

        • Director

          A person who acts in the capacity of director of a firm (whether appointed or not, or whether titled director or not). In the case of a sole trader, unincorporated body or partnership, a person directing its affairs, or a partner (of a partnership). Directors are a controlled function (cf. LR-1A.1.2).

          Amended: April 2012

        • Disabled customer(s)

          For the purpose of Module BC 'disabled' means: all those who suffer from permanent total or partial physical or sensory impairments as a result of illness, accident, congenital or hereditary factor that may prevent them from accessing banking and financial services on an equal basis with others. These are the customers who have the ability to make their own decisions but need assistance to do so, due to their circumstances. The term 'disabled' includes visual impairments and hearing impairments and physical impairments.

          People who have limited ability to take their own decisions (mental impairment) do not fall within this definition.

          Added: April 2016

      • [ E ]

        • Effective interest rates

          The annual rate at which an investment grows in value when interest is credited more often than once a year.

        • Electronic banking

          Electronic banking or 'e-banking' refers to the provision of retail and small value banking products and services through electronic channels. Such products and services can include deposit-taking, lending, account management, the provision of financial advice, electronic bill payment, and the provision of other electronic payment products and services such as electronic money.

        • Electronic money

          The investment, which is monetary value, as represented by a claim on the issuer, which is:

          (a) Stored on an electronic device;
          (b) Issued on receipt of funds; and
          (c) Accepted as a means of payment by persons other than the issuer.
          Amended: January 2011

        • Eligible Account(s)

          Means any Deposit Account (being a deposit in accordance with the Central Bank of Bahrain Resolution No.(23) of 2009 in respect of Definition of Deposit), and any other deposits or accounts similar in nature and which have similar characteristics which are approved by the CBB, regardless of currency, with the exception of bearer certificates of deposit.

          Added: October 2012

        • Eligible depositor(s)

          Means any natural person, (resident or non-resident), holding an Eligible Account(s) with a conventional retail bank in the Kingdom. It does not include Deposits and Unrestricted Investments Accounts held with a conventional retail bank's foreign branches operating outside the Kingdom.

          Added: October 2012

        • Executive director

          Means a director who is an officer or employee, or is otherwise involved in day-to-day management, of either:

          (a) The bank;
          (b) Another company which is a controller of the bank;
          (c) Another company of which the bank is a controller; or
          (d) Another company which is controlled by a controller of the bank.

          In this definition, the word "company" which is a controller of the bank excludes sovereigns such as government owned entities and government ministries.

          Amended: April 2011

        • Exposure(s)

          [Deleted in January 2023.]

          Deleted: January 2023
          Amended: January 2015
          Added: January 2011

      • [ F ]

        • Face value (see Murabaha)

          The amount of a Murabaha receivable based on the price agreed between the client and the Islamic bank including the latter's profit on the transaction.

        • Family

          The term family refers to father, mother, husband, wife, son, daughter, grandfather, grandmother, grandson or granddaughter.

        • FATF Member State

          A country which is a current member of the FATF, and which is not subject to NCCT listing or to any advisories by the FATF.

        • Fiduciary

          A legal entity that is authorised to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles.

          Added: October 2018

        • Financial Action Task Force (FATF)

          The inter-governmental body responsible for developing and promoting policies, both nationally and internationally, to combat money laundering.

        • Financial contracts for differences

          Comprise rights under a contract for differences, or any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in:

          (a) The value or price of investment or property of any description;
          (b) Any currency;
          (c) The rate of interest in any currency or any index of such rates including interest rate options;
          (d) The level of any index which is derived for the prices of an investment or physical commodity (including index options) or;
          (e) Any combination of the above.
          Amended: January 2011

        • Financial entity(ies)

          An entity which conducts banking activities or other financial activities such as insurance, finance leasing, issuing credit cards, portfolio management, investment advisory, money changing, factoring, forfaiting, custodial and safekeeping services, investment management and other similar activities that are ancillary to the business of banking, whether or not the entity is regulated. For the sake of clarification, special purpose vehicles are included in the definition of financial entity if such SPVs conduct any of the activities outlined above.

          Added: January 2015

        • Financial Institutions

          Institutions defined as financial institutions by the CBB (local financial institutions) or by foreign banking regulators (foreign financial institutions); examples of financial institutions include investment companies, insurance companies and currency exchange companies.

          Added: October 2018

        • Financial instruments

          Any of the following instruments:

          (a) Transferable securities;
          (b) Islamic financial instruments;
          (c) Money market instruments;
          (d) Units in collective investment undertakings;
          (e) Derivative contracts other than commodity derivatives;
          (f) Derivative contracts relating to commodities settled in cash;
          (g) Derivative contracts relating to commodities;
          (h) Credit derivatives;
          (i) Financial contracts for differences;
          (j) Other derivative contracts;
          (k) Interests in real estate property;
          (l) Certificates representing certain securities; and
          (m) Rights or Interests in Financial Instruments.
          Amended: January 2011

        • Financial Instruments Trader

          A person who is engaged in buying or selling financial instruments.

          Amended: October 2014
          Amended: January 2011

        • Financial services (as used in Module LR)

          For the purpose of Module LR, financial services means:

          (a) Any dealings in any instrument defined as a financial instrument in any Volume of the CBB Rulebook;
          (b) Any arrangement where money, goods or services are made available to a person in exchange for his promise to pay at a later date and that arrangement is of a type habitually provided by another person for commercial gain;
          (c) Any arrangement in which money is solicited from the public in return for a promise of financial gain on, or safekeeping of, that money; or
          (d) Any product or other financial services in the area of regulated services (regulated by the CBB) marketed in the Kingdom of Bahrain.
          Added: January 2013

        • Framework (as used in Module OM)

          Deleted in January 2021.

          Amended: January 2021
          Added: October 2012

        • Future(s)

          Rights under a contract for the sale of a commodity or property of any other description under which delivery is to be made at a future date and at a price agreed on when the contract is made.

          Amended: January 2011

      • [ G ]

        • General Manager

          The General Manager (of a firm whether incorporated in Bahrain or not) means a person who (regardless of actual title) is responsible, alone or jointly, for the conduct of the whole of the firm, or in the case of an overseas licensee, for all the activities of the branch. Equivalent to Chief Executive in the case of firms incorporated in Bahrain (cf. HC-2).

        • Going concern

          The idea that a company will continue to operate indefinitely, and will not go out of business and liquidate its assets.

      • [ H ]

        • Head of function

          [Deleted in April 2015.]

          Deleted: April 2015
          Amended: January 2011

        • Hedging

          A strategy designed to reduce investment risk using call options, put options, short-selling, or futures contracts. A hedge can help lock in profits. Its purpose is to reduce the volatility of a portfolio by reducing the risk of loss.

        • High-Quality Liquid Asset ('HQLA')

          An asset is considered to be HQLA if it can be easily and immediately converted into cash at little or no loss of value under stress scenarios.

          Added: October 2018

        • Home Supervisor

          The competent regulatory authority in which the parent of a conventional bank licensee is incorporated, or in which the head office of a branch is incorporated.

        • Homogeneous loans

          Loan facilities bearing similar attributes.

        • Host Regulator/Supervisor

          The competent authority in which a branch of a foreign bank licensee is located or in which a subsidiary or joint venture of a foreign parent bank licensee is incorporated.

        • Hybrid instruments

          A package of two or more different kinds of risk management instruments that are usually interactive.

      • [ I ]

        • Independent director

          Determination by the Board. Under Module HC an 'independent director' is a director whom the board has specifically determined has no material relationship which could affect his independence of judgment, taking into account all known facts. The board should consider that, although a particular director meets the formal requirements, he may not be independent owing to specific circumstances of the person or the bank, ownership structure of the bank, or for any other reason. The board's determination should be a good faith finding after diligent review and full discussion.

          Formal Requirements. 'Independent director' means a director of the bank who, or whose family shareholders either separately or together with him or each other, does not have any material pecuniary relationships or transactions with the bank (not counting director's remuneration for this purpose) and in particular who, during the one year preceding the time in question met all the following conditions:

          (a) Was not an employee of the company;
          (b) Did not:
          (i) Make to, or receive from, the bank payments of more than 31,000 BD or equivalent (not counting director's remuneration);
          (ii) Own more than a 10% share or other ownership interest, directly or indirectly, in an entity that made to or received from the bank payments of more than such amount;
          (iii) Act as a general partner, manager, director or officer of a partnership or company that made to or received from the bank payments of more than such amount;
          (iv) Have any significant contractual or business relationship with the bank which could be seen to materially interfere with the person's capacity to act in an independent manner,
          (c) Did not own directly or indirectly (including for this purpose ownership by any family member or related person) 5% or more of the shares of any type or class of the bank;
          (d) Was not engaged directly or indirectly as an auditor or professional advisor for the bank;
          (e) Was not an associate of a Director or a member of senior management of the bank; and
          (f) Was not an associate of a Director, member of senior management or board member of the Bank’s controller.

          For purposes of this definition, the 'payments' referred to in paragraph (b)(i), (b)(ii) and (b)(iii) do not include monies received from dividends, deposits, investments and credit facilities arising from the bank's normal business activities, but instead ordinarily refer to monies received (and/or payable during the period in question) for services rendered to the bank by the director or company concerned, or paid (or payable) by the concerned director or company to the bank for services provided by the bank. The CBB may in its absolute discretion vary any such requirement (and/or restrictive effect thereof) in writing on a case-by-case basis.

          Dividends, deposits, investment accounts and credit facilities are to be considered under item (b)(iv) of this definition.

          For the purpose of the definition of "independent director":

          (a) Where the term "family" or "family member or related persons" is used reference is made to: spouse, father, mother, son(s) or daughter(s); and
          (b) Where the term "associate" is used reference is made to:
          (i) Spouse, father, mother, son(s) or daughter(s); or
          (ii) A person who is an employee or partner of the Director or of the firm represented or owned by the Director.
          Amended: October 2020
          Amended: July 2020
          Amended: January 2012
          Amended: October 2011
          Amended: January 2011

        • Independent non-executive director

          [deleted 01/2011]

        • Initial Margin

          A clearing member or client funded collateral posted to the CCP to mitigate the potential future exposure of the CCP to the clearing member, arising from the possible future change in the value of the transactions.

          Added: October 2018

        • Insider trading

          The activity which is in summary:

          (a) The offence of which an individual is guilty if he has information as an insider and:
          (i) In the circumstances described in (b), he deals in securities that are price-affected securities in relation to the information; or
          (ii)  (A) he encourages another person to deal in securities that are (whether or not that other knows it) price affected securities in relation to the information, knowing or having reasonable cause to believe that the dealing would take place in the circumstances mentioned in (b); or (B) he discloses the information, otherwise than in the proper performance of the functions of his employment, office or profession, to another person; and
          (b) The circumstances referred to in (a) are that the acquisition or disposal in question occurs on a regulated market, or that the person dealing relies on a professional intermediary or is himself acting as a professional intermediary.
          Amended: January 2011

        • Insurance licensee

          A person licensed under Volume 3 of the BMA/CBB Rulebook.

        • Interests in real estate property

          Any financial instrument giving right to or interests in real estate property other than owner occupied properties.

          Amended: January 2011

        • Intermediary

          A person who in the course of any business or profession invites other persons to make offers or proposals or to take other steps with a view to entering into contracts of insurance, but not a person who publishes such invitations only on behalf of, or to the order of, some other person.

        • Intra-group outsourcing

          Intra-group outsourcing is an arrangement in which one company within a group of companies provides services for another company within the same group that could also be or usually have been provided in-house.

        • Investigator

          An Investigator is a person appointed by the CBB under the authority of Article 121 of the CBB Law to carry out an investigation of the business of a licensee or listed company.

          Added January 2009

        • Investment(s) (as referred to in Module CM)

          An investment is any holding by a bank of capital instruments issued by a third party that is not a subsidiary of the bank. Therefore holdings of subordinated debt eligible as regulatory capital issued by another financial institution would be regarded as an "investment". In this case "holding" means legal or beneficial ownership of capital instruments.

          Added: January 2011

        • Investment analyst (as referred to in Module BC)

          An employee of a conventional bank licensee who prepares investment research.

          Added: January 2011

        • Investment firm licensee

          A person licensed under Volume 4 of the CBB Rulebook.

          Amended: January 2011

        • Investment fund managers

          A commercial organisation that manages investors' money for a fee.

        • Investment research (as referred to in Module BC)

          A document (other than a recommendation made to an individual customer), distributed outside a conventional bank licensee, which contains one or more of the following:

          (a) The results of research into an individual financial instrument;
          (b) Analysis of factors likely to influence the future performance of an individual financial instrument or its issuer; and
          (c) Advice or recommendations based on those results or that analysis.
          Added: January 2011

        • Investment risk reserve

          Investment risk reserve is the amount appropriated by the Islamic bank out of the income of investment account holders, after allocating the mudarib share, in order to cater against future losses for investment account holders.

        • Islamic bank licensee

          A person licensed under Volume 2 of the BMA/CBB Rulebook.

        • Issued share capital

          Total amount of shares that have been issued.

      • [ J ]

        • Joint accounts

          An agreement between two or more firms to share risk and financing responsibility in purchasing or underwriting securities, or an account owned jointly by two or more persons at a bank or brokerage house.

      • [ L ]

        • Licensed exchange(s)

          "Licensed exchange" means an exchange licensed in respect of the operation of its market in and from the Kingdom of Bahrain.

          Added: January 2011

        • Licensees

          Any person licensed by the CBB under any of the Volumes of the CBB Rulebook.

        • Liquidation

          The process of terminating a bank's activities whereby all creditors are discharged either in full (a solvent liquidation), or in part (an insolvent liquidation) and any remaining funds are returned to the shareholders. This process normally takes place in accordance with the requirements of specific legislation in the country of incorporation. In Bahrain this includes the Bankruptcy and Preventative Settlements Act.

      • [ M ]

        • MDB

          A multilateral development bank, which refers to any bank or lending or development body established by agreement between, or guaranteed by, two or more countries, territories or international organizations, other than for purely commercial purposes.

          Added: October 2018

        • Major Investment

          A major investment is defined as any acquisition or investment in the capital instruments of another entity by a Bahraini conventional bank licensee which is equivalent to or more than 10% of the Bahraini conventional bank licensee's consolidated total capital.

          Added: October 2016

        • Malus

          A malus is a feature of a remuneration arrangement that reduces the amount of a deferred bonus, so that the amount of the payout is less than the amount of the bonus award.

          Added: January 2014

        • Managing financial instruments

          Managing financial instruments means managing on a discretionary basis financial instruments on behalf of another person (see LR-1.3.27).

        • Managing Shari'a profit/loss sharing investment accounts

          Managing a Shari'a profit sharing investment account means managing an account, portfolio or fund, whereby a sum of money is placed with the service provider on terms that a return will be made according to an agreed Shari'a compliant profit-sharing arrangement, based either on a mudaraba or musharaka partnership (see LR-1.3.21).

        • Market (as referred to in the definition of licensed exchange)

          "Market" means a place at which, or a facility (whether electronic or otherwise) by means of which, offers or invitations to sell, purchase or exchange securities or futures contracts (including options and derivatives) regularly made on a centralised basis, being offers or invitations that are intended or may reasonably be expected to result, whether directly or indirectly, in the acceptance or making, respectively, of offers to sell, purchase or exchange securities or futures contracts (whether through that place or facility or otherwise).

          Added: January 2011

        • Market risk

          The risk of losses in on- and off-balance sheet positions arising from movements in market prices. The risks that are subject to the market risk capital requirement are:

          (a) Equity position risk in the trading book (see Chapter CA-10);1
          (b) Interest rate risk in trading positions in financial instruments in the trading book (see Chapter CA-9);
          (c) Foreign exchange risk (see Chapter CA-11); and
          (d) Commodities risk (see Chapter CA-12).

          1 Equity positions in the banking book are dealt with under Paragraph CA-3.2.26.

          Added: January 2015

        • Material Risk-Takers

          The following table provides a non-exhaustive list of examples of key positions that should be considered as material risk-takers:

          High-level category Suggested business lines
          Heads of significant business lines and any individuals within their control who have a material impact of the bank's risk profile Fixed income
          Foreign exchange
          Commodities
          Securitisation
          Sales areas
          Investment banking
          Commercial banking
          Equities
          Structured finance
          Lending
          Trading areas

          Banks should consider how the examples in the above table apply in relation to their own organisational structure.

          Added: January 2014

        • Memorandum of association

          The Memorandum of Association is the first constitutional document of a company containing fundamentals such as the name, the company's objects and powers, and its original share capital.

        • Mind and Management

          The presence of persons with executive authority to act on behalf of the bank and who have knowledge of the customers of the bank and their business, and the business of the bank where it acts as principal.

        • Minority interest

          Has the same meaning as used in IFRS.

          Added: January 2015

        • MLRO

          Money Laundering Reporting Officer of each bank as more particularly described in Chapter FC-4.

        • Money Laundering

          Means the activity constituting a criminal offence pursuant to Article 2 of the AML Decree Law No. 4 dated 29th January 2001 (see Appendix FC-1). More generally, money laundering refers to the process of hiding or disguising the true origin or ownership of the proceeds of criminal activities.

        • Money-market instruments

          Those classes of instruments which are normally dealt in on the money market, such as treasury bills, certificates of deposit and commercial papers and excluding instruments of payment.

      • [ N ]

        • NIM

          Net Interest Margin.

        • Name lending

          Lending on the basis of personal relationships rather than financial fundamentals.

        • Non-executive director

          Means any director who is not an executive director.

      • [ O ]

        • Offering Shari'a Financing Contracts

          Entering into, or making arrangements for another person to enter into, a contract to provide finance in accordance with Shari'a principles, such as murabaha, bay muajjal, bay salam, ijara wa iktina and istisna'a contracts.

        • Off-balance Sheet ('OBS') Activities

          A banks' business that does not generally involve booking assets or liabilities. Examples include the granting of standby commitments, letters of credit and guarantees.

          Added: October 2018

        • Off-site ATM

          Automated Teller Machine. An unattended electronic machine in a public place (other than the premises of the owning bank), connected to a data system and related equipment and activated by a bank customer to obtain cash withdrawals and other banking services.

        • Operating a collective investment undertaking

          Operating a collective investment undertaking means operating, establishing or winding up a Shari'a compliant CIU.

        • Operational Deposits

          The deposits generated by clearing, custody and cash management activities.

          Added: October 2018

        • Operational risk

          The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk2, but excludes strategic and reputational risk.


          2 Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.

          Added: January 2015

        • Option(s)

          An option is a contract giving the buyer the right, but not the obligation, to buy or sell any of the following at a specific price on or before a certain date:

          (a) Currency of the Kingdom of Bahrain or any other country or territory;
          (b) Palladium, platinum, gold or silver; or other commodity;
          (c) Option to acquire or dispose of a financial instrument of the kind specified by this definition by virtue of the above.
          Amended: January 2011

        • Originator Information

          a) The name of the payer;
          b) The address of the payer; and
          c) The account number of the payer (where funds are being remitted from an account with your bank).
          Added: December 2018

        • Other derivative contracts

          Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.

        • Outsourcing

          The use of a person to provide customised services to a licensee other than (a) a member of a licensee's board acting in his capacity as such (b) an individual employed by a licensee under a contract of service or (c) a licensed insurance manager providing services to a captive insurance firm.

        • Outsourcing Provider

          The person providing the customised services as described in the definition of "outsourcing"

        • Overseas conventional bank licensees

          Deleted: July 2017

        • Overseas conventional retail bank licensee(s)

          Deleted: July 2017
          Amended: April 2015

        • Overseas conventional wholesale bank licensee

          An overseas conventional bank licensee, licensed as a wholesale bank (see Volume 1, Section LR-1.2)

        • Over the counter (OTC)

          A decentralised market (as opposed to an exchange market) where geographically dispersed dealers are linked by telephones and computer screens. OTC trades are more often than not, denominated in non-standard amounts and on non-standard terms (eg maturity outside IMM dates). The term may also refer to trading in securities not listed on a stock or bond exchange.

        • Over-the-Counter Option

          An option traded off-exchange, as opposed to a listed stock option. The OTC option has a direct link between buyer and seller, has no secondary market, and has no standardization of striking prices and expiration dates.

      • [ P ]

        • Parent or Parent Undertaking

          An undertaking or individual ("P"), which has the following relationship to another undertaking ("S"):

          (i) P holds (alone or, under an agreement with other shareholders) a majority of the voting rights in S;
          (ii) P (alone or in conjunction with its other subsidiary undertakings), has the right to appoint or remove a majority of its board of directors;
          (iii) P has the right to exercise a dominant influence over S, either through provisions contained in S's memorandum or articles, or a control contract; or
          (iv) P is a parent undertaking of a parent undertaking of S.

        • Participant(s)

          A (CIU) participant is a person with one or more holdings in a CIU.

          Added: January 2011

        • Payment Initiation Service

          A 'payment initiation service' is an online service to initiate a payment order at the request of a payment service user from a payment account held at another account servicing payment service provider with the user's consent and authentication.

          Added: December 2018

        • Payment Initiation Service Provider (s) or PISP(s)

          A person licensed by the CBB to undertake payment initiation services.

          Added: December 2018

        • Person

          Unless the context requires otherwise, a natural or corporate person.

        • Personal account transaction

          A transaction undertaken by an employee of a conventional bank licensee in a financial instrument, for his own account.

          Added: January 2011

        • Politically Exposed Persons or 'PEPs'

          Foreign PEPs are individuals who are or have been entrusted with prominent public functions by a foreign country, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.

          Domestic PEPs are individuals who are or have been entrusted domestically with prominent public functions, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.

          Persons who are or have been entrusted with a prominent function by an international organisation refers to members of senior management, i.e. directors, deputy directors and members of the board or equivalent functions.

          The definition of PEPs is not intended to cover middle ranking or more junior individuals in the foregoing categories.

          Amended: July 2016
          Amended: June 2025

        • Pooled funds

          In investments, the combination of funds for the benefit of a common project, or a group of investors who use their combined influence to manipulate prices.

        • Price risk

          The narrow definition of price risk as applied to securities is as follows: The risk that the value of a security (or a portfolio) will decline in the future. Price risk can apply to any financial instrument, commodity, or foreign exchange position. Therefore a wider definition used by hedge funds is: The risk that the value of position in financial instruments, commodities or foreign exchange will decline due to moves in market factors.

          Amended: January 2015

        • Principal

          Means the amount of credit received plus any other potential other charges, the total of which is subject to interest/profit.

          Added: October 2012

        • Principal Amount

          The amount of any outstanding claim (excluding any interest and other expenses) on, or contingent liability in respect of, the relevant counterparty.

          Added: October 2018

        • Profit equalization reserve

          Profit equalisation reserve is the amount appropriated by the Islamic bank out of the mudaraba income, before allocating the mudarib share, in order to maintain a certain return level of return on investment for investment account holders and increase owners' equity.

        • Providing credit

          Providing credit is defined as the provision of credit to a person in his capacity as borrower or potential borrower. This includes consumer and mortgage credit; and providing credit by way of finance leases, factoring, forfaiting and reverse repo transactions. It also includes the issuance or endorsement of letters of credit, the issuance of letters of guarantee, and other contingent credit activities (such as the underwriting of loans), the purchase on the secondary market of loans and other contracts of credit (that do not otherwise fall under the definition of financial instruments), and the provision of ancillary credit-related activities, such as advising on or arranging loans. It excludes money advanced to a person in consideration for debt instruments issued by the same person. (see LR-1.3.18).

          Amended: January 2013

        • PSE

          A public sector entity which is specified as such either by the central bank ('domestic PSE') or by an overseas banking supervisory authority ('foreign PSE'). Domestic PSEs include those entities owned by the government, excluding the subsidiaries of such institutions undertaking commercial activities.

          Added: October 2018

        • Public Offering(s)

          An offer of securities to the general public. (see Rule BC-8.5.9).

          Amended: January 2013
          Added: January 2011

      • [ Q ]

        • Qualified by Exception

          A report issued by an appointed expert that is qualified and indicates that certain areas or issues remain unresolved or are unverifiable due to certain limitations imposed on the appointed expert's work. The report will clearly indicate the type and reason for exception and the action that would have been taken by the appointed experts had the mentioned limitation not been placed on their work.

          Added: October 2011

        • Qualifying Holding(s) (as referred to in Module CM)

          [Deleted in April 2015.]

          Deleted: April 2015
          Amended: April 2012
          Added: January 2011

      • [ R ]

        • Real time promotion

          A real time promotion is a promotion made in the course of a personal visit, telephone conversation or other interactive dialogue.

          Added: January 2011

        • Regulated banking services

          Any of the regulated activities permitted to be undertaken by a conventional bank licensee (see LR-1.3).

        • Regulated insurance services

          Regulated insurance services are any of the activities specified in Volume 3, Section AU-1.4, carried on by way of business.

        • Regulated Islamic banking services

          Regulated Islamic banking services are any of the activities specified in Volume 2, Section LR-1.3, carried on by way of business.

        • Relevant Authorities

          For the purposes of Module FC, relevant authority refers to the authorities listed in Rule FC-5.3.2.

          Amended: October 2014

        • Remuneration

          Means all types of compensation including but not limited to salary (fixed and variable bonus), fee and non-cash benefits such as health insurance, car housing, education, grants of stock, stock options or pension benefits.

          Amended: January 2014

        • Reporting Accountant

          A Reporting Accountant is a person appointed by the CBB under the authority of Article 114 of the CBB Law as an Inspector of the business of a licensee or listed company.

          Added January 2009

        • Representative office

          A person who is licensed by the CBB as per Volume 5 (Specialised Licensee/Representative Office) Module AU to undertake only representative office functions:

          (i) Gather financial, economic and commercial information;
          (ii) Carry out general promotional activities; and/or
          (iii) Provide general assistance of a non specific nature to resident and non resident customers of the overseas entity/group the office is representing.
          Amended: January 2011

        • ROAA

          Return on Average Assets.

        • ROAE

          Return on Average Equity.

        • Repo

          (a) an agreement between a seller and buyer for the sale of securities, under which the seller agrees to repurchase the securities, or equivalent securities, at an agreed date and, usually, at a stated price;
          (b) an agreement between a buyer and seller for the purchase of securities, under which the buyer agrees to resell the securities, or equivalent securities, at an agreed date and, usually, at a stated price.

        • Repo-style Transactions

          Transactions involving the sale and repurchase ('repo') of assets, purchase and resale ('reverse repo') of assets, as well as securities lending and securities borrowing. The term 'repo-style transactions' is generally taken to refer to any of the following transactions of a bank:

          i Sale and repurchase ('repo') of securities — the bank agrees to sell securities to a third party for cash with a commitment to repurchase the securities at an agreed price on an agreed future date.
          ii Securities lending — the bank lends securities to a third party and receives either cash or other securities from that party in exchange as collateral.
          iii Purchase and resale ('reverse repo') of securities — the bank agrees to acquire securities from a third party for cash, with a commitment to resell the securities at an agreed price on an agreed future date (i.e. the reverse of repo transactions).
          iv Securities borrowing — the bank borrows securities from a third party and gives cash or other securities to that party in exchange as collateral.
          Added: October 2018

        • Reputational risk

          Reputational risk is the potential that negative publicity regarding an institution's business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions.

        • Resident

          This term includes:

          (a) Persons of whatever nationality whose normal place of residence or business is in Bahrain at the relevant time or whose main source of income is earned from Bahrain.
          (b) Persons who have been granted permanent resident permits in Bahrain.
          (c) Corporate and other institutions who have a permanent registered address in Bahrain and/or a commercial registration number including branches or subsidiaries located in Bahrain of overseas registered corporate or other institutions (excluding offshore companies). However, dealings with the offices of such corporations outside Bahrain in respect of non-Bahrain business is permitted.
          (d) Staff of Bahrain Embassies and Consulates living outside Bahrain.
          (e) Agents or Agencies located abroad but acting on behalf of or for the account of Bahrain residents.

        • Restricted Investment Accounts

          With this type of account, the investment account holder imposes certain restrictions as to where, how and for what purpose his funds are to be invested. Further, the Islamic bank may be restricted from commingling its own funds with the restricted investment account funds for purposes of investment. In addition, there may be other restrictions which investment account holders may impose. For example, investment account holders may require the Islamic bank not to invest their funds in instalment sales transactions or without guarantor or collateral or require that the Islamic bank itself should carry out the investment itself rather than through a third party. Restricted participating investment bonds and restricted participating investment units (investment funds) and any other accounts of similar nature are equivalent to the restricted investment accounts.

        • Retail customer(s)

          Defined in Rule BC-8.4.10. A retail customer means a customer who is not classified as an accredited investor under Rules BC-8.4.6.

          Added: January 2011

        • Retail Deposits

          Deposits placed with a bank by a natural person. Deposits from legal entities, sole proprietorships or partnerships are captured in wholesale deposit categories.

          Added: October 2018

        • Rights or interests in Financial instruments

          Rights to or interests in all financial instruments.

      • [ S ]

        • Safeguarding financial instruments

          Safeguarding financial instruments means the safeguarding and administration of financial instruments belonging to another person (see LR-1.3.29 ff).

        • Secured Obligations

          Obligations that are secured by legal rights on specifically designated assets owned by the bank which are used in the case of bankruptcy, insolvency or liquidation.

          Added: October 2018

        • Securitised assets

          Creating a financial product such as a mortgage pass-through security, by pooling assets to back the instrument. Also refers to the replacement of loans and/or cash flows of financial intermediaries with negotiable securities issued in the capital markets.

        • Security(ies) (as referred to in Chapter BC-7 and in the definition of market)

          "Securities" means shares or bonds issued by shareholding companies, government debt instruments and the following financial instruments:

          (a) Shares in companies and other securities equivalent to shares in companies or other entities, and depositary receipts in respect of shares;
          (b) Bonds or other forms of debt, including depositary receipts in respect of such securities;
          (c) Warrants;
          (d) Units, rights or interests (however described) of the participants in a collective investment scheme;
          (e) Options, futures and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event);
          (f) Options, futures and any other derivative contract relating to commodities that can be physically settled;
          (g) Units to Real Estate Investment Trusts (REITs);
          (h) Index tracking products including Islamic indices;
          (i) Any other financial instrument approved as a financial instrument by the CBB for the purpose of trading such instrument on an exchange; and
          (j) Islamic securities, being those financial instruments that are Shari'a compliant.
          Amended: January 2011

        • Securities Financing Transactions (SFTs)

          Transactions such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions, where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements.

          Added: January 2015

        • Self-Regulatory Organisation(s) or (SROs)

          "Self-Regulatory Organizations (SROs)" means any organisation licensed by the CBB under Volume 6 of the Markets and Exchanges (MAE) Module, or the Clearing, Settlement and Central Depository (CSD) Module, or any other organisation recognised as an SRO by the CBB.

          Added: January 2011

        • Senior Manager/Management

          Refers to individuals occupying the position of CEO or head of function.

        • Service level agreement

          An agreement forming part of the Outsourcing Agreement between the outsourcing service provider and the bank that outlines the standards of service to be provided by the outsourcing service provider.

        • Shareholders

          a) In relation to a share which is represented by a bearer certificate, the person who holds the certificate; b) in relation to a share that is not represented by a bearer certificate, the person whose name is entered on the register in relation to the share.

        • Shares

          A share or stock in the share capital of an enterprise, whether incorporated or unincorporated, but excluding units in collective investment undertakings.

        • Shari'a board or shari'a supervisory board

          An independent body of specialized jurists who, collectively, are entrusted with the duty of directing, reviewing and supervising the activities of an Islamic financial institution in order to ensure that they are in compliance with Islamic Shari'a rules and principles.

        • Small Business Deposits

          Deposits that are considered as having similar characteristics to retail accounts, provided the total aggregated funding raised from one small business customer is less than BHD 500,000 (on a consolidated basis where applicable).

          Added: October 2018

        • Soft dollar agreement (as referred to in Chapter BC-8)

          An agreement in any form under which a conventional bank licensee receives goods or services in return for investment business put through or in the way of another person.

          Added: January 2011

        • Sovereign debt

          A debt instrument issued by central government.

        • Spot transactions

          A foreign exchange transaction in which each party promises to settle the transaction two days after the transaction date.

        • Stable Deposits

          Amounts of the deposits that are fully insured by a deposit insurance scheme which represents a portion from the deposits in the transactional accounts (e.g. accounts where salaries are automatically deposited), as per the provisions of those regulations.

          Added: October 2018

        • Subsidiary(ies)

          An entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent entity).

          Amended: April 2015
          Added: January 2015

        • Subsidiary undertaking

          A company or other enterprise controlled by another company or enterprise (the parent or the holding company).

        • Succession plan

          A plan developed by a bank that would lay down the bank's strategy with respect to succession of various senior management or board positions within the bank.

        • Suspicious Transaction

          Any transaction or dealing which raises in the mind of a person involved, any concerns or indicators that such a transaction or dealing may be related to money laundering or terrorist financing or other unlawful activity. Examples of suspicious transactions are set out in Appendix FC 3.

        • Swap(s)

          A financial contractual agreement between two parties to exchange (swap) a set of payments that one party owns for a set of payments owned by the other party.

          Amended: January 2011

      • [ T ]

        • Tranche

          One of several related securities offered at the same time. Tranches from the same issuer usually have different risk, reward, and/or maturity characteristics.

        • Transactional Accounts

          Accounts used to settle transactions pertaining to salaries and customer income.

          Added: October 2018

        • Transfer Risk

          The risk that a borrower will not be able to convert local currency into foreign exchange and so will be unable to make debt service payments in foreign currency. The risk normally arises from exchange restrictions imposed by the government in the borrower's country.

          Added: July 2017

        • Transferable securities

          Those classes of securities which are negotiable on the capital market, with the exception of instruments of payment. Transferable securities include:

          (a) shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares;
          (b) bonds or other forms of securitized debt, including depositary receipts in respect of such securities;
          (c) warrants;
          (d) any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.

        • Trigger event(s) (as used in Section CA-2.1)

          A trigger event is the earlier of:

          (a) A decision that a write-off (without which the conventional bank licensee would be unviable) is necessary, as determined by the CBB; or
          (b) The decision to make a public sector injection of capital (or equivalent support) without which the conventional bank licensee would have become unviable (as determined by the CBB).
          Added: January 2015

        • Trilateral meeting

          A meeting between a bank, an appointed expert and the CBB.

          Amended: October 2011

        • Transferee

          For purpose of Chapter GR-4, means any person licensed to carry out the transferred banking business.

          Added: October 2012

        • Transferor

          For the purpose of Chapter GR-4, means the bank wishing to transfer any part of its banking business according to the provisions of Resolution No.(33) for the year 2012.

          Added: October 2012

      • [ U ]

        • Underwriting (as defined in Paragraph CM-5.3.6)

          A binding commitment by the reporting bank to purchase securities issued by, or provide syndicated loans/credit facilities to (as the case may be) an unconnected party ("the issuer" or "the borrower") at a mutually agreed price.

          Added: April 2012

        • Unencumbered Assets

          Assets free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell or transfer these assets. Liquid assets should not be used to cover trading positions or to secure, collateralize or credit-enhance any transaction, nor be designated to cover operational costs (such as rents and salaries).

          Added: October 2018

        • Units in collective investment undertakings

          Rights or interests (however described) of the participants in a collective investment scheme.

        • Unrestricted Investment Accounts

          With this type of account, the investment account holder authorizes the Islamic bank to invest the account holder's funds in a manner which the Islamic bank deems appropriate without laying down any restrictions as to where, how and for what purpose the funds should be invested. Under this arrangement the Islamic bank can commingle the investment account holder's funds with its own funds or with other funds the Islamic bank has the right to use (e.g., current accounts). The investment account holders and the Islamic bank generally participate in the returns on the invested funds. Unrestricted participating investment bonds and any other accounts that are of similar nature are equivalent to unrestricted investment accounts.

      • [ V ]

        • VaR

          An estimate expressed as a monetary value of the probability of losses on a portfolio of financial instruments based on a statistical analysis of historical market price trends, correlations, and volatilities.

        • Variation Margin

          A clearing member or client funded collateral posted on a daily or intraday basis, to a CCP based upon price movements of their transactions.

          Added: October 2018

      • [ W ]

        • Warrants

          Warrants are instruments that confer an entitlement to subscribe for shares, debenture and government and public securities. The rights conferred must be rights to 'subscribe' for the relevant investments. This means that they are rights to acquire the investments directly from the issuer of the investments and by way of the issue of new investments.

        • Wholesale banks

          Deleted: July 2017

        • Wholesale Funding

          Deposits and obligations that are raised from non-natural persons (i.e. legal entities, including sole proprietorships and partnerships).

          Added: October 2018

        • Without delay

          The phrase 'without delay' means, ideally, within a matter of hours of a designation by the United Nations Security Council or its relevant Sanctions Committee (e.g. the 1267 Committee, the 1988 Committee, the 1718 Sanctions Committee or the 1737 Sanctions Committee). For the purposes of S/RES/1373(2001), the phrase 'without delay' means upon having reasonable grounds, or a reasonable basis, to suspect or believe that a person or entity is a terrorist, one who finances terrorism or a terrorist organisation. In both cases, the phrase 'without delay' should be interpreted in the context of the need to prevent the flight or dissipation of funds or other assets which are linked to terrorists, terrorist organisations, those who finance terrorism, and to the financing of proliferation of weapons of mass destruction, and the need for global, concerted action to interdict and disrupt their flow swiftly.

          Added: October 2019

      • [ Y ]

        • Yield curve

          The graphic depiction of the relationship between the yield on bonds of the same credit quality but over different maturities.

        • Yield to maturity (YTM)

          The percentage rate of return paid on a bond, note, or other fixed income security if the investor buys and holds it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity, and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate.

          Amended: January 2015

    • List of Circulars

      • Licensing and Authorisation Requirements (LR)

        Circular Ref Date of Issue Module Ref. Circular Subject
        5/77 8 Mar 1977 LR B-1.1, LR 3.3 Permitted Business Transactions with Residents
        OG/16/90 10 Jan 1990 LR 2.3, LR 3.3 'no subject'
        OG/192/98 16 Jun 1998 LR 4 Financial Trust Regulation
        no reference Apr 1981 LR 5 Precious Metals and Commodities

      • High Level Controls (HC)

        Circular Ref Date of Issue Module Ref. Circular Subject
        EDBS/.../04
        (Consultative Paper)
        24 Feb 2004 HC 1 High Level Controls Requirements for Banks—Enhancing Corporate Governance
        BC/23/99 8 Nov 1999 HC 1 'Enhancing Corporate Governance in Banking Organisations'
        BC/904/95 24 Jul 1995 HC 1.6 Notification to, and approval from the Agency for certain matters
        ODG/329/03 10 Sep 2003 HC 1.6 Corporate Governance Reporting
        BC/11/98 27 Jul 1998 HC 2 Terms and Definitions Applying to the Management of Banks and Financial Institutions
        BC/8/00 24 May 2000 HC 2 Controllers of, and holdings and transfers of significant ownership or controlling interests in, Agency licensees
        BC/13/99 15 Jun 1999 HC 3 Compliance, Risk Management and Internal Controls
        BMA/1287/94 6 Nov 1994 HC 4 Foreign Exchange, Securities and Other Dealers

      • Business and Market Conduct (BC)

        Circular Ref Date of Issue Module Ref. Circular Subject
        EDBC/73/96 1 May 1996 BC 1.1 Explanatory note on the promotion of Banking and Financial Products offered in/from Bahrain by Means of Incentives etc.
        BS.C7/91/442 10 Sep 1991 BC 1.1 Promotion of Banking Services
        85/25 2 May 1985 BC 2 Code of Conduct for Foreign Exchange Dealers and Brokers
        83/5 10 Apr 1983 BC 3 Disclosure of Information about Individual Accounts
        BC/14/98 2 Sep 1998 BC 4.1 Savings Accounts
        BS.C7/90/34 31 Jan 1990 BC 4.2 Dinar Certificates of Deposits
        EDBO/51/02 2 Apr 2002 BC 4.3 Charges to Customers
        BC/5/00 8 Mar 2000 BC 4.4 Accounts held for Clubs and Societies in Bahrain
        BS.D(111)/94/1507 24 Sep 1994 BC 4.5 Fees on Current Accounts
        BC/2/01 3 Mar 2001 BC 4.6 Brokerage Fees in Bahrain
        ODG/145/92 18 Aug 1992 BC 4.7 New or expanded products and facilities in the Retail Banking Field
        EDBO/46/03 8 Apr 2003 BC 4.8 Inheritance—Financial Procedures
        EDBO/27/96 25 Sep 1996 BC 5.1 Regulation Relating to a Penalty System for "Dishonoured Cheques"
        OG/399/94 28 Nov 1994 BC 5.2 Returned Cheques
        EDBO/49/01 6 May 2001 BC 5.3 Penalty Charges on Returned Cheques
        BC/8/98 24 May 1998 BC 6.1 Off-site ATMs
        EDBO/45/02 13 Mar 2002 BC 6.2 GCC ATM Network Charges

      • Capital Adequacy (CA)

        Circular Ref Date of Issue Module Ref. Circular Subject
        ODG/50/98 11 Sep 1998 CA 1CA 9 Market Risk Capital Regulations
        BC/07/02 26 Jun 2002 CA 1.4 Review of PIR by External Auditors
        OG/78/01 20 Feb 2001 CA 2.5 Monitoring of Capital Adequacy
        BC/01/98 10 Jan 1998 CA 2.5 Risk Asset Ratio

      • Credit Risk Management (CM)

        Circular Ref Date of Issue Module Ref. Circular Subject
        BC/117/95
        (partial)
        1 Feb 1995 CM 1CM 2 Risk Management
        2 OG/127/01 18 Mar 2001 CM 2.3 Developing a Sound Credit Culture
        BC/1/01
        (partial)
        8 May 2001 CM 4.2 IAS 39
        EDBC/1/95 26 Aug 1995 CM 4.3 Re: Provisioning Policies of Branches of Foreign Banks in Bahrain
        OGD/27/88 9 Feb 1988 CM 4.4 Provisions Against Country Debt
        BC/1/01
        (partial)
        8 May 2001 CM 4.4 IAS 39
        BC/12/01 26 Nov 2001 CM 5 The Monitoring and Control of Large Exposures of Banks Licensed by the Agency
        EDBC/128/96 4 Aug 1996 CM 6 Staff Loans
        OG/45/88 13 Mar 1988 CM 7.1 Write-Off—Credit Facility
        BC/7/01
        (partial)
        23 Oct 2001 CM 7.1 Audited Financial Statement of Locally Incorporated Banks for the Year Ending 31 December 2001 and Subsequent Years.
        BC/8/01 22 Oct 2001 CM 7.1 Audited Financial Statement of Branches of Foreign Banks for the (partial) Year Ending 31 December 2001 and Subsequent Years.
        OG/50/92
        (partial)
        4 Mar 1992 CM 8.1CM 8.2 Consumer Finance
        OG/73/02 17 Feb 2002 CM 8.1CM 8.2 Duty to Display Current Effective Rate of Interest
        BC/3/98 21 Feb 1998 CM B-2 Basel Committee on Banking Supervision Framework for the Evaluation of Internal Controls Systems

      • Operational Risk Management (OM)

        Circular Ref Date of Issue Module Ref. Circular Subject
        BS/9/03 14 Sep 2003 OM 1 Operational Risk Management
        ODG/162/03 21 May 2003 OM 2 Outsourcing
        BC/9/98 16 Jun 1998 OM 3 Electronic Money and Electronic Banking Activities
        BC/6/02 24 Jun 2002 OM 3 Risk Management Principles for Electronic Banking
        ODG/347/03 28 Sep 2003 OM 4.2 Succession Planning

      • Financial Crimes (FC)

        Circular Ref Date of Issue Module Ref. Circular Subject
        BC/17/97 10 Nov 1997 FC B-1 Money Laundering
        OG/308/89 14 Oct 1989 FC B-1 Money Laundering
        EDBC/6/01 14 Oct 2001 FC 1, FC 4FC 7 Re: Money Laundering Regulation
        BC/1/02 27 Jan 2002 FC 3 FATF Special Recommendations on Terrorism Financing
        BC/3/00 5 Mar 2000 FC 4.4 Re: Accounts for Charity Organisations
        OG/423/01 1 Oct 2001 FC 8 UN Security Council Resolution 1373 (2001)

      • BMA Reporting Requirements (BR)

        Circular Ref Date of Issue Module Ref. Circular Subject
        BC/7/01
        (partial)
        23 Oct 2001 BR 1.1 Audited Financial Statement of Locally Incorporated Banks for the Year Ending 31 December 2001 and Subsequent Years.
        no reference
        (partial)
        Apr 1981 BR 1.1 Precious Metals and Commodities
        BC/3/02 13 Mar 2002 BR 1.1 Additional Public Disclosure Requirements Amended Version – 2002
        ODG/329/03 10 Sep 2003 BR 1.1 Corporate Governance Reporting
        BC/8/01
        (partial)
        23 Oct 2001 BR 1.2 Audited Financial Statement of Branches of Foreign Banks for the Year Ending 31 December 2001 and Subsequent Years.
        EDBC/1/95 26 Aug 1995 BR 1.2 Re: Provisioning Policies of Branches of Foreign Banks in Bahrain
        BC/1/99
        (partial)
        22 Feb 1999 BR 2.1 Enhancing Bank Transparency
        ODG/50/98
        (partial)
        11 Sep 1998 BR 3.1, BR 5.2 BR Market Risk Capital Adequacy Regulations
        BC/07/02 26 Jun 2002 BR 3.1, BR 3.2 Review of PIR by External Auditors
        BC/06/00 26 Apr 2000 BR 3.1, BR 3.2 BMA—Prudential Returns
        BC/12/01
        (partial)
        26 Nov 2001 BR 3.1, BR 5.1 The Monitoring and Control of Large Exposures of Banks Licensed by the Agency
        ER/118/98 2 Feb 1998 BR 3.3, BR 4.1 Revised Statistical Returns
        ER/247/98 22 Mar 1998 BR 3.3, BR 4.1 Revised Statistical Returns
        OG/89/88 30 Jun 1988 BR 4.2 Reserve Balances
        BMA/751/93
        (partial)
        8 Jul 1993 BR 4.3 Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange.
        BC/904/95
        (partial)
        24 Jul 1995 BR 5.1 Notification to, and approval from the Agency for certain matters
        BC/309/94 28 Mar 1994 BR 5.1 Management Personnel
        BMA/1287/94
        (partial)
        6 Nov 1994 BR 5.1 Foreign Exchange, Securities and Other Dealers
        BC/13/99
        (partial)
        15 Jun 1999 BR 5.1 Compliance, Risk Management and Internal Controls
        EDBC/6/01
        (partial)
        14 Oct 2001 BR 5.1 Re: Money Laundering Regulation
        EDBC/73/96
        (partial)
        1 May 1996 BR 5.1 Explanatory note on the promotion of Banking and Financial Products offered in/from Bahrain by Means of Incentives etc.
        BMA(4)/91/832 22 Oct 1991 BR 5.1. Specimen Signatures
        OG/45/88 13 Mar 1988 BR 5.2 Write-Off—Credit Facility
        ODG/145/92 18 Aug 1992 BR 5.3 New or expanded products and facilities in the Retail Banking Field
        BC/3/00 5 Mar 2000 BR 5.3 Re: Accounts for Charity Organisations
        BC/03/99 27 Feb 1999 Appendix New Prudential Information Returns

      • Public Disclosure Requirements (PD)

        Circular Ref Date of Issue Module Ref. Circular Subject
        EDBC/14/96 17 Jan 1996 PDB-2 Public Disclosure of the Trading and Derivatives Activities of Banks and Securities Firms
        BC/2/99 21 Feb 1999 PD 1.3, PD 3.2 Public Disclosure
        BC/3/02 13 Mar 2002 PD 1.3 Additional Public Disclosure Requirements Amended Version – 2002
        no reference
        (partial)
        Apr 1981 PD 1.5 Precious Metals and Commodities
        BMA/751/93 8 Jul 1993 PD 1.1, PD 1.3, PD 1.4, PD 3.2 Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange.
        EDBC/782/93 17 Jul 1993 PD 1.1 The Interests of Directors, Chief Executive and Senior Managers in the Shares of Locally Incorporated Banks Quoted on the Bahrain Stock Exchange.
        BC/1/99 22 Feb 1999 PD 2.2 Enhancing Bank Transparency
        OG/73/02 17 Feb 2002 PD 4.2 Duty to Display Current Effective Rate of Interest
        OG/50/92 4 Mar 1992 PD 4.2 Consumer Finance
        OG/107/01 3 Mar 2001 PD 4.3 Disclosure of BD Interest Rates
        OG/425/94 21 Dec 1994 PD 4.4 Deposit Protection
        OG/423/93 28 Nov 1993 PD 4.4 Deposit Protection Scheme (the "Scheme")

      • Compensation (CP)

        Circular Ref Date of Issue Module Ref. Circular Subject
        OG/423/93 28 Nov 1993 CP 1CP 2 Deposit Protection Scheme (the "Scheme")
        OG/425/94 21 Dec 1994 CP 2.4 Deposit Protection

    • CBB Reporting Forms

      • LR: LR: Licensing Requirements

        • Appendix OM-1: Appendix OM-1: Operational Risk Management

          Please download the Form in PDF format.

          • Appendix LR-1: Annual License Fee Form (ALF)

            Please download the Form in PDF format.

          • Appendix LR-2: Direct Debit Authorisation Form

            Please download the Form in PDF format.

        • [Deleted]

          Deleted: October 2011

          • [Deleted]

            Deleted: October 2011

        • BC: Business and Market Conduct

          • Appendix BC 1: List of Dishonoured Cheques

            Please download the Form in PDF format.

        • FC: Financial Crime

          • Appendix FC 2: Suspicious Transaction Report (STR)

            [Deleted in July 2016]

            Deleted: July 2016

          • Appendix FC 4: MLRO Form

            [Deleted in July 2016]

            Deleted: July 2016

        • BR: CBB Reporting Requirements

          • Appendix BR 2: Statistical Returns

            Please download the Form in Excel format.

          • Appendix BR 5: — PIR Bahraini Conventional Banks

            Please download the Form in Excel format.

          • Appendix BR 5A: — PIR Overseas Conventional Banks

            Please download the Form in Excel format.

          • Appendix BR 8: Quarterly Report on Overseas Banking Subsidiaries and Branches

            Please download the Form in PDF format.

          • Appendix BR 9: External Auditor's PIR Review Letter

            Please download the Form in PDF format.

          • Appendix BR 10: Board and Committee Meetings

            Please download the Form in PDF format.

          • Appendix BR 11: Connected Counterparty Exposures

            Please download the Form in Excel format.

          • Appendix BR 13: Appointed Experts Report

            Please download the Form in PDF format.

          • Appendix BR-14: Details of Remuneration Paid

            Please download the Form in PDF format.

          • Appendix BR-15: Details of Remuneration for Top 12 Employees

            Please download the Form in PDF format.

          • Appendix BR-16: Eligible Accounts Report for the Deposits Protection Scheme

            Please download the Form in PDF format.

          • Appendix BR-19 Large Exposures Report

            Please download the Form in PDF format.

          • Appendix BR-20 Guidelines for Completion of Supplementary Information Form

            Please download the Guidelines in PDF format.

          • Appendix BR-21: Information required for Annual and Interim Financial Review

            Please download the document in Excel format.

          • Appendix BR-22: Continuous Professional Development Form (CPD)

            Please download the Form in PDF format.

          • Appendix BR-23: Liquidity Coverage Ratio (LCR)

            Please download the Form in Excel format.

          • Appendix BR-24: Net Stable Funding Ratio (NSFR)

            Please download the Form in Excel format.

        • EN: EN: Enforcement

          • Appendix EN 1: Enforcement

            Please download the Form in PDF format.

        • OM: Operational Risk Management

    • CBB Authorization Forms

      • LR: Licensing and Authorisation Requirements

        • Form 1: Application for a License

          Please download the Form in PDF format.

        • [Deleted]

          Deleted: April 2011

        • Form 2: Application for Authorisation of Controller

          Please download the Form in PDF format.

        • Form 3: Application for Approved Person Status

          Please download the Form in PDF format.

    • Supplementary Information

      • HC: HC: High-level Controls

        • Appendix HC-(i) Agreed-upon Procedures re Compliance with HC-5 (Remuneration)

          Please download the Form in PDF format.

      • GR: GR: General Requirements

        • Appendix GR-1: Application for Transfer of Business

          Please download the Form in PDF format.

      • BC: Business and Market Conduct

        • Appendix BC 2: CBB Control List for Dishonored Cheques

          Please download the Form in PDF format.

        • Appendix BC 3: CBB List of abusers of cheques — active

          Please download the Form in PDF format.

        • Appendix BC 4: CBB List of abusers of cheques — inactive

          Please download the Form in PDF format.

        • Appendix BC 5: Market Terminology — Foreign Currency and Deposit Market

          Please download the Form in PDF format.

        • Appendix BC 6: Proposed Scale of Brokerage Fees

          Please download the Form in PDF format.

        • Appendix BC 7: Caps on Fees and Charges for Standard Services Provided to Individuals Applicable to Retail Banks From 01/May/2018

          Please download the Form in PDF format.

      • CA: Capital Adequacy

        • Appendix CA-1 Minority interest illustrative example

          Please download the Appendix in PDF format.

        • Appendix CA-2 Treatment of counterparty credit risk and cross-product netting

          Please download the Appendix in PDF format.

        • Appendix CA-3 The 15% of common equity limit on specified items

          Please download the Appendix in PDF format.

        • Appendix CA-4 Capital treatment for failed trades and non-DvP transactions

          Please download the Appendix in PDF format.

        • Appendix CA-5 Overview of Methodologies for the Capital Treatment of Transactions Secured by Financial Collateral under the Standardised Approach

          Please download the Appendix in PDF format.

        • Appendix CA-6 Illustrative IRB Risk Weights

          Please download the Appendix in PDF format.

        • Appendix CA-7 Supervisory Slotting Criteria for Specialised Lending

          Please download the Appendix in PDF format.

        • Appendix CA-8 Illustrative Examples: Calculating the Effect of Credit Risk Mitigation under the Supervisory Formula

          Please download the Appendix in PDF format.

        • Appendix CA-9 Mapping of Business Lines

          Please download the Appendix in PDF format.

        • Appendix CA 10: Basel II — Operational Risk — Standardized approach — Calculation of capital charge

          Please download the Form in PDF format.

        • Appendix CA 11: Worked example of maturity method of calculating general interest rate risk

          Please download the Form in PDF format.

        • Appendix CA 12: Worked example of duration method of calculating general interest rate risk

          Please download the Form in PDF format.

        • Appendix CA 13: Worked example of maturity ladder approach for calculating commodities risk

          Please download the Form in PDF format.

        • Appendix CA 14: Worked example of delta-plus method of calculating options risk

          Please download the Form in PDF format.

        • Appendix CA 15: Supervisory Framework for the Use of "Backtesting" in Conjunction with the Internal Models Approach to Market Risk Capital Requirements

          Please download the Form in PDF format.

        • Appendix CA 16: Table for Mapping Notations of ECAIs

          Please download the Form in PDF format.

        • Appendix CA 17: Calculation of risk weighted amount of an investment subject to fair value treatment

          Please download the Form in PDF format.

        • Appendix CA 18: Bahrain Sovereign and Public Sector Entities Eligible for Zero Risk Weighting

          Please download the Form in PDF format.

        • Appendix CA 19: Stress Testing Guidance for the Correlation Trading Portfolio

          Please download the Appendix in PDF format.

        • Appendix CA 20: Supplementary Schedules to Calculate Capital Charges under the Standardised Approach for Market Risk

          Please download the Appendix in Excel format.

        • Appendix CA-21: Investments in Commercial Entities

          Please download the Appendix in PDF format.

        • Appendix CA-22: Comprehensive Example of Deductions

          Please download the Appendix in PDF format.

        • Appendix CA-23: Comprehensive Example of Deductions and T2 2% Cap

          Please download the Appendix in PDF format.

      • CM: Credit Risk Management

        • Appendix CM 1: Sovereign Debt Provisioning Matrix

          [Deleted in January 2023]

          Deleted: January 2023

        • Appendix CM 2: Code of Best Practice on Consumer Credit and Charging

          Please download the Form in PDF format.

        • Appendix CM 3: Credit Reference Bureau Code of Best Practice

          Please download the Form in PDF format (Arabic).

        • Appendix CM-4: Regulation in respect of Close-Out Netting under a Market Contract

          Please download the Appendix in PDF format.

      • FC: Financial Crime

        • Appendix FC 1: Amiri Decree Law No. 4

          Please download the Form in PDF format.

        • Appendix FC-2A: Decree Law No. 54 (2006)

          Please download the Form in PDF format.

        • Appendix FC-2B: Decree Law No. 58 (2006)

          Please download the Form in PDF format.

        • Appendix FC 3: Guidelines for Detecting Suspicious Transactions

          Please download the Form in PDF format.

        • Appendix FC 5: UN Security Council Resolution 1373 (2001)

          Please download the Form in PDF format.

        • Appendix FC 6: Guidance Notes

          Please download the Form in PDF format.

        • Appendix FC 7: UN Security Council Resolution 1267

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      • BR: CBB Reporting Requirements

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        • Appendix BR-17: Instructions for the Completion of the Eligible Accounts Report for the Deposits Protection Scheme

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      • PD PD Public Disclosure

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        • Appendix PD-5 Instructions for Publication of Press Releases

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      • CP: Compensation

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        • Appendix CP 2: Resolution No. [23] of 2009 in respect of Definition of Deposit

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      • OB: Open Banking

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  • Quarterly Updates

    • January 2024

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    • July 2006

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    • January 2006

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  • Ad-hoc Communications

    • Implementation of Ministerial Resolution No. (43) of 2024 with respect to Payments related to Commercial Transactions for Commercial Establishments_24 July 2025

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    • Cyber Security Requirements_17 July 2025

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    • New Stablecoin Issuance and Offering Module_2 July 2025

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      Click here to download the Volume 6 CRA in PDF format.

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    • GCC Fund Passporting Regime_4 May 2025

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      Click here to download the Volume 7 CIU Module in PDF format.

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    • Electronic Certificates of Origin_7 April 2025

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    • Appointment of Data Protection Guardian_24 March 2025

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    • Remote Visual Notarisation Service_13 March 2025

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    • New Identity Card Launch_10 March 2025

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    • New Fit and Proper Requirements Module_3 March 2025

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    • National e-KYC_17 February 2025

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    • Implementation of Jaywan within GCCNET SWITCH Transactions_4 February 2025

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    • GCC Funds Passporting Regime_2 January 2025

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    • Resolution No. (43) of 2024 Regarding the Conditions and Licensing Procedures of Undertaking Trustee Services_19 November 2024

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    • Tax on Multinational Enterprises (MNEs)_16 September 2024

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    • Amendment to the Central Bank of Bahrain's Market Making Framework & Introduction of an Alternative Market Making Mechanism by Bahrain Bourse_12 August 2024

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    • Dealing with Accounts of Expatriates whose Work Permits have been Cancelled_3 July 2024

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    • WPS Reengineering Project_26 June 2024

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    • Open Banking_26 May 2024

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    • Amendments to the Dividends and Profit Repatriation Requirements_24 January 2024

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    • Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Exposure Drafts_15 January 2024

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    • Climate-related Financial Risks_7 January 2024

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    • Amendments to Customer Due Diligence (CDD) Requirements_7 January 2024

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    • Amendments to the Financial Crime Module (Module FC)_26 December 2023

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    • New Requirements on Insurance Cover on Loans/Financing_24 December 2023

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    • Point of Sales Transactions in Bahrain_19 November 2023

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    • Restructuring the High-Level Controls Module (Module HC)_19 November 2023

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    • Environmental, Social and Governance Requirements Module_5 November 2023

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    • Resolution No. (54) of 2023 with Respect to issuing a Regulation on the Rules and Procedures of Mergers and Acquisitions of Shares of Companies Listed on Exchanges Licensed by the Central Bank of Bahrain_1 November 2023

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    • Reliance on Third Parties for Customer Due Diligence_16 October 2023

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      Click here to download the Volume 1 FC Module in PDF format.

    • Financing to Small and Medium Sized Enterprises (SMEs)_5 October 2023

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    • Amendments to Customer Due Dillgence (CDD) and Customer Onboarding Requirements_14 September 2023

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      Click here to download the Volume 1 FC Module in PDF format.

    • Dividends and Profit Repatriation_3 August 2023

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      Click here to download the Volume 2 CA Module in PDF format.

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    • Sub: Submission of CIUs Application_22 June 2023

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    • Employee Salary Transfers by Banks' Corporate Customers_29 May 2023

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    • Doctors' Education Loans Scheme supported by Tamkeen_19 April 2023

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    • Government Employee Certificates issued through the National Electronic Portal_30 March 2023

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      Click here to download the User Guide in Arabic.

    • Revised High-Level Controls (HC) Module_5 March 2023

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    • Amendments to the Credit Risk Management (CM) Module_23 February 2023

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    • Trade based Money Laundering – Guidance for all Financial Institutions_16 February 2023

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    • Credit Protection Guarantees Provided by Tamkeen_30 January 2023

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    • Amendments to the Credit Risk Management Module (Module CM)_18 January 2023

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    • Amendments to the Financial Crime Module (Module FC) and Anti-Money Laundering and Combating Financial Crime Module (Module AML)_17 January 2023

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    • Pension Commutation Scheme_15 December 2022

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    • Amendments to the Financial Crime Module (Module FC)_1 December 2022

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    • Social Housing Loans Through Participating Banks_29 September 2022

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    • Re: Judicial Banking Orders System (JBOS)_28 September 2022

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      Click here to download the Users Manual in PDF format.

    • Subject: ATM Physical Security Measures_20 September 2022

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    • Amendments to Cybersecurity Requirements_18 August 2022

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    • Amendments to Outsourcing Requirements

      Click here to download the Outsourcing Requirements July 21, 2022 Letter in PDF format.

      Click here to download the Outsourcing Requirements July 25, 2022 Letter in PDF format.

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    • Re: Directive with Regards to Execution Orders Against Banks_21 July 2022

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    • Arab International Cybersecurity Summit_3 July 2022

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    • Certificates Issued through SIO Electronic Portal_27 June 2022

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    • Amendments to Financial Crime Module (Module FC)_15 June 2022

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    • Bahrain Open Banking Framework Developer Portal_18 May 2022

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      Click here to download the Attachment in PDF format.

    • Reporting of Financial Impact of Covid-19_9 May 2022

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    • Subject: Discrepancies in BCRB Reporting_11 April 2022

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    • Subject: Replacement of the Traditional Hard-Copy Residency Permits with Digital Residency Permits_31 March 2022

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    • Amendments to Requirements on Reporting Cyber Security Incidents_28 March 2022

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    • Issuance of the new Collective Investment Undertakings Module_24 March 2022

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      Click here to download the CIU Module.

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    • Re: Climate-Related Risks_14 March 2022

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      Click here to download the Guidance Note for CBB Licensees.

    • Amendments to Module GR of the CBB Rulebook Volumes 1 and 2_9 Feb 2022

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      Click here to download the Amendments to Volume 1 GR Module.

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    • Amendments to Take-overs, Mergers and Acquisitions (TMA) Module_19 January 2022

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    • Amendments to Requirements on Promotion of Financial Products and Services_16 January 2022

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    • Issuance of Final Amendments to the Requirements on Promotion of Financial Products and Services_25 November 2021

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      Click here to download the BC Module.

    • Subject: Climate-Related Risks_8 November 2021

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    • Re: Amendments to Caps on Fees and Charges for Standard Services Provided to Individuals applicable to Retail Banks_28 September 2021

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      Click here to download the Appendx BC-7 in PDF format.

    • Amendments to the Financial Crime Module (Module FC)_14 September 2021

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    • Requirements on Dormant Accounts and Unclaimed Balances_2 September 2021

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    • Subject: Cooperating with the Ministry of Housing_22 August 2021

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      Click here to download the Customer Consent in PDF format.

    • Issuance of Amendments to Open Banking Regulations_7 July 2021

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    • Re: Application of the recently issued Resolution No. (16) of 2021 promulgating the Regulation on Control in Banks on Branches of Foreign Banks_6 July 2021

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    • Subject: New Section OM-5.5: Cyber Security Risk Management_1 July 2021

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    • WPS Project Implementation_17 June 2021

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    • Resolution No. (16) of 2021 with respect to promulgating the Regulation Pertaining to Control in Banks_13 June 2021

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    • Subject: Extension of Credit Instalments Deferral_27 May 2021

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    • Amendments to Domestic Systemically Important Banks (DS) Module and Internal Capital Adequacy Assessment Process (ICAAP) Module_26 May 2021

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    • Revised Credit Risk Management Module (Module CM)_26 May 2021

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    • Re: Requirements to Incorporate Merchant Category Codes for Internal Fund Transfers_25 May 2021

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    • Amendments to Caps on Fees and Charges for Individual Customers, including Non-Bahraini Individuals_10 May 2021

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    • Draft Executive Resolutions issued by the Personal Data Protection Authority_26 April 2021

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    • Merchant Fees_20 April 2021

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    • Information Required for Annual and Interim Financial Review_13 April 2021

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      Click here to download the Appendix (BR-20) Guidelines.

      Click here to download the Spreadsheet in Excel format.

    • Merchant Fees on Payments to Zakat and Charity Fund_6 April 2021

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    • Independent Review by Third Party Consultants_22 March 2021

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    • Mandating the Use of Purpose Codes for SWIFT Cross-Border Payments_17 March 2021

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      Click here to download the Purpose Codes in Arabic in PDF format.

    • Agreed-Upon Procedures of the Financial Crime ("FC") Module_3 March 2021

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    • Upcoming Annual General Meetings_14 February 2021

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    • Prepaid Cards_12 January 2021

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    • Mandating the Use of Purpose Codes for SWIFT Cross-Border Payments_4 January 2021

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      Click here to download the Purpose Code Logic - Internal Use in PDF format.

      Click here to download the Purpose codes - Disclosure Document in PDF format.

      Click here to download the Purpose Codes, Explanatory Notes and Examples - Internal Use in PDF format.

      Click here to download the Subscription steps for a participant to BHD service in PDF format.

    • Re: CBB Rules on Blocking/Unblocking of Customer Accounts_23 December 2020

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    • Re: Virtual Assets - Red Flags and Indicators_30 November 2020

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      Click here to download the Guidance Paper in PDF format.

    • Re: Combating the Financing of Terrorism - Guidance for All Financial Institutions_17 November 2020

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    • Subject: Cyber Security Risks and Threats Workshop by Visa_3 November 2020

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    • Re: Fund Transfers by Customers of Payment Service Providers_8 October 2020

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    • Subject: Off-Plan Sale Projects Escrow Account Manager_5 October 2020

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    • Re: Proof of Residency Permit__29 September 2020

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      Click here to download the Proof of Residency Permit Attachment in PDF format.

    • Resolution No. (123) with respect to the Regulations and Implenting Procedures for Selling Mortgaged Properties in Public Auction_29 September 2020

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    • Re: Fraudulent Phishing Attempts_23 September 2020

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    • Re: Issuance of Contactless Payment Cards_8 Sept 2020

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    • Re: Provision of Financial Services on a Non-discriminatory Basis_26 Aug 2020

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    • Re: Exemptions from Submission of Agreed upon Procedures on PIR/PIRI/PIRFM_24 August 2020

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    • Transition from LIBOR_29 July 2020

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    • Reporting of Financial Impact of COVID-19_14 July 2020

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    • Re: Money Laundering & Terrorist Financing Risks & Practices during Covid-19_27 May 2020

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      Click here to download the Guidance Paper for Money Laundering & Terrorist Financing Risks & Practices during Covid-19 in PDF format.

    • Amendments to Operational Risk Management (OM) Modules - Volumes 1 and 2_18 May 2020

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    • Amendments to the Financial Crime (FC) and High-Level Controls (HC) Modules_7 May 2020

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    • Financial Impact Assessment of the Six Months Instalment Deferral_26 April 2020

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    • Directive Automatic Exchange of Information ("AEOI") - Common Reporting Standard ("CRS") and Foreign Account Tax Compliance Act ("FATCA") Reporting Window_16 April 2020

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    • Webinar on Principles and Practices of Real Estate Valuation in the Financial Services Sector_13 April 2020

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    • Directive on Use of Salary Transfers to Bahrainis by the Government_12 April 2020

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    • Additional COVID-19 Precautionary Measures_8 April 2020

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    • Date Sensitive Reporting Requirements Extensions/ Exemptions Under Rulebooks (Volume 1 and 2)_2 April 2020

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    • Agreed Upon Procedures for Financial Crime Module_1 April 2020

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    • Exemption for first Quarter Financial Results Preparation and Publication_30 March 2020

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    • Deferral of Implementation of Announced Regulatory Policy Requirements_30 March 2020

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    • Implementation Guidelines Regarding the 6 Months Deferral_24 March 2020

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    • Implementation Guidelines Regarding the 6 Months Deferral_23 March 2020

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    • Real Estate Valuation Requirements_19 March 2020

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    • Upcoming General Meetings_19 March 2020

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    • Regulatory Measures to Contain the Financial Repercussions of the Covid-19_17 March 2020

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      • Real Estate Valuation Requirements_16 March 2020

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      • EDBS_Services Continuity Measures_12 March 2020

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      • Disinfection Instructions_11 March 2020

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        Click here to download the Disinfection of Public Places Guidelines in PDF format.

        Click here to download the Guidelines for Quarantine Facilities and Disinfection in PDF format.

        Click here to download the Home Quarantine and Disinfection Guidelines in PDF format.

      • Measures to Mitigate the Impact of Coronavirus on Customers_8 March 2020

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      • Directive: Prohibiting the Practice of Blocking Accounts upon Loss of Employment_8 March 2020

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      • Sharing of Data on Financing to Small and Medium Enterprises_8 March 2020

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      • Concessionary Measures To Mitigate The Impact of Coronavirus_5 March 2020

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      • Account Balance Feature in BenefitPav_4 March 2020

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      • Caps on Fees for Credit Facilities Provided to Individuals_27 February 2020

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      • Removal of Prior Approval Requirement in Business and Market Conduct Module (Module BC) for Advertisements on Financial Products and Services_26 February 2020

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      • Wage Protection Scheme_13 February 2020

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      • Monthly Escrow Account Data_27 January 2020

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      • Instructions for Publication of Press Releases Concerning Financial Results_14 January 2020

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      • Transition from LIBOR_14 January 2020

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      • Financial Reporting for VAT purposes_13 January 2020

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      • EDBS_e-KYC Project Implementation_12 January 2020

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      • Appendix BR-24 Net Stable Funding Ratio (NSFR) - Volume 1_9th January 2020

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      • Certificate of Capital Deposits for Companies_2 January 2020

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      • Revised Operational Risk Management Module (Module OM)_31 December 2019

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      • EDBS_KH_New Requirements in Module HC_29 December 2019

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      • CBB Regulatory Policy Initiatives for the banking industry for the year 2020_25 December 2019

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        • Re: Fund Transfers Within the Banks_28 November 2019

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          Click here to download the Appendix BC-7 of Retail Banks Standard Service Charges in PDF format.

        • Local Tokenization Project for Local Debit Cards_24 October 2019

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        • Issuance of the Amended Module TMA -Volume 6_2 October 2019

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        • Use of Monthly Flat Rate of Interest/Profit for Credit Facilities_24 September 2019

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        • SMS on Failed ATM/Point of Sale ("POS") Transactions_24 September 2019

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        • Interest charge computation on credit cards_4 September 2019

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        • Interest charge computation on credit cards_27 August 2019

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        • Contactless Payment Transactions_18 August 2019

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        • Proposed Requirements on Point of Sale (POS) Infrastructure_8 August 2019

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        • Wage Protection Scheme ("WPS")_22 July 2019

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        • Unclaimed Account Balances_10 July 2019

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        • Appendix BR-23 Liquidity Coverage Ratio Report (LCR) — Volume 1_4 July 2019

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        • Deleted

          This communication letter has been deleted as of 27th August 2019.

        • Local Tokenization Project for Local Debit Cards_26 June 2019

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        • Agreed Upon Procedures for Module FC_19 June 2019

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          Click here to download the Supplementary Information Appendix FC-8 in PDF format.

        • Practices for charging profit on credit cards_13 June 2019

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        • Account Opening, Acceptance and Deposit of funds — Clubs and Youth Centres_23 May 2019

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        • Re: Open Banking - Additional Implementation Guidance_24 April 2019

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        • Exposures to Social Housing Schemes_23 April 2019

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          • New Procedures for Opening Bank Accounts for Owner's Association_24 April 2019

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          • Issuance of the Digital Financial Advice Rules_26 March 2019

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            Click here to download the Volume 1 Digital Financial Advice Module in PDF format.

            Click here to download the Volume 1 Licensing Requirements Module in PDF format.

            Click here to download the Volume 1 Glossary Module in PDF format.

          • e-KYC Project Implementation_7 March 2019

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          • Regulations relating to 'Crypto-Assets'_21 February 2019

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            Click here to download the Crypto-Assets Module in PDF format.

            Click here to download the Definitions Module in PDF format.

          • Brokerage Fees in Bahrain_31 January 2019

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          • Clarification regarding treatment of Fixed Deposits_20 January 2019

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          • Deleted

            This communication letter has been deleted as of 11th February 2019.

          • Compliance Chapter in Module HC — High-Level Controls_15 January 2019

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          • Agreed Upon Procedures for Module FC_13 January 2019

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          • Amendment to Appendices BR-20 and BR-21 under CBB Rulebook_9 January 2019

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          • Failed ATM/POS Terminal Transactions Resulting in Un-claimed Cash Resting with Licensees_30 December 2018

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          • VAT and Financial Services_25 December 2018

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          • Disclosure of information in credit card statements_24 December 2018

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          • CBB Regulatory Policy Initiatives for the banking industry for the year 2019_18 December 2018

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          • Regulations relating to 'Open Banking'_6 December 2018

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          • Circular Card Rounding off Transactions_22 November 2018

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          • Issuance of the Leverage Ratio Requirements_4 November 2018

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          • Amazon Web Services "AWS" Cloud Session_11 October 2018

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          • Drive-Thru ATMs_16 September 2018

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          • Fees on letter certifying the receipt of capital amount for companies under formation_13 September 2018

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          • BD-USD Exchange Rate on Cards_30 August 2018

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          • Use of Rule 78 on Early Repayment of Installment Financing Facilities_30 August 2018

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          • Account opening and funds collected by way of donations_29 August 2018

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          • Liquidity Risk Management Module_16 August 2018

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          • ATM Alert_15 August 2018

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          • Interest/profit charges on credit cards_15 August 2018

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          • Amendments to LR Module_12 August 2018

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          • Risk Management Related Modules_5 August 2018

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          • Failed ATM/POS Terminal Transactions Resulting in Un-Claimed Cash Resting with Licensees_31 May 2018

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          • Circular - Amendments to the Public Disclosure Module (PD)_17 May 2018

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          • Failed ATM/PoS Terminal Transactions Resulting in Un-claimed Cash Resting with Licensees_7 May 2018

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          • Amendments to the Operational Risk Management Module_29_April_2018

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          • Failed ATM/PoS Terminal Transactions Resulting in Un-claimed Cash Resting with Licensees_23 April 2018

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          • Re: Financial Penalties_15 April 2018

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          • Revised Form "Prudential Information Report" (PIR) for Conventional Banks_2 April 2018

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          • Implementation of Wage Protection System (WPS)_15 March 2018

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          • Compliance with the CBB Rules Applicable to Controllers_6 March 2018

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          • Compliance with the CBB Rules Applicable to Controllers_28 February 2018

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          • Issuance of new Internal Audit Requirements under the High Level Controls Module (Module HC)_13 February 2018

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          • New Requirements in the Operational Risk Management Module (OM)_13 February 2018

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          • CBB Regulatory Policy Initiatives for the Banking Industry for the Year 2018_31 January 2018

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          • Failed ATM/POS Terminal Transactions Resulting in Un-claimed Cash Resting with Licensees_11 January 2018

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          • Investing in Fintech_3 December 2017

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          • Wage Protection System Solution — Request for Proposal_25 September 2017

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          • Industry Feedback Open Bank Account for CUF_13 September 2017

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          • Amendments to Financial Crime Module (FC)_12 September 2017

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          • Amendments to Financial Crime Module (FC)_10 September 2017

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          • Amendments to Operational Risk Management Module_7 September 2017

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          • Amendment to the Regulatory Sandbox Framework_28 August 2017

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          • Amendments to CBB Reporting Requirements Module (BR)_28 August 2017

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          • Registration of Expatriate Staff with the Labour Market Regulatory Authority_27 July 2017

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          • Proposed Procedures for Opening bank accounts for Companies Under Formation_27 July 2017

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          • Protected Cell Companies_22 June 2017

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          • Investment Limited Partnerships_22 June 2017

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          • Trust Registration and Amendment Form_22 June 2017

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          • Country & Transfer Risks - Additional Section to Module CM_4 June 2017

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          • "Bahrain Trade" Initiative_30 May 2017

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          • Provision of data on Commodity Murabaha and Interbank Wakala_22 May 2017

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            Attachments
            Data Worksheet - Commodity Murabaha and Wakala View Document

          • Insurance Charges and Costs for Credit Facilities and Debit/Credit Cards_21 May 2017

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          • Cyber Security Forum & Expo_25 April 2017

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          • Directive Common Reporting Standards (CRS)_30 January 2017

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          • Implementation of Resolution No. (59) of 2011 — Registration of Pledges and Liens on Securities — and its amendment Resolution No. (30) of 2015_11 January 2017

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          • Onsite Inspection Process_10 January 2017

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          • CBB Regulatory Policy Initiatives for the banking industry for the year 2017_29 December 2016

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          • Guidelines for IFRS9 ECL Implementation by Banks and Financing Companies_28 December 2016

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          • Qualifications and Core Competencies for Controlled functions_14 December 2016

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          • Outsourcing of Functions Containing Customer Information_8 December 2016

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          • Electronic System for Commercial Licenses launched by the Ministry of Industry Commerce & Tourism ("MOICT")_16 November 2016

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          • Newly Issued Laws — Protected Cell Companies and Investment Limited Partnerships_6 November 2016

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          • Trust Law_6 November 2016

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          • Latest Version of Prudential Information Returns (PIR & PIRI)_30 October 2016

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          • Specialized Workshop on Cyber Security in Banks & Fintech_25 October 2016

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          • Serving the Disabled Customers_16 October 2016

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          • Third Annual Information Security Conference for the Financial Sector_3 October 2016

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          • New Appointment Notification_7 September 2016

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          • Transaction Advice_31 August 2016

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          • Implementation of Bahrain Credit Reference Bureau Code of Practice and Rules_22 August 2016

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          • Transaction Advice — Corporate Customer Accounts_21 August 2016

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          • Transaction Advice_28 July 2016

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          • US Dollar Parity Rate_4 July 2016

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          • Issuance of CRB Code of Practice_9 June 2016

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          • Outsourcing of Functions Containing Customer Information_9 June 2016

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          • Cyber Security Risk Management_1 June 2016

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          • Cyber Attacks on Critical IT Systems and Infrastructure_11 May 2016

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          • SMS Transaction Advice_28 April 2016

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          • Update of Appendix CA-18 and Amendments to Module CA: Bahrain Sovereign and Government Entities Eligible for Zero Risk Weighting_1 March 2016

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          • Reminder on Submission of Eligible Accounts Report_7 January 2016

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          • Amendments to the Central Bank and Financial Institutions Law No. (64) of the year 2006_27 December 2015

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          • Paid-up Capital Bank Certificates for the Establishment of Commercial Companies_27 December 2015

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          • New Electronic System for Commercial Licenses launched by the Ministry of Industry & Commerce ("MOIC")_27 December 2015

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          • Update of Appendix CA-18: Bahrain Sovereign and Government Entities Eligible for Zero Risk Weighting_16 November 2015

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          • IFRS 9: Quantitative Impact Assessment (QIA)_15 November 2015

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          • BIBF's Securities Market Regulation Certification Programme_30 September 2015

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          • Credit Check Reports Requested by Pensioners_27 August 2015

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          • Adoption of an Electronic Establishment of Registration Certificate By the Ministry of Industry & Commerce_6 May 2015

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          • Microsoft 'End of Lifecycle & Support for Windows Server 2003'_22 April 2015

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          • ATMs — Precautions During Formula One Period_9 April 2015

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          • Women in the Financial and Banking Sector 2015_31 March 2015

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          • Submission of the Quarterly Capital Adequacy Form_26 March 2015

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          • Specialized Workshop on Stress Testing & Capital Planning_24 March 2015

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          • Women in the Financial and Banking Sector_15 March 2015

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          • Clarification of Remuneration Rule and Guidance_19 February 2015

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          • Court Actions Taken Against Customers_16 February 2015

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          • Basel Committee Consultative Document: Revisions to the Standardised Approach for Credit Risk_10 February 2015

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          • Publication of Close-Out Netting Regulation_30 December 2014

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          • Reminder on Submission of Eligible Accounts Report_25 December 2014

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          • Changes in the Current Smart ID Cards_20 November 2014

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          • Monthly Progress Reports on Implementation of Basel III — Pillar I_18 September 2014

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          • Financial Advice Programme_24 July 2014

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          • Upgrade of ATMs and application software that run on Windows XP_28 April 2014

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          • Treatment of Interest or Profit in Suspense in the PIR and Published Financial Statements_17 April 2014

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          • Conventional Banks Contributions - Deposit & URIA Protection Scheme_26 March 2014

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          • Microsoft announces end of Lifecycle & Custom Support for its Windows XP operating systems_25 March 2014

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          • Private Placements of Securities Issued by or Promoted by Banks Licensed in Bahrain_24 March 2014

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            Attachments
            Private Placement Progress Report Letter for Real Estate and other Projects Under Development View PDF
            Private Placement Progress Report Letter for Private Equity purchases of existing companies View PDF

          • ATM During Formula One_17 March 2014

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          • Discriminatory Service Treatment Not Allowed_11 March 2014

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          • Questionnaire for significant IT Outsourcing_9 March 2014

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          • Compliance with Resolution No. (16) 2012_25 December 2013

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          • Skimming Frauds at ATMs_11 December 2013

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          • Module TC Volumes 1 and 2 Amendment_9 December 2013

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          • Sound remuneration practices for Licensed Banks_26 November 2013

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            Attachments
            Glossary terms View PDF
            Module BR Remuneration Changes View PDF
            Details of Remuneration Paid App BR-14 View PDF
            Module AU Remuneration Changes View PDF
            Module HC Remuneration Changes View PDF
            Module PD Remuneration Changes View PDF
            Remuneration Top 12 App BR-15 View PDF

          • BIS Consultative Document — "Fundamental review of the trading book — second consultative document"_18 November 2013

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          • Nomination of bank's representatives to participate in the Eleventh Banking Conference (Abu Dhabi 4–5 November 2013)_6 October 2013

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          • Non-Resident Accounts_9 September 2013

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          • Deposits from Private Security Firms Operating in the Kingdom of Bahrain_5 September 2013

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          • Foreign Account Tax Compliance Act (FATCA)_29 August 2013

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          • Automated Teller Machines_21 August 2013

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          • Recent cases of fraud in auto finance_24 July 2013

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          • Treasury Master Agreements and IIFM Interbank Unrestricted Master Investment Wakalah Agreement_10 July 2013

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          • Promotion of and participation in educational scholarships and bursaries by licensees of the CBB_3 July 2013

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          • Suspicious Transaction Reports Online System (STRs)_25 June 2013

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          • Extension of Bahrain Credit Reference Bureau ("BCRB") Services to Cover Corporates_13 June 2013

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          • Basel 3 Implementation Plan_12 June 2013

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          • Written Communications with the Banking Supervision Staff at the Central Bank of Bahrain — Use of Electronic Files_30 May 2013

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          • Electronic Submission of Returns and Analysis of Data (ESRAD)_20 May 2013

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          • Outsourcing of Card Business and Electronic/Internet Banking Services_19 May 2013

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          • Internet Security Measures_16 May 2013

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          • The official adoption of the GCC States Identity Card_24 March 2013

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          • Foreign Account Tax Compliance Act (FATCA)_19 February 2013

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          • Change in Due Date and Payment for CBB Annual License Fees_4 December 2012

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          • Basel 3 Proforma Reporting_27 November 2012

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          • Sale of Insurance Products_16 September 2012

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          • New Basel Committee Consultative Document: Margin requirements for non-centrally cleared derivatives_30 July 2012

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          • Secured Lending Baseline Survey for the AMF_11 July 2012

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            Click here to download the Annex in Word format.

          • Press Releases Concerning Financial Statements 5 July 2012

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          • Benefits received by Approved Persons 5 July 2012

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          • Advertisements for retail Banking Products and Services 4 July 2012

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          • Foreign Account Tax Compliance Act ("FATCA")_21 May 2012

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          • Public Disclosure of Quarterly Financial Statements — Module PD-3

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          • Request for Information on Disclosures related to Corporate Governance

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          • Transaction Advice and Internet Security

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          • Arrangements for Retired Customers' Financing Facilities

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          • Interest/Profit Rates, Commissions, Fees & Other Charges on Products & Services

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          • Delivery of Date Sensitive Documents at the CBB

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          • Appointment of Independent Director

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          • Appointment of Independent Director

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          • Financial Advice Programme_22 June 2011

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          • Financial Advice Programme

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          • Publication of Financial Statements

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          • Disbursement of BD1000 Grant to Bahraini Families

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          • Implementation of the Corporate Governance requirements in the High Level Controls Module (HC) and Public Disclosure Module (PD)

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          • Disbursement of BD1000 Grant to Bahraini Families

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          • BCRB's Retention of Adverse Customer Data

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          • "Basel 3" - Quantitative Impact Assessment

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          • Circular - Business Card Requirements - Conventional Retail Banks

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          • Circular - Business Card Requirements - Conventional Wholesale Banks

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          • Circular - FCB Working Week

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  • Archived Part A

    • Introduction

      • UG UG Users Guide

        • UG-A UG-A Introduction

          • UG-A.1 UG-A.1 Purpose

            • UG-A.1.1

              The Bahrain Monetary Agency ("the BMA"), in its capacity as the regulatory and supervisory authority for all financial institutions in Bahrain, issues regulations that licensees are legally obliged to comply with. These regulations are contained in the BMA Rulebook.

            • UG-A.1.2

              The Rulebook is divided into 5 Volumes, covering different areas of financial services activity. Volume 1 (Conventional Banks) covers all conventional banks licensed by the Agency. Islamic banks are covered in Volume 2. Volume 3, covering insurance licensees, was issued in April 2005. Volume 4 is being issued in two phases, starting in April 2006. Representative offices of banks and specialised licensees are in Volume 5, which will be issued in 2007.

            • UG-A.1.3

              This Users' Guide provides guidance on:

              (a) the status and application of the Rulebook, with specific reference to Volume 1 (Conventional Banks);
              (b) the structure and design of the Rulebook; and
              (c) its maintenance and version control.

          • UG-A.2 UG-A.2 Module history

            • UG-A.2.1

              This User's Guide — Module UG — was first issued in July 2004 together with the rest of Volume 1 (Conventional Banks). All subsequent changes to this Module are dated with the month and year at the base of the relevant page and in the Table of Contents: Chapter UG-3 of this Module provides further details on Rulebook maintenance and version control.

            • UG-A.2.2

              A list of recent changes made to this Module are detailed in the table below:

              Module Ref. Change Date Description of Changes
              UG-A.2 1/2005 Update of changes to Module
              UG-1.2 1/2005 Clearer wording on rules and guidance
              UG-2.2 1/2005 Sections and paragraphs explained more fully
              UG-2.3 1/2005 Footers explained more fully
              UG-3.1 1/2005 Contents pages explained more fully
              UG-2.3 & UG-3.1 4/2006 Revised dating and update system

        • UG-1 UG-1 Rulebook status and application

          • UG-1.1 UG-1.1 Legal basis

            • UG-1.1.1

              Volume 1 (Conventional Banks) of the BMA Rulebook is issued by the BMA pursuant to Amiri Decree Law No. 23 of 1973 (the "BMA Law").

          • UG-1.2 UG-1.2 Status of provisions

            • UG-1.2.1

              The contents of the Rulebook have the formal status either of Rules or Guidance.

            • UG-1.2.2

              Rules have a binding effect. If a licensee breaches a Rule to which it is subject, it is liable to enforcement action by the BMA and, in certain cases, criminal proceedings by the Office of the Public Prosecutor.

            • UG-1.2.3

              Guidance is not binding. It is material that helps inform a particular Rule or set of Rules, or provides other general information. Where relevant, compliance with Guidance will generally lead the BMA to assess that the business has complied with the rule(s) to which the Guidance relates. Conversely, failure to comply with Guidance will generally be viewed by the BMA as tending to suggest breach of a Rule.

            • UG-1.2.4

              The status of each paragraph within the Rulebook can be identified by its text format, as follows:

              (a) Rules are in bold, font size 12. The paragraph reference number is also highlighted in a coloured box.
              (b) Guidance is in normal type, font size 11.

            • UG-1.2.5

              The Agency's interpretation of all Rules and Guidance in this Volume is final.

          • UG-1.3 UG-1.3 Application

            • UG-1.3.1

              Rules and Guidance contained in Volume 1 of the BMA Rulebook apply to all conventional licensed banks subject to the provisions of the BMA Law, except for representative offices of banks which are subject to the relevant requirements contained in Volume 5 (Specialised Firms) and Islamic banks which are covered in Volume 2.

            • UG-1.3.2

              Where relevant, individual sections of Volume 1 may identify which specific Rules and Guidance apply to particular types of banking licensee.

          • UG-1.4 UG-1.4 Effective date

            • UG-1.4.1

              Volume 1 (Conventional Banks) of the BMA Rulebook was first issued in July 2004. It replaces all regulations previously issued with respect to conventional banks.

            • UG-1.4.2

              For reference, these superseded regulations are listed in the Rulebook, under the 'Regulation history' section of the appropriate Module in each Volume. The list includes the reference number of the previously superseded circular or regulation, its date and subject heading.

        • UG-2 UG-2 Rulebook structure and format

          • UG-2.1 UG-2.1 Rulebook structure

            • Rulebook Volumes

              • UG-2.1.1

                The Rulebook is divided into 5 Volumes, covering different areas of financial services activity, as follows:

                Volume 1 Conventional Banks
                Volume 2 Islamic Banks
                Volume 3 Insurance
                Volume 4 Investment Business
                Volume 5 Specialised Activities

              • UG-2.1.2

                Volume 5 (Specialised Activities) covers money changers; leasing firms; factoring firms; representative offices; finance companies; mono-line credit card companies and providers of ancillary services to the financial sector.

            • Rulebook contents (overview)

              • UG-2.1.3

                Except for Volume 5, the basic structure of each Rulebook is the same. Each Volume starts with a contents page and User's Guide. Subsequent material is organised underneath the following headings:

                (a) High Level Requirements
                (b) Business Requirements
                (c) Reporting Requirements and
                (d) Enforcement and Redress

              • UG-2.1.4

                Volume 5 is organised by the category of specialised firm concerned.

              • UG-2.1.5

                The material in Volumes 1–4 is contained in Modules, each covering a specific area of requirements (e.g. High-level Controls). In turn, each Module is divided into Chapters, Sections and Paragraphs, as detailed below.

              • UG-2.1.6

                Each Volume has its own appendix Volume containing relevant reporting forms and a glossary.

          • UG-2.2 UG-2.2 Volume structure

            • Modules

              • UG-2.2.1

                Rulebook Volumes are subdivided into Modules, arranged in groups according to their subject matter, underneath the headings listed in paragraph UG-2.1.3 above.

              • UG-2.2.2

                Each Module in a Volume is referenced using a two-letter code which is usually a contraction or abbreviation of its title. These codes are used for cross-referencing within the text.

            • Chapters

              • UG-2.2.3

                Each Module consists of chapters, categorised into two types:

                (a) A standard introductory chapter (referenced with a letter: e.g. UG-A); and
                (b) Chapters containing the substantive content of the Module (referenced with a number: e.g. CA-1, CA-2, etc.)

              • UG-2.2.4

                The introductory chapter summarises the purpose of the Module, its history (in terms of changes made to its contents) and, where applicable, lists previously issued circulars and regulations that were replaced by the Rulebook Module.

            • Sections and paragraphs

              • UG-2.2.5

                Chapters are further sub-divided into Sections (numbered consecutively after the Chapter number: e.g. FC-1.1, FC-1.2, FC-1.3 etc). In turn, Sections are sub-divided into Paragraphs (numbered consecutively after the Chapter and Section numbers: e.g. FC-1.1.1, FC-1.1.2, FC-1.1.3 etc.). Where appropriate, sub-section headings may be used, to guide the reader through a Section: sub-section headings are italicised and unnumbered, and act purely as an indicator (without limitation as to the status of the paragraphs that follow.

            • Table of contents

              • UG-2.2.6

                Each Volume's contents page lists all the Modules contained within it (Part A), and the information contained in the relevant appendix Volume (Part B).

              • UG-2.2.7

                The contents page of each Module lists the chapters, section and, in some Modules, sub-sections it contains, and the latest date of each section in issue.

          • UG-2.3 UG-2.3 Format and page layout

            • Headers

              • UG-2.3.1

                The top of each page in the Rulebook identifies the Volume, Module and Chapter in question. Each Module is a separate document. New Chapters start on a fresh page.

            • Footers

              • UG-2.3.2

                The bottom of each page in the Rulebook (on the left hand side) identifies the Module in question, its section and page number. Page numbering starts afresh for each Section: the total number of pages in each respective Section is shown as well as the individual page number. The bottom right hand side shows an issue date. The Contents Page for each Module is given its own separate version number. In addition, the Contents page lists the latest issue date for each Section in that Module. The Contents page thus acts as a summary checklist of the current version in force for each section. Further explanation is provided in Section UG-3.1 below.

            • Defined terms

              • UG-2.3.3

                Defined terms used in the Rulebook are underlined. Each Volume has its own glossary listing defined terms and giving their meaning. Definitions of terms used apply only to the Volume in question. It is possible for the same term to be used in a different Volume with a different meaning.

            • Cross-references

              • UG-2.3.4

                Cross-references are highlighted in yellow. Two active cross-references are shown in Paragraph UG-2.3.5 below. Any cross-references given in a text state the Module code, followed by the numbering convention for the chapter and section being referred to. For example, the cross-reference FC-1.2.3 refers to the first Paragraph in the second Section of the first Chapter of the Financial Crimes Module. Many references will be quite general, referring to a Module or Chapter rather than a specific Paragraph.

            • Text format

              • UG-2.3.5

                Each paragraph is assigned a complete reference to the Module, Chapter, and Section, as well as its own paragraph number, as explained in UG-2.3.4 above. The format of the paragraph reference and paragraph text indicates their status as either a Rule or Guidance, as explained in UG-1.2.4 above.

        • UG-3 UG-3 Rulebook maintenance and availability

          • UG-3.1 UG-3.1 Maintenance

            • Quarterly Updates

              • UG-3.1.1

                Changes to the Rulebook are made quarterly. After the end of each calendar quarter, the BMA automatically reissues the contents page of each Module. Users can thus determine whether they have access to the latest version of these pages, by checking that they have those marked with the most recent date.

              • UG-3.1.2

                The contents page of each Module lists the current date of each Section. The Module contents pages thus act as a checklist for users to verify that they have the current requirements.

              • UG-3.1.3

                Where changes to the regulations are required, then the affected pages are re-issued, alongside the contents pages for each Module. Where possible, only the relevant Section or Chapter is re-issued, rather than the whole Module.

              • UG-3.1.4

                A summary of any changes made to a Module is included in the 'Regulation history' section of each Module. The table summarises the nature of the change made, the date of the change and the Module components affected.

              • UG-3.1.5

                The updates are posted to the BMA website, together with a summary of changes for that quarter. Licensees are in addition e-mailed the summary of each quarter's changes. Hard-copy users are required to print off the updated pages from the website to incorporate in their Rulebook in order to keep it current. The website version of the Rulebook acts at all times as the definitive version of the Rulebook.

          • UG-3.2 UG-3.2 Rulebook availability and ordering details

            • Ordering details

              • UG-3.2.2

                Order forms for CD-ROMs and hard copies are included in an annexure to the Users' Guide (please refer to the end of this module).

              • UG-3.2.3

                Please complete all relevant boxes on the order form, taking particular care to provide full contact and address details. The completed form should be sent (accompanied with the appropriate payment) to:

                Rulebook Section
                Rulebook Section — Licensing & Policy Directorate
                Bahrain Monetary Agency
                PO Box 27
                Manama
                Kingdom of Bahrain

                Tel: + 973 - 17 54 7413
                Fax: + 973 - 17 53 0228
                E-mail: rulebook@bma.gov.bh
                Web: www.bma.gov.bh

            • UG-3.2.1

              The Rulebook is available on the BMA website, on CD-ROM-and in hard copy.

        • ANNEXURE — BMA Rulebook Order Form

          View PDF

          INSTRUCTIONS
          Please complete all relevant boxes, taking particular care to provide full contact and address details. The completed form should be sent (accompanied with the appropriate payment) to:
            Bahrain Monetary Agency
          (Rulebook Section, Licensing & Policy Directorate)
          PO Box 27
          Manama
          Kingdom of Bahrain

          For enquiries, please contact:
          Phone: +973 - 17 547 413
          E-mail: rulebook@bma.gov.bh
          ORDER REQUIREMENT
          Rulebook Volume Number Hard-Copy1: number required (at BD 110 each) CD-ROM2: number required (at BD 5 each) Cost:
          1 — Parts A & B Conventional Banks      
          2 — Parts A & B Islamic Banks      
          3 — Parts A & B Insurance Licensees      
          4 — Parts A & B Investment Business Licensees (Due 2006)      
          5 — Parts A & B Specialised Licensees (Due 2006)      
          POSTAGE The above prices include postage for delivery within the Kingdom of Bahrain. Postage for international orders will be charged at cost: please contact the BMA (see above) for details of rates and delivery options.  
          1: Hard copy subscribers are provided the latest version of the Rulebook Volume(s) ordered, which they can then keep up to date by printing off new or amended pages from the BMA website (www.bma.gov.bh).
          2: CD-ROM subscribers are sent the latest available version of the complete Rulebook (i.e. the CD-ROM contains all Volumes that have been issued).
          Total Cost:
          ADDRESS / PAYMENT DETAILS
          Name  
          Institution (if applicable)  
          Full Postal Address

           
          Contact e-mail / telephone / fax E-mail:

          Telephone:

          Fax:
          Please remember to enclose your payment with the order Payment should be by cheque drawn on a Bahraini-licensed bank, payable in Bahraini Dinars. Cheques should be made out to "Bahrain Monetary Agency". Persons ordering from outside Bahrain should contact the BMA (see above) for postage rates and payment options.

    • High Level Standards

      • LR LR Licensing Requirements

        • LR-A LR-A Introduction

          • LR-A.1 LR-A.1 Purpose

            • LR-A.1.1

              The Licensing Requirements Module sets out the BMA's approach to licensing conventional bank licensees.

            • LR-A.1.2

              The Module builds on the legal requirements contained in Decree Law No. (23) of 1973 (the BMA Law 1973). The Module is issued under legal powers granted to the BMA under the BMA Law 1973, notably Articles 56 to 69.

            • Licensing Requirement

              • LR-A.1.3

                Persons wishing to undertake regulated banking services are required to be licensed by the BMA as a conventional bank licensee. Regulated banking services consist of two determinant activities undertaken in combination — deposit-taking and providing credit. In addition, various supplementary regulated activities may also be undertaken. These activities are defined in Rule LR-1.3.1.

              • LR-A.1.4

                In other words, persons wishing to undertake deposit taking must also undertake the activity of providing credit. In addition, they may undertake any of the other activities falling within the definition of regulated banking services. Deposit taking may not be undertaken on its own, without the activity of providing credit also being undertaken. Persons wishing to provide credit without undertaking deposit taking may qualify as a finance company, a category of specialised licensee (see separate regulations regarding these: they will fall under Volume 5 of the BMA Rulebook, when issued in 2007).

            • License Categories

              • LR-A.1.5

                Conventional bank licensees are divided into two sub-categories: conventional retail bank licensees and conventional wholesale bank licensees. Certain specific regulatory requirements may differ between these two sub-categories, where appropriate to address their different risk profiles.

              • LR-A.1.6

                Conventional retail bank licensees may undertake transactions in any currency, with both Bahraini residents and non-residents. To qualify as a conventional retail bank licensee, the activity of providing credit must account for a significant portion of the institution's business (defined, broadly, as accounting for over 20% of an institution's assets).

              • LR-A.1.7

                Conventional wholesale bank licensees may also undertake transactions without restriction, when dealing with the Government of Bahrain and its agencies; BMA bank licensees; and non-residents. However, they may only undertake transactions denominated in Bahraini Dinar and/or with a resident of the Kingdom of Bahrain, if these are wholesale in nature. Wholesale transactions are defined in terms of transaction size (broadly, BD 7 million or more for a credit or deposit transaction, and US$ 250,000 or more for an investment transaction).

              • LR-A.1.8

                Collectively, licensed providers of regulated banking services are called conventional bank licensees. Bahrain-incorporated conventional bank licensees are called Bahraini conventional bank licensees. Conventional bank licensees that are incorporated in an overseas jurisdiction and operate via a branch presence in the Kingdom of Bahrain are called overseas conventional bank licensees. The same naming convention applies to the two sub-categories of conventional bank license: thus, Bahraini conventional retail bank licensees and Bahraini conventional wholesale bank licensees are those incorporated in Bahrain, whilst overseas conventional retail bank licensees and overseas conventional wholesale bank licensees are those incorporated in an overseas jurisdiction and operating in Bahrain via a branch presence.

            • Islamic transactions

              • LR-A.1.9

                Conventional bank licensees may not hold themselves out as an Islamic bank. They may nonetheless enter into Shari'a compliant transactions, subject to certain restrictions. Thus, conventional bank licensees may only undertake transactions that are based on Shari'a compliant contracts, when dealing with governments, public sector entities and other licensed financial institutions. Shari'a compliant contracts may not be undertaken with resident corporates or individuals. (See Paragraphs LR-1.2.27 to LR-1.2.30.)

            • Licensing Conditions

              • LR-A.1.10

                Conventional bank licensees are subject to 8 licensing conditions, mostly specified at a high level in Module LR, and further expanded in underlying subject Modules (such as Module CA). These licensing conditions are broadly equivalent to the standards applied in other Volumes of the BMA Rulebook, to other license categories, and are consistent with international good practice, such as relevant Basel Committee standards.

            • Retaining Licensed Status

              • LR-A.1.11

                The requirements contained in Chapter LR-2 represent the minimum conditions that have to be met in each case, both at the point of licensing and on an on-going basis thereafter, in order for licensed status to be retained.

            • Information Requirements and Processes

              • LR-A.1.12

                Chapter LR-3 specifies the processes and information requirements that have to be followed for applicants seeking a conventional bank license, as well as existing licensees seeking to vary the scope of their license, by adding new regulated activities. It also covers the voluntary surrender of a license, or its cancellation by the BMA.

            • Representative Offices and Ancillary Services Providers

              • LR-A.1.13

                Representative offices of overseas conventional bank licensees are not covered in Volume 1 (Conventional Banks) of the Rulebook. Requirements covering Representative Offices (for all financial services firms) will instead be included in Volume 5, to be issued in 2007.

              • LR-A.1.14

                Until such time as Volume 5 (Specialised Activities) of the BMA Rulebook is issued, representative offices of overseas conventional bank licensees remain subject to the requirements contained in the BMA's "Standard Conditions and Licensing Criteria" applicable to representative offices of foreign banks, and relevant existing Circulars.

              • LR-A.1.15

                Providers of ancillary services to the financial sector are not covered in Volume 1 (Conventional Banks) of the Rulebook. Requirements covering ancillary services providers will instead be included in Volume 5, to be issued in 2007.

              • LR-A.1.16

                Until such time as Volume 5 (Specialised Activities) of the BMA Rulebook is issued, ancillary services providers remain subject to the requirements contained in the BMA's "Standard Conditions and Licensing Criteria" applicable to providers of ancillary services to the financial sector, and relevant existing Circulars.

            • Updating the BMA Rulebook

              • LR-A.1.17

                Unless the context suggests otherwise, references elsewhere in Volume 1 to Full Commercial Bank(s) should be taken as referring to conventional retail bank licensees, and references to Offshore Banking Units and Investment Bank Licensees should be taken as referring to conventional wholesale bank licensees. References to the previous bank license categories that applied prior to 1 July 2006 will be gradually updated over time, across the rest of Volume 1.

          • LR-A.2 LR-A.2 Module History

            • Evolution of Module

              • LR-A.2.1

                This Module (Module LR — "Licensing and Authorisation Requirements") was first issued in July 2004, as part of the initial release of Volume 1 of the BMA Rulebook. It was subsequently reissued in full in July 2006 (and renamed "Licensing Requirements").

              • LR-A.2.2

                The reissued Module was one of several Modules modified to reflect the introduction of the BMA's new integrated license framework. Module LR was amended to reflect the new conventional bank licenses introduced by the framework, and to more closely align its presentation with that found in other BMA Rulebook volumes.

              • LR-A.2.3

                The reissued Module is dated July 2006. All subsequent changes are dated with the month and year when the change was made, at the base of the relevant page and in the Table of Contents. Chapter UG-3 of Module UG provides further details on Rulebook maintenance and control.

              • LR-A.2.4

                A list of recent changes made to this Module is provided below:

                Module Reference Change Date Description of Changes
                LR-6 01/2005 New guidance on record keeping.
                Whole Module 07/2006 Whole Module reissued to reflect integrated license framework: new license categories and updated licensing conditions introduced.
                     

            • Superseded Requirements

              • LR-A.2.5

                The initial July 2004 version of this Module superseded various circulars and other requirements relating to licensing. Some of these circulars were combined in 1997 into a licensing folder ("Part 1: Licensing", which formed part of the three volume information pack, "The Establishment, regulations and supervision of banks and other financial institutions in Bahrain"). The requirements contained in these circulars were transposed into the initial July 2004 version of this Module unchanged, as follows:

                Circular Ref. Date of Issue Module Ref. (July 2004 version) Circular Subject
                5/77 08/03/77 LR-B.1.1, LR-3.3 Permitted Business Transactions with residents
                OG/16/90 10/01/90 LR-2.3, LR-3.3 Dealing with Residents
                OG/192/98 16/06/98 LR-4 Financial Trust Regulation
                No reference 04/81 LR-5 Precious Metals and Commodities
                       

        • LR-B LR-B Scope of Application

          • LR-B.1 LR-B.1 General Prohibitions

            • LR-B.1.1

              The licensing requirements in Chapter LR-1 have general applicability, in that they prevent any person from providing (or seeking to provide) regulated banking services within or from the Kingdom of Bahrain, unless they have been licensed as a conventional bank licensee by the BMA (see Rule LR-1.1.1).

            • LR-B.1.2

              In addition, no one may use the term 'bank' in their trading or corporate name, or otherwise hold themselves out to be a bank in Bahrain, unless they hold the appropriate license from BMA (see Rule LR-1.1.2).

            • LR-B.1.3

              The Rules referred to above are supported by statutory restrictions contained in the BMA Law 1973 (cf. Articles 60 and 61).

          • LR-B.2 LR-B.2 Licensed Persons

            • LR-B.2.1

              The remaining requirements in Chapters LR-1 to LR-3 (besides those mentioned in Section LR-B.1 above) apply to all those licensed by the BMA as a conventional bank licensee, or which are in the process of seeking such a license. They apply regardless of whether the person concerned is incorporated in the Kingdom of Bahrain, or in an overseas jurisdiction, unless otherwise specified.

            • LR-B.2.2

              These remaining requirements prescribe the types of license offered; their associated operating conditions; the licensing conditions that have to be satisfied in order to secure and retain a license; and the processes to be followed when applying or varying a license, or when a license is withdrawn.

        • LR-1 LR-1 Requirement to Hold a License

          • LR-1.1 LR-1.1 Conventional Bank Licensees

            • General Prohibitions

              • LR-1.1.1

                No person may:

                (a) undertake (or hold themselves out to undertake) regulated banking services within or from the Kingdom of Bahrain unless duly licensed by the BMA; or
                (b) hold themselves out to be licensed by the BMA unless they have as a matter of fact been so licensed.

              • LR-1.1.2

                Only persons licensed to undertake regulated banking services (or regulated Islamic banking services), may use the term 'bank' in their corporate or trading names, or otherwise hold themselves out to be a bank.

              • LR-1.1.3

                Licensees are not obliged to include the word 'bank' in their corporate or trading names; however, they may be required to make clear their regulatory status in their letter heads, customer communications, website and so on.

              • LR-1.1.4

                For the purposes of Rule LR-1.1.2, persons will be considered in breach of this requirement if they attempt to operate as, or incorporate a bank in Bahrain with a name containing the word "bank" (or the equivalents in any language), without holding the appropriate BMA license or obtaining the prior approval of the BMA.

            • Licensing

              • LR-1.1.5

                Persons wishing to be licensed to undertake regulated banking services within or from the Kingdom of Bahrain must apply in writing to the BMA.

              • LR-1.1.6

                An application for a license must be in the form prescribed by the BMA and must contain:

                (a) a business plan specifying the type of business to be conducted;
                (b) application forms for all controllers; and
                (c) application forms for all controlled functions.

              • LR-1.1.7

                The BMA will review the application and duly advise the applicant in writing when it has:

                (a) granted the application without conditions;
                (b) granted the application subject to conditions specified by the BMA; or
                (c) refused the application, stating the grounds on which the application has been refused and the process for appealing against that decision.

              • LR-1.1.8

                Detailed rules and guidance regarding information requirements and processes for license applications can be found in Section LR-3.1. As specified in Paragraph LR-3.1.14, the BMA will provide a formal decision on a Phase 1 license application within 60 calendar days of all required documentation having been submitted in a form acceptable to the BMA.

              • LR-1.1.9

                In granting new licenses, the BMA will specify the specific types of regulated banking service for which a license has been granted, and on what basis (i.e. conventional retail bank licensee or conventional wholesale bank licensee).

              • LR-1.1.10

                All applicants for conventional bank licenses must satisfy the BMA that they meet, by the date of their license, the minimum conditions for licensing, as specified in Chapter LR-2. Once licensed, conventional bank licensees must maintain these criteria on an ongoing basis.

              • LR-1.1.11

                Conventional bank licensees must not carry on any commercial business in the Kingdom of Bahrain or elsewhere other than banking business and activities directly arising from or incidental to that business.

              • LR-1.1.12

                Rule LR-1.1.11 is intended to restrict bank licensees from undertaking any material non-financial business activities. The Rule does not prevent a bank undertaking commercial activities if these directly arise from their financial business: for instance, in the context of Islamic contracts, such as murabaha, ijara and musharaka, where the bank may hold the physical assets being financed or leased. Nor does it restrict a bank from undertaking commercial activities if, in the judgment of the BMA, they are incidental and do not detract from the financial nature of the bank's operations: for example, a bank may rent out spare office space in its own office building, and provide services associated with the rental (e.g. office security or cleaning).

              • LR-1.1.13

                Rule LR-1.1.11 applies to the legal entity holding the bank license. A bank may thus own subsidiaries that undertake non-financial activities, although the BMA generally does not support the development of significant commercial activities within a banking group. Capital invested in such subsidiaries by a bank would be deducted from the bank's capital base under the BMA's capital rules (see Module CA). In addition, the BMA may impose restrictions — such as dealings between the bank and its commercial subsidiaries — if it was felt necessary to limit the bank's exposure to non-financial risks.

          • LR-1.2 LR-1.2 License Sub-Categories

            • Retail vs. Wholesale

              • LR-1.2.1

                Depending on the nature of activities undertaken, conventional bank licensees must be licensed either as a conventional retail bank licensee or as a conventional wholesale bank licensee. The same legal entity may not hold both types of license.

              • LR-1.2.2

                The nature of activities allowed under each license sub-category is specified below (cf. Rule LR-1.2.4ff). The conventional retail bank licensee category replaces the Full Commercial Bank (conventional principles) category that existed prior to July 2006; the conventional wholesale bank licensee category replaces the Offshore Banking Unit and Investment Bank License (conventional principles) categories.

              • LR-1.2.3

                Banks licensed prior to the introduction of these new license categories in July 2006 are not required to reapply for their license. Rather, their new license category is to be confirmed by an exchange of letters with the BMA, and the issuance of a new license certificate. Where (prior to July 2006) the same legal entity holds multiple licenses, the BMA will agree transitional measures aimed at rationalizing the number of licenses held.

            • Conventional Retail Banks

              • LR-1.2.4

                Conventional retail bank licensees are allowed to transact with both residents and non-residents of the Kingdom of Bahrain, and in both Bahraini Dinar and foreign currencies.

              • LR-1.2.5

                To qualify as a conventional retail bank licensee, the person concerned must undertake (as a minimum), the activities of deposit-taking and providing credit (as defined in Rules LR-1.3.16 and LR-1.3.18). The activity of providing credit must be a significant part of the bank's business, relative to other activities.

              • LR-1.2.6

                When assessing the significance of credit-related activities, in the context of Rule LR-1.2.5, the BMA would normally expect to see loans and other credit-related activity (such as overdraft facilities, loan commitments, letters of credit, guarantees and other activities falling under the definition of providing credit), to constitute at least 20% of the total assets of the institution. Other activities and criteria may also be taken into account, if the BMA believes they are of a credit-related nature, and that such activities constitute a significant share of the bank's overall business.

              • LR-1.2.7

                In the case of new applicants, the above assessment is made based on the financial projections and business plan provided as part of the license application. Where existing licensees fail to satisfy the condition contained in Rule LR-1.2.5, the BMA will initiate discussion with the licensee as to the appropriateness of their license category: this may result in the licensee being required to change its license category. A branch of an overseas bank may nonetheless be allowed to hold a bank license in Bahrain, even if it fails to undertake the activities specified in Rule LR-1.2.5, providing that it undertakes other regulated banking services in Bahrain and its head office is licensed as a bank in its home country.

              • LR-1.2.8

                The purpose of Rule LR-1.2.5 is to ensure that, besides deposit-taking, the core banking activity of providing credit forms part of the definition of conventional retail bank licensees, and accounts for a significant share of their business, in keeping with their intermediation function.

            • Conventional Wholesale Banks

              • LR-1.2.9

                Conventional wholesale bank licensees are allowed to transact with residents of the Kingdom of Bahrain (irrespective of currency), and in Bahraini Dinar (irrespective of the location of the counterparty), subject to the conditions and exemptions specified in Rules LR-1.2.13, LR-1.2.16 and LR-1.2.18. Foreign currency transactions with non-residents are not subject to these conditions.

              • LR-1.2.10

                The effect of Rule LR-1.2.9 is to limit the on-shore/Bahraini Dinar customer business of conventional wholesale bank licensees to larger transactions. By definition, their on-shore client base is therefore wholesale in nature (i.e. other banks, large corporates and high net-worth individuals).

              • LR-1.2.11

                To qualify as a conventional wholesale bank licensee, the person concerned must undertake (as a minimum), the activities of deposit-taking and providing credit (as defined in Rules LR-1.3.16 and LR-1.3.18).

              • LR-1.2.12

                The purpose of Rule LR-1.2.11 is to ensure that the core banking activities of deposit taking and providing credit form part of the definition of conventional wholesale bank licensees. However, unlike conventional retail bank licensees, there is no requirement that the activity of providing credit must be a significant part of the bank's business, relative to other activities. This is to allow conventional wholesale bank licensees greater flexibility as to the nature of their activities; it also recognises that, because of the wholesale nature of their client base, there is less need to limit the scale of non-credit related risks to which their depositors may be exposed. Rule LR-1.2.11 does not in any way prevent conventional wholesale bank licensees from developing the provision of credit as a major activity, should they wish to. The Guidance provided in Paragraph LR-1.2.7 with regards to overseas banks is also applicable to Rule LR-1.2.11.

              • LR-1.2.13

                Conventional wholesale bank licensees may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (a) to (e) listed in Rule LR-1.3.1, only where the individual transaction is BD 7 million or above (or its foreign currency equivalent).

              • LR-1.2.14

                To comply with Rule LR-1.2.13, the initial amount taken as a deposit must be BD 7 million or above (or its equivalent in foreign currency); however, subsequent additions and withdrawals from that deposit account may be for any amount. The initial amount taken as deposit may be split between different types of accounts (e.g. call, 3-month and 6-month accounts) — providing at least BD 7 million is taken from the customer on the same day and the bank's records can demonstrate this. Where subsequent withdrawals lead to a zero balance on an account (or the aggregate of accounts where more than one was originally opened), then a further BD 7 million must be deposited to re-start the 'wholesale' relationship, before additional deposits for smaller amounts may be made.

              • LR-1.2.15

                Similarly, with respect to credit-related transactions, the initial facility amount advised must be for BD 7 million or above (or its equivalent); but drawdowns (and repayments) under the facility may be for any amount, as may any subsequent changes to the facility amount. If the facility is fully repaid, then a further BD 7 million transaction must be agreed in order to re-start the 'wholesale' relationship.

              • LR-1.2.16

                Conventional wholesale bank licensees may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (f) to (l) listed in Rule LR-1.3.1, only where the individual transaction is US$ 250,000 or above (or its foreign currency equivalent).

              • LR-1.2.17

                With respect to activities (f) and (g) (dealing in financial instruments as principal / agent), the threshold refers to the individual transaction size. With respect to activities (h) and (i) (managing / safeguarding financial instruments), the threshold refers to the initial investment amount. With respect to activity (j) (operating a Collective Investment Undertaking), the threshold refers to the minimum investment required for participation in the scheme. With respect to activities (k) and (l) (arranging deals in / advising on financial instruments), the threshold refers to the size of the deal arranged or of the investment on which advice is being given.

              • LR-1.2.18

                Note that the threshold with respect to activities (h) and (i) applies to the initial investment amount: where a subsequent distribution to a client or a reduction in the mark to market value of the investment reduces the initial investment amount below US$ 250,000 it is still considered a wholesale transaction. The threshold in Rule LR-1.2.16 applies to a client even if the same client satisfies the BD 7m threshold in Rule LR-1.2.13, with respect to deposit/credit activities. Finally, the initial amount taken as an investment may be split between two or more investment products — providing at least US$ 250,000 is taken from the customer on the same day and the bank's records can demonstrate this.

              • LR-1.2.19

                Conventional wholesale bank licensees may only undertake activities (m) and (n) listed in Rule LR-1.3.1, on behalf of residents of Bahrain and/or in Bahrain Dinar, where the customer concerned meets either of the thresholds specified in LR-1.2.13 or LR-1.2.16 (in which case, activities (m) and (n) may be undertaken for any amount).

              • LR-1.2.20

                Notwithstanding Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19, conventional wholesale bank licensees are allowed to transact in Bahraini Dinar (or any other currency) for any amount with the Government of Bahrain, Bahrain public sector entities (as defined in the Guidelines for completion of the Prudential Information Reports), and BMA bank licensees. Conventional wholesale bank licensees may also transact in Bahraini Dinar for any amount, where required to fund their normal operating expenses; or when investing for their own account in securities listed on the Bahrain Stock Exchange.

              • LR-1.2.21

                Any transactions entered into prior to 1 July 2006 which may be in breach of the conditions specified in Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19 must be notified to the BMA. These transactions will be allowed to mature.

              • LR-1.2.22

                Since the conventional wholesale bank licensee regime represents an easing of the restrictions on on-shore business that previously applied to offshore bank licensees (i.e. OBUs and IBLs), there should be few transactions of the type specified in Rule LR-1.2.21 — they are likely to exist only where individual ad-hoc exemptions may have been previously granted by the BMA, and these exemptions went further than those now being applied across the Board to all conventional wholesale bank licensees.

              • LR-1.2.23

                Conventional wholesale bank licensees wishing to undertake transactions of the type specified in Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19 must seek prior written BMA approval.

              • LR-1.2.24

                The approval requirement in Rule LR-1.2.23 only has to be made once, prior to the licensee starting to undertake such transactions. Its purpose is to allow the BMA to monitor the initiation of such business by conventional wholesale bank licensees, and to check that adequate systems and controls have been in place, so that such transactions are likely to be well managed. In addition, it is to allow, where relevant, for the necessary arrangements to be made to ensure that conventional wholesale bank licensees comply with the BMA's reserve requirements (which apply to deposit liabilities denominated in Bahraini Dinars — see LR-2.5.10).

              • LR-1.2.25

                Conventional wholesale bank licensees that are unclear about the interpretation of the conditions specified in Rules LR-1.2.13, LR-1.2.16 or LR-1.2.19 must consult the BMA prior to undertaking the transaction concerned.

              • LR-1.2.26

                The BMA may publish additional interpretative guidance on the above conditions, in response to licensees' queries. The minimum thresholds specified under Rules LR-1.2.13 and LR-1.2.16 will be kept under review by the BMA and may be amended in response to market developments.

            • Shari'a compliant transactions

              • LR-1.2.27

                Conventional bank licensees may not hold themselves out as an Islamic bank. Conventional bank licensees may only enter into activities (c) to (e) listed in Rule LR-1.3.1, when dealing with governments, public sector entities and other licensed financial institutions. Conventional bank licensees may not undertake these activities with individual or corporate clients (whether resident or non-resident).

              • LR-1.2.28

                As an exception to the restriction in Rule LR-1.2.27, conventional bank licensees may invest for their own account in sukuks.

              • LR-1.2.29

                Conventional bank licensees may also freely deal in financial instruments or operate a Collective Investment Undertaking that happens to be Shari'a compliant (because of the nature of the financial instruments concerned).

          • LR-1.3 LR-1.3 Definition of Regulated Banking Services

            • LR-1.3.1

              Regulated banking services are any of the following activities, carried on by way of business:

              (a) Deposit-taking
              (b) Providing Credit
              (c) Accepting Shari'a money placements/deposits
              (d) Managing Shari'a profit/loss sharing investment accounts
              (e) Offering Shari'a Financing Contracts
              (f) Dealing in financial instruments as principal
              (g) Dealing in financial instruments as agent
              (h) Managing financial instruments
              (i) Safeguarding financial instruments
              (j) Operating a Collective Investment Undertaking
              (k) Arranging deals in financial instruments
              (l) Advising on financial instruments
              (m) Providing money exchange/remittance services
              (n) Issuing/administering means of payment.

            • LR-1.3.2

              Upon application, the BMA may exclude specific transactions from the definition of regulated banking services.

            • LR-1.3.3

              The BMA will normally only consider granting such an exemption when a Bahrain resident is unable to obtain a specific product in Bahrain and it would be unreasonable to require the overseas provider of that product to be licensed for that specific transaction, and the provider has no intention of regularly soliciting such business in Bahrain.

            • LR-1.3.4

              For the purposes of Rule LR-1.3.1, carrying on a regulated banking service by way of business means:

              (a) undertaking the regulated banking service of (a), plus any of the activities (b) to (n), as defined in Section LR-1.3, for commercial gain;
              (b) holding oneself out as willing and able to engage in such activities; or
              (c) regularly soliciting other persons to engage in transactions constituting such activities.

            • LR-1.3.5

              Licensees should note that they may still undertake activities falling outside the definition of regulated banking services, such as investing in physical commodities — subject to Rule LR-1.1.11. The fact that an activity is not included in the definition of regulated banking services does not mean that it is prohibited. In transitioning to the new licensing framework, the BMA will be closely liaising with licensees to ensure that no disruption occurs to their legitimate business activities.

            • LR-1.3.6

              Licensees should note that the same legal entity cannot combine regulated banking services with other regulated services, such as regulated insurance services. However, different legal entities within the same group may of course each hold a different license (e.g. banking and insurance).

            • General exclusions

              • LR-1.3.7

                A person does not carry on an activity constituting a regulated banking service if the activity:

                (a) is carried on in the course of a business which does not ordinarily constitute the carrying on of financial services;
                (b) may reasonably be regarded as a necessary part of any other services provided in the course of that business; and
                (c) is not remunerated separately from the other services.

              • LR-1.3.8

                For example, the taking of a deposit in connection with the rental of a property would not be considered a regulated banking service, since it satisfies the criteria in Rule LR-1.3.7.

              • LR-1.3.9

                A person does not carry on an activity constituting a regulated banking service if the person is a body corporate and carries on that activity solely with or for other bodies corporate that are members of the same group.

              • LR-1.3.10

                A person does not carry on an activity constituting a regulated banking service if such person carries on an activity with or for another person, and they are both members of the same family.

              • LR-1.3.11

                A person does not carry on an activity constituting a regulated banking service if the sole or main purpose for which the person enters into the transaction is to limit any identifiable risks arising in the conduct of his business, providing the business conducted does not itself constitute a regulated activity.

              • LR-1.3.12

                For example, an industrial company entering into an interest rate swap to switch floating-rate borrowings for fixed rate borrowings, in order to manage interest rate risk, would not be considered to be dealing in financial instruments as principal, and would not therefore be required to be licensed as an investment firm.

              • LR-1.3.13

                A person does not carry on an activity constituting a regulated banking service if that person enters into that transaction solely as a nominee for another person, and acts under instruction from that other person.

              • LR-1.3.14

                A person does not carry on an activity constituting a regulated banking service if that person is a government body charged with the management of financial instruments on behalf of a government or public body.

              • LR-1.3.15

                A person does not carry on an activity constituting a regulated banking service if that person is an exempt person, as specified by Royal decree.

            • Deposit-taking

              • LR-1.3.16

                Deposit-taking is defined as receiving a sum of money paid on terms under which it will be repaid in full, with or without interest or a premium, and either on demand or in circumstances agreed by the parties involved. It excludes sums referable to the giving of security or as a fee paid in advance for goods or services. It also excludes money received by a person in consideration for debt instruments issued by the same person, or money received by a person entering into a loan or other financing agreement.

              • LR-1.3.17

                The above definition, therefore, includes savings, current, notice, fixed and time deposits.

            • Providing credit

              • LR-1.3.18

                Providing credit is defined as the provision of credit to a person in his capacity as borrower or potential borrower. This includes consumer and mortgage credit; and providing credit by way of finance leases, factoring, forfeiting, and reverse repo transactions. It also includes the issuance or endorsement of letters of credit; the issuance of letters of guarantee and other contingent credit activities (such as the underwriting of loans); the purchase on the secondary market of loans and other contracts of credit (that do not otherwise fall under the definition of financial instruments); and the provision of ancillary credit-related activities, such as advising on or arranging loans. It excludes money advanced to a person in consideration for debt instruments issued by the same person.

            • Accepting Shari'a money placements/deposits

              • LR-1.3.19

                Accepting Shari'a money placements is defined as the acceptance of sums of money for safe-keeping) in a Shar'ia compliant framework, under which it will be repaid, either on demand or in circumstances agreed by the parties involved, and which is not referable to the giving of security.

            • Offering Shari'a Financing Contracts

              • LR-1.3.20

                Offering Shari'a financing contracts is defined as entering into, or making arrangement for another person to enter into, a contract to provide finance in accordance with Shari'a principles, such as murabaha, bay muajjal, bay salam, ijara wa iktina and istisna'a contracts.

            • Managing Shari'a profit sharing investment accounts

              • LR-1.3.21

                Managing a Shari'a profit sharing investment account is defined as managing an account, portfolio or fund, whereby a sum of money is placed with the service provider on terms that a return will be made according to an agreed Shari'a compliant profit-sharing arrangement, based either on a mudaraba or musharaka partnership.

            • Dealing in financial instruments as principal

              • LR-1.3.22

                Dealing in financial instruments as principal means buying, selling, subscribing for or underwriting any financial instrument on one's own account.

              • LR-1.3.23

                Rule LR-1.3.22 includes the underwriting of equity and other financial instruments. The underwriting of loans comes under the activity of providing credit (see Rule LR-1.3.18). It also includes the temporary sale of a financial instrument through a repo transaction.

              • LR-1.3.24

                A person does not carry on an activity specified in Rule LR-1.3.22 if the activity relates to the person issuing his own shares/debentures, warrants or bonds.

            • Dealing in financial instruments as agent

              • LR-1.3.25

                Dealing in financial instruments as agent means buying, selling, subscribing for or underwriting financial instruments on behalf of a client.

              • LR-1.3.26

                A licensee that carries on an activity of the kind specified by Rule LR-1.3.25 does not determine the terms of the transaction and does not use its own financial resources for the purpose of funding the transaction. Such a licensee may however receive or hold assets in connection with the transaction, in its capacity as agent of its client.

            • Managing Financial Instruments

              • LR-1.3.27

                Managing financial instruments means managing on a discretionary basis financial instruments on behalf of another person.

              • LR-1.3.28

                The activities included under the definition of Rule LR-1.3.27 include activities such as asset management.

            • Safeguarding Financial Instruments (i.e. Custodian)

              • LR-1.3.29

                Safeguarding financial instruments means the safeguarding of financial instruments for the account of clients.

              • LR-1.3.30

                A person does not carry on an activity specified in Rule LR-1.3.29 if the person receives documents relating to a financial instrument for the purpose of onward transmission to, from, or at the direction of the person to whom the financial instrument belongs; or else is simply providing a physical safekeeping service such as a deed box.

              • LR-1.3.31

                A person does not carry on an activity specified in Rule LR-1.3.29 if a third person, namely a qualifying custodian, accepts responsibility with regard to the financial instrument.

              • LR-1.3.32

                A "qualifying custodian" means a person who is:

                (a) a licensee who has permission to carry on an activity of the kind specified in Rule LR-1.3.29; or
                (b) an exempt person in relation to activities of that kind.

              • LR-1.3.33

                A person does not carry on an activity specified in Rule LR-1.3.29 if they are managing a central depository, which is part of an exchange recognised by the BMA.

              • LR-1.3.34

                The following are examples of activities, which when taken in isolation, are unlikely to be regarded as an activity of the kind specified under Rule LR-1.3.29:

                (a) providing information as to the number of units or the value of any assets safeguarded; and
                (b) converting currency.

              • LR-1.3.35

                A person undertaking an activity of the kind specified under Rule LR-1.3.29 may also be engaged in the administration of the financial instruments, including related services such as cash/collateral management.

            • Operating a Collective Investment Undertaking

              • LR-1.3.36

                Operating a Collective Investment Undertaking means operating, establishing or winding up a Collective Investment Undertaking.

              • LR-1.3.37

                For the purposes of LR-1.3.36, a Collective Investment Undertaking means any arrangements, authorised by or registered with the BMA, with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements to participate in or receive profits or income arising from the acquisition, holding or disposal of the property or sums paid out of such profits or income.

              • LR-1.3.38

                A person does not carry on an activity specified in Rule LR-1.3.36 if the activity relates to the person establishing or winding up a Collective Investment Undertaking, and that activity may be reasonably regarded as necessary in the course of providing legal services or providing accounting services.

              • LR-1.3.39

                Collective investment undertakings of the kind specified in Rule LR-1.3.36 may be open-ended (i.e. with shares continuously issued and redeemed to meet investor demand) or close-ended (where there is a single issue of shares and investors can only realise their investments on the winding-up of the fund).

            • Arranging deals in financial instruments

              • LR-1.3.40

                Arranging deals in financial instruments means making arrangements with a view to another person, whether as principal or agent, buying, selling, subscribing for or underwriting deals in financial instruments.

              • LR-1.3.41

                A person does not carry on an activity specified in Rule LR-1.3.40 if the arrangement does not bring about the transaction to which the arrangement relates.

              • LR-1.3.42

                A person does not carry on an activity specified in Rule LR-1.3.40 if a person's activities are limited solely to introducing clients to licensees.

              • LR-1.3.43

                The exclusion in Rule LR-1.3.42 does not apply if the agent receives from any person, other than the client, any pecuniary reward or other advantage, which he does not account to the client, arising out of his entering into the transaction. Thus, if A receives a commission from B for arranging credit or deals in investment for C, the exclusion in Rule LR-1.3.42 does not apply.

              • LR-1.3.44

                A person does not carry on an activity specified in Rule LR-1.3.40 merely by providing the means of communication between two parties to a transaction.

              • LR-1.3.45

                A person does not carry on an activity specified in Rule LR-1.3.40 if they operate an exchange, duly recognised and authorised by the BMA.

              • LR-1.3.46

                Negotiating terms for an investment on behalf of a client is an example of an activity which may be regarded as an activity of the kind specified in Rule LR-1.3.40.

              • LR-1.3.47

                The following are examples of activities, which when taken in isolation, are unlikely to be regarded as an activity of the kind specified in Rule LR-1.3.40:

                (a) appointing professional advisers;
                (b) preparing a prospectus/business plan;
                (c) identifying potential sources of funding;
                (d) assisting investors/subscribers/borrowers to complete and submit application forms; or
                (e) receiving application forms for processing/checking and/or onward transmission.

            • Advising on deals in financial instruments

              • LR-1.3.48

                Advising on financial instruments means giving advice to an investor or potential investor (or a person in his capacity as an agent for an investor or potential investor) on the merits of buying, selling, subscribing for or underwriting a particular financial instrument or exercising any right conferred by such a financial instrument.

              • LR-1.3.49

                The following are examples of activities, which may be regarded as an activity as defined by Rule LR-1.3.48:

                (a) a person may offer to tell a client when shares reach a certain value on the basis that when the price reaches that value it would be a good time to buy or sell them;
                (b) recommendation on the size or timing of transactions; and
                (c) advice on the suitability of the financial instrument, or on the characteristics or performance of the financial instrument concerned.

              • LR-1.3.50

                A person does not carry on an activity specified in Rule LR-1.3.48 by giving advice in any newspaper, journal, magazine, broadcast services or similar service in any medium if the principal purpose of the publication or service, taken as a whole, is neither:

                (a) that of giving advice of the kind mentioned in Rule LR-1.3.48; nor
                (b) that of leading or enabling persons to buy, sell, subscribe for or underwrite a financial instrument.

              • LR-1.3.51

                The following are examples of activities, which when taken in isolation, are unlikely to be regarded as an activity as defined by Rule LR-1.3.48:

                (a) explaining the structure, or the terms and conditions of a financial instrument;
                (b) valuing financial instruments for which there is no ready market;
                (c) circulating company news or announcements;
                (d) comparing the benefits and risks of one financial instrument to another; and
                (e) advising on the likely meaning of uncertain provisions in an agreement relating to, or the terms of, a financial instrument or on the effect of contractual terms and their commercial consequences or on terms that are commonly accepted in the market.

            • Providing money exchange / remittance services

              • LR-1.3.52

                Means providing exchange facilities between currencies, and the provision of wire transfer or other remittance services.

            • Issuing / administering means of payment

              • LR-1.3.53

                Means the selling or issuing of payment instruments, or the selling or issuing of stored value (e.g. credit cards, travellers' cheques, electronic purses).

        • LR-2 LR-2 Licensing Conditions

          • LR-2.1 LR-2.1 Condition 1: Legal Status

            • LR-2.1.1

              The legal status of a conventional bank licensee must be:

              (i) a Bahraini joint stock company (BSC); or
              (ii) a branch resident in Bahrain of a conventional bank incorporated under the laws of its territory of incorporation and authorized as a bank in that territory.

            • LR-2.1.2

              Where the conventional bank licensee is a branch of an overseas bank, in deciding whether to grant a license, the BMA will pay close regard to its activities elsewhere and how these activities are regulated. If the conventional bank licensee is not regulated elsewhere or in a jurisdiction not substantially compliant with Basel Core Principles or FATF standards, then an application for licensing can only be considered after exhaustive enquiries into the bank's shareholders, management structure and financial position.

          • LR-2.2 LR-2.2 Condition 2: Mind and Management

            • LR-2.2.1

              Conventional bank licensees with their Registered Office in the Kingdom of Bahrain must maintain their Head Office in the Kingdom. Overseas conventional bank licensees must maintain a local management presence and premises in the Kingdom appropriate to the nature and scale of their activities.

            • LR-2.2.2

              In assessing the location of a conventional bank licensee's Head Office, the BMA will take into account the residency of its Directors and senior management. The BMA requires the majority of key decision makers in executive management — including the Chief Executive Officer — to be resident in Bahrain. In the case of overseas conventional bank licensees, the BMA requires the branch or subsidiary of a foreign owned company to have a substantive presence, demonstrated by a level of staff and other resources sufficient to ensure adequate local scrutiny and control over business booked in the Bahrain branch or subsidiary.

          • LR-2.3 LR-2.3 Condition 3: Controllers

            • LR-2.3.1

              Conventional bank licensees must satisfy the BMA that their controllers are suitable and pose no undue risks to the licensee. Conventional bank licensees must also satisfy the BMA that their group structures do not prevent the effective supervision of the conventional bank licensee by the BMA and otherwise pose no undue risks to the licensee.

            • LR-2.3.2

              Chapter GR-5 contains the BMA's requirements and definitions regarding controllers.

            • LR-2.3.3

              In summary, controllers are persons who directly or indirectly are significant shareholders in a conventional bank licensee, or who are otherwise able to exert significant influence on the conventional bank licensee. The BMA seeks to ensure that controllers pose no significant risks to the licensee. In general terms, controllers are assessed in terms of their financial standing, their judicial and regulatory record, and standards of business and (where relevant) personal probity.

            • LR-2.3.4

              As regards group structures, the BMA seeks to ensure that these do not prevent adequate consolidated supervision being applied to financial entities within the group, and that other group entities do not pose any material financial, reputational or other risks to the licensee.

            • LR-2.3.5

              In all cases, when judging applications from existing groups, the BMA will have regard to the reputation and financial standing of the group as a whole. Where relevant, the BMA will also take into account the extent and quality of supervision applied to overseas members of the group and take into account any information provided by other supervisors in relation to any member of the group.

          • LR-2.4 LR-2.4 Condition 4: Board and Employees

            • LR-2.4.1

              Those nominated to carry out controlled functions must satisfy the BMA's approved persons requirements.

            • LR-2.4.2

              The definition of controlled functions is contained in HC-2.1, whilst HC-2.2 sets out the BMA's approved persons requirements.

            • LR-2.4.3

              The conventional bank licensee's staff, taken together, must collectively provide a sufficient range of skills and experience to manage the affairs of the licensee in a sound and prudent manner. Conventional bank licensees must ensure their employees meet any training and competency requirements specified by the BMA.

          • LR-2.5 LR-2.5 Condition 5: Financial Resources

            • Capital Adequacy

              • LR-2.5.1

                Conventional bank licensees must maintain a level of financial resources, as agreed with the BMA, adequate for the level of business proposed. The level of financial resources held must at all times meet the minimum risk-based requirements contained in Module CA (Capital Adequacy), as specified for the category of banking license held.

              • LR-2.5.2

                Conventional bank licensees must maintain a minimum level of paid-up capital of BD 20,000,000 (or its equivalent in foreign currency, where legally permitted and agreed with the BMA).

              • LR-2.5.3

                Persons seeking a license as a conventional bank licensee must submit a 3-year business plan, with financial projections. Their proposed level of paid-up capital must be sufficient to cover expected regulatory capital requirements over that period, based on projected activities.

              • LR-2.5.4

                In practice, applicants seeking a conventional bank license are likely to be required to hold significantly more capital than the minimum paid-up capital specified in Rule LR-2.5.2.

              • LR-2.5.5

                Overseas banking applicants are required to provide written confirmation from their head office that the head office will provide financial support to the branch sufficient to enable it to meet its obligations as and when they fall due. Overseas banking applicants must also demonstrate that the bank as a whole is adequately resourced for the amount of risks underwritten, and that it and its group meet capital adequacy standards applied by its home supervisor.

              • LR-2.5.6

                For Bahraini conventional bank licensees, deposit liabilities must not exceed 20 times their capital and reserves. For overseas conventional wholesale bank licensees, endowment capital may be required.

              • LR-2.5.7

                Factors taken into account in setting endowment capital for branches includes the financial strength of the parent company, the quality of its risk management, and the nature and scale of the Bahrain operations of the branch.

            • Liquidity

              • LR-2.5.8

                Conventional bank licensees must maintain sufficient liquid assets to meet their obligations as they fall due in the normal course of their business. Conventional bank licensees must agree a liquidity management policy with the BMA.

              • LR-2.5.9

                The BMA would normally expect the mark-to-market value of assets that could be readily realized at short-notice to exceed 25% of deposit liabilities at all times. Liquidity arrangements may vary, however, particularly for overseas conventional banks, as agreed with the BMA and documented in the liquidity management policy.

            • Reserve Requirements

              • LR-2.5.10

                Conventional bank licensees must maintain a minimum daily cash reserve balance with the BMA, equivalent to 5% of its total non-bank Bahraini Dinar deposits and Bahraini Dinar denominated Certificates of Deposit.

          • LR-2.6 LR-2.6 Condition 6: Systems and Controls

            • LR-2.6.1

              Conventional bank licensees must maintain systems and controls that are, in the opinion of the BMA, adequate for the scale and complexity of their activities. These systems and controls must meet the minimum requirements contained in Modules HC and OM.

            • LR-2.6.2

              Conventional bank licensees must maintain systems and controls that are, in the opinion of the BMA, adequate to address the risks of financial crime occurring in the licensee. These systems and controls must meet the minimum requirements contained in Module FC, as specified for the category of license held.

            • LR-2.6.3

              Applicants will be required to demonstrate in their business plan (together with any supporting documentation) what risks their business would be subject to and how they would manage those risks. Applicants may be asked to provide an independent assessment of the appropriateness of their systems and controls to the BMA, as part of the license approval process.

          • LR-2.7 LR-2.7 Condition 7: External Auditors

            • LR-2.7.1

              Conventional bank licensees must appoint external auditors, subject to the BMA's prior approval. The minimum requirements regarding auditors contained in Module AU (Auditors and Accounting Standards) must be met.

            • LR-2.7.2

              Applicants must submit details of their proposed external auditors to the BMA as part of their license application.

          • LR-2.8 LR-2.8 Condition 8: Other Requirements

            • Books and Records

              • LR-2.8.1

                Conventional bank licensees must maintain comprehensive books of accounts and other records, and satisfy the minimum record keeping requirements contained in Module GR. Books of accounts must comply with IAS. Audited accounts must be submitted to the BMA within 3 months of the licensee's financial year-end.

            • Provision of Information

              • LR-2.8.2

                Conventional bank licensees must act in an open and cooperative manner with the BMA. Conventional bank licensees must meet the regulatory reporting and public disclosure requirements contained in Modules BR and PD respectively.

            • General Conduct

              • LR-2.8.3

                Conventional bank licensees must conduct their activities in a professional and orderly manner, in keeping with good market practice. Conventional bank licensees must comply with the general standards of business conduct contained in Module PB, as well as the standards relating to treatment of customers contained in Modules BC and CM.

            • License fees

              • LR-2.8.4

                Conventional bank licensees must comply with any license fee requirements applied by the BMA.

              • LR-2.8.5

                The BMA's license fees are set out in Chapter GR-8.

            • Additional conditions

              • LR-2.8.6

                Conventional bank licensees must comply with any other specific requirements or restrictions imposed by the BMA on the scope of their license.

              • LR-2.8.7

                Bank licensees are subject to the provisions of the BMA Law 1973. These include the right of the BMA to impose such terms and conditions, as it may deem necessary when issuing a license. Thus, when granting a license, the BMA specifies the regulated banking services that the licensee may undertake. Licensees must respect the scope of their license. LR-3.2 sets out the process for varying the scope of an authorisation, should a licensee wish to undertake new activities.

              • LR-2.8.8

                In addition, the BMA may impose additional restrictions or requirements, beyond those already specified in Volume 1, to address specific risks. For instance, a license may be granted subject to strict limitations on intra-group transactions.

              • LR-2.8.9

                Conventional retail bank licensees are subject to the deposit protection scheme of eligible deposits held with the Bahrain offices of the licensee (see Chapter CP-2).

        • LR-3 LR-3 Information Requirements and Processes

          • LR-3.1 LR-3.1 Licensing

            • LR-3.1.1

              The application process for a conventional bank license consists of two parts: Phase 1 and Phase 2. For Phase 1, applicants for a license must submit a duly completed Form 1 (Phase 1) (Application for a License), under cover of a letter signed by an authorized signatory of the applicant marked for the attention of the Director, Licensing and Policy Directorate. The application must be accompanied by the documents listed in Paragraph LR-3.1.5, unless otherwise directed by the BMA.

            • LR-3.1.2

              If, after submission of a duly completed Form 1 (Phase 1) and associated documents, an applicant is granted a conditional (in principle) approval for a license, the applicant must submit Form 1 (Phase 2), together with the documents referred to in Paragraph LR-3.1.10.

            • LR-3.1.3

              When referring to the applicant, reference is made to the proposed licensee seeking a conventional bank license. The applicant may choose to have an authorized representative acting on its behalf. In instances where an authorized representative is used by the applicant, the application form should provide all details regarding the authorized representative and is to be signed by both the applicant and authorized representative.

            • LR-3.1.4

              Conventional bank licensees who were licensed prior to the publication of the new LR Module of Volume 1 Rulebook do not need to resubmit an application for a license. Their license category, and the scope of their authorization, will be confirmed in an exchange of letters, and by re-issuing their license certificate.

            • LR-3.1.5

              Unless otherwise directed by the BMA, the following documents must be provided as Part of Phase 1 in support of a license application:

              (a) a duly completed Form 2 (Application for Authorisation of Controller) for each controller of the proposed licensee;
              (b) a duly completed Form 3 (Application for Approved Person status), for each proposed Director of the proposed licensee;
              (c) a comprehensive business plan for the application, addressing the matters described in LR-3.1.6;
              (d) for overseas banks, a copy of the bank's current commercial registration or equivalent documentation;
              (e) where the applicant is a registered institution, a copy of the applicant's commercial registration;
              (f) where the applicant is a corporate body, a certified copy of a Board resolution of the applicant, confirming its decision to seek a BMA conventional bank license;
              (g) in the case of applicants that are part of a regulated group, a letter of non-objection to the proposed license application from the applicant's home supervisor, together with confirmation that the group is in good regulatory standing and is in compliance with applicable supervisory requirements, including those relating to capital adequacy and solvency requirements;
              (h) in the case of overseas branch applicants, a letter of non-objection to the proposed license application from the applicant's home supervisor, together with confirmation that the applicant is in good regulatory standing and is in compliance with applicable supervisory requirements, including those relating to capital adequacy requirements;
              (i) in the case of branch applicants, copies of the audited financial statements of the applicant (head office) for the three years immediately prior to the date of application; and
              (j) in the case of other applicants, copies of the audited financial statements of the applicant's major shareholder and/or group (as directed by the BMA), for the three years immediately prior to the date of application.

            • LR-3.1.6

              The business plan submitted in support of an application should explain:

              (a) an outline of the history of the applicant and its shareholders;
              (b) the reasons for applying for a license, including the applicant's strategy and market objectives;
              (c) the proposed type of activities to be carried on by the applicant in/from the Kingdom of Bahrain;
              (d) the proposed Board and senior management of the applicant and the proposed organisational structure of the applicant;
              (e) an assessment of the risks that may be faced by the applicant, together with the proposed systems and controls framework to be put in place for addressing those risks and to be used for the main business functions; and
              (f) an opening balance sheet for the applicant, together with a three-year financial projection, with all assumptions clearly outlined, demonstrating that the applicant will be able to meet applicable capital adequacy and liquidity requirements.

            • LR-3.1.7

              The applicant's memorandum and articles of association must explicitly provide for it to undertake the activities proposed in the licensed application, and must preclude the applicant from undertaking other commercial activities, unless these arise out of its banking activities or are incidental to those.

            • LR-3.1.8

              In the case of a new bank's capital being financed by a private placement, the Private Placement Memorandum must also be submitted to the BMA for its approval as part of the Phase 1 documentation.

            • LR-3.1.9

              The purpose of Rule LR-3.1.8 is to allow the BMA to verify that the contents of the Private Placement Memorandum are consistent with other information supplied to the BMA, notably in the business plan, and otherwise meets any applicable regulatory requirements with respect to PPM documents. The BMA's review of the PPM does not in any way constitute an approval or endorsement as to any claims it may contain as to the future value of the proposed bank.

            • LR-3.1.10

              As part of Phase 2 of the licensing application process, unless otherwise directed by the BMA, the following documents and information must be provided:

              (a) a duly completed Form 3 (Application for Approved Person status), for each individual, (other than for Directors, submitted as part of Phase 1) applying to undertake controlled functions in the applicant;
              (b) a draft copy of the applicant's memorandum and articles of association, addressing the matters described in LR-3.1.7;
              (c) a letter of guarantee from the applicant's major shareholder, confirming its willingness to support the proposed licensee in case of need; and
              (d) in the case of overseas branch applicants, a letter of guarantee from the applicant's head office, confirming responsibility for all of the liabilities of the proposed branch, together with evidence of the power to give such a guarantee.

            • LR-3.1.11

              All documentation provided to the BMA as part of an application for a license must be in either the Arabic or English language. Any documentation in a language other than English or Arabic must be accompanied by a certified English or Arabic translation thereof.

            • LR-3.1.12

              Any material changes or proposed changes to the information provided to the BMA in support of an authorisation application that occurs prior to authorisation must be reported to the BMA.

            • LR-3.1.13

              Failure to inform the BMA of the changes specified in LR-3.1.12 is likely to be viewed as a failure to provide full and open disclosure of information, and thus a failure to meet licensing condition LR-2.8.2.

            • LR-3.1.14

              As part of the Phase 1 review of application process, the BMA will provide a formal decision on a license application within 60 calendar days of all required documentation having been submitted in a form acceptable to the BMA. Once an "in principle" approval has been granted for Phase 1, the applicant must submit within 6 months of the "in principle" approval, all requirements for Phase 2 as outlined in Paragraph LR-3.1.10. The BMA will provide a final decision within 30 calendar days of all Phase 2 documentation having been submitted in a form acceptable to the BMA. Applicants are encouraged to approach the BMA to discuss their application at an early stage, so that any specific questions can be dealt with prior to the finalisation of the application.

            • LR-3.1.15

              Within 6 months of the license being issued, the new licensee must provide to the BMA:

              (a) a detailed action plan for establishing the operations and supporting infrastructure of the bank, such as the completion of written policies and procedures, and recruitment of remaining employees (having regard to the time limit set by Article 66 of the BMA Law 1973);
              (b) the registered office address and details of premises to be used to carry out the business of the proposed licensee;
              (c) the address in the Kingdom of Bahrain where full business records will be kept;
              (d) the licensee's contact details including telephone and fax number, e-mail address and website;
              (e) a description of the business continuity plan;
              (f) a description of the IT system that will be used, including details of how IT systems and other records will be backed up;
              (g) a copy of the auditor's acceptance to act as auditor for the applicant;
              (h) a copy of the Ministry of Industry & Commerce commercial registration certificate; and
              (i) other information as may be specified by the BMA.

            • LR-3.1.16

              Applicants issued new licenses by the BMA must start operations within 6 months of the license being issued, as per Article 66 of the BMA Law 1973.

            • LR-3.1.17

              Applicants who are refused a license have a right of appeal under the provisions contained in Article 68 of the BMA Law 1973.

          • LR-3.2 LR-3.2 Variations to a License

            • LR-3.2.1

              Conventional bank licensees must seek prior BMA approval before undertaking new regulated banking services.

            • LR-3.2.2

              Failure to secure BMA approval prior to undertaking a new regulated activity may lead to enforcement action being taken against the licensee concerned.

            • LR-3.2.3

              In addition to any other information requested by the BMA, and unless otherwise directed by the BMA, a conventional bank licensee requesting BMA approval to undertake a new regulated banking service must provide the following information:

              (a) a summary of the rationale for undertaking the proposed new activities;
              (b) a description of how the new business will be managed and controlled;
              (c) an analysis of the financial impact of the new activities; and
              (d) a summary of the due diligence undertaken by the Board and management of the conventional bank licensee on the proposed new activities.

          • LR-3.3 LR-3.3 Withdrawal of a License

            • Voluntary Surrender

              • LR-3.3.1

                All requests for the voluntary surrender of a license are subject to BMA approval. Such requests must be made in writing to the Executive Director of Banking Supervision, setting out in full the reasons for the request and how the voluntary surrender is to be carried out.

              • LR-3.3.2

                Conventional bank licensees must satisfy the BMA that their customers' interests are to be safeguarded during and after the proposed voluntary surrender.

              • LR-3.3.3

                The BMA will only approve a voluntary surrender where it has no outstanding regulatory concerns and any relevant customers' interests would not be prejudiced. A voluntary surrender will not be accepted where it is aimed at pre-empting supervisory actions by the BMA. Also, a voluntary surrender will only take effect once the licensee, in the opinion of the BMA, has discharged all its regulatory responsibilities to customers.

            • Cancellation

              • LR-3.3.4

                Cancellation of a license requires the BMA to issue a formal notice of cancellation to the person concerned. The notice of cancellation must describe the BMA's rationale for the proposed cancellation.

              • LR-3.3.5

                Failure to meet the relevant conditions contained in Chapter LR-2 can lead to cancellation of a license. The BMA generally views cancellation of a license as appropriate only in the most serious of circumstances, and generally tries to address supervisory concerns through other means beforehand. Further guidance is contained in Module EN (Enforcement), regarding the BMA's approach to enforcement and on the process for issuing a notice of cancellation and the recipient's right to appeal the notice.

              • LR-3.3.6

                Normally, where cancellation of a license has been confirmed by the BMA, the BMA will only effect the cancellation once a licensee has discharged all its regulatory responsibilities to customers. Until such time, the BMA will retain all its regulatory powers with regards to the licensee, and will direct the licensee such that no new regulated banking activity may be undertaken whilst the licensee discharges its obligations to customers.

      • PB PB Principles of Business

        • PB-A PB-A Introduction

          • PB-A.1 PB-A.1 Purpose

            • PB-A.1.1

              The principles are a general statement of the fundamental obligations of all banks.

            • PB-A.1.2

              This module requires banks to establish adequate systems and procedures to ensure:

              (a) compliance to the guidance set forth in this module, and
              (b) that the personnel responsible for maintaining such systems and controls are adequately qualified and competent in discharging their duties.

            • PB-A.1.3

              This module provides support to all regulations provided in this Rulebook.

          • PB-A.2 PB-A.2 Module history

            • PB-A.2.1

              This module was first issued in July 2004 as part of the conventional principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter UG-3 of Module UG provides further details on Rulebook maintenance and control.

            • PB-A.2.2

              The most recent changes made to this module are detailed in the table below:

              Summary of changes

              Module Ref. Change Date Description of Changes
                   
                   
                   
                   
                   

        • PB-B PB-B Non-compliance with the principles

          • PB-B.1 PB-B.1 Non-compliance

            • PB-B.1.1

              A breach of the principles outlined in this module may call into question whether the Board and management of a licensee with a BMA license are still fit and proper, and whether the licensee may continue to be licensed.

            • PB-B.1.2

              Breaching a principle makes a licensee liable to disciplinary sanctions. In determining whether a principle has been breached it is necessary to look to the standard of conduct required by the principle in question. The BMA will determine, after collating all the relevant information required (through its regulatory reporting authority), whether a licensee is in breach of these principles.

        • PB-1 PB-1 Principles

          • PB-1.1 PB-1.1 Integrity

            • PB-1.1.1

              All relevant persons should be straightforward and honest in their services and conduct. Integrity is not just limited to honesty but also includes fair dealing and full disclosure of all relevant information.

          • PB-1.2 PB-1.2 Objectivity

            • PB-1.2.1

              All relevant persons should be fair and should not allow prejudice, bias, conflict of interest or influence to override their objectivity.

          • PB-1.3 PB-1.3 Competence, skill care and due diligence

            • PB-1.3.1

              All relevant persons should perform services with competence, due care and diligence and have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional services based on up-to-date developments in practice, legislation and techniques.

          • PB-1.4 PB-1.4 Confidentiality

            • PB-1.4.1

              All relevant persons should treat client information with the strictest of confidentiality unless disclosure is warranted under specific authority or there is a legal or professional duty to disclose.

          • PB-1.5 PB-1.5 Management and control

            • PB-1.5.1

              The Board and management must take reasonable care to organise and control the affairs of the licensee responsibly and effectively with adequate risk management systems.

          • PB-1.6 PB-1.6 Market conduct

            • PB-1.6.1

              All relevant persons should observe proper standards of market conduct.

          • PB-1.7 PB-1.7 Communications with client

            • PB-1.7.1

              All relevant persons must pay due regard to the information needs of their clients and communicate information to them in a manner which is clear, fair and not misleading.

          • PB-1.8 PB-1.8 Relationship of trust

            • PB-1.8.1

              All relevant persons must take reasonable care to ensure the suitability of their advice and discretionary decisions for any customer who is entitled to rely upon their judgment.

      • HC HC High-Level Controls

        • HC-A HC-A Introduction

          • HC-A.1 HC-A.1 Purpose

            • HC-A.1.1

              This Module presents requirements that have to be met by conventional bank licensees with respect to:

              a) the role and composition of their Boards and Board Committees; and
              b) related high-level controls and policies.

            • HC-A.1.2

              In addition, this Module contains requirements for the notification and pre-approval of individuals, undertaking certain designated functions with respect to conventional bank licensees. These functions (called "controlled functions"), include Directors and members of senior management. The controlled functions regime supplements the BMA's corporate governance requirements by ensuring that key persons involved in the running of conventional bank licensees are fit and proper. Those approved by the BMA to undertake controlled functions are called approved persons.

            • HC-A.1.3

              Finally, this Module contains certain notification and approval requirements regarding the use of Special Purpose Vehicles ("SPVs"; see Section HC-1.5).

            • HC-A.1.4

              This Module supplements various provisions relating to corporate governance contained in Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law ("Commercial Companies Law 2001"). In case of conflict, the Commercial Companies Law shall prevail. The Module also supplements (for companies listed on the Bahrain Stock Exchange), Stock Exchange regulations that are relevant to corporate governance and high-level controls. Compliance with this Module does not guarantee compliance with either the Commercial Companies Law 2001 or the BSE regulations.

          • HC-A.2 HC-A.2 Key requirements

            • Corporate governance

              • HC-A.2.1

                The Chairman of the Board should preferably be non-executive and independent. The role of Chairman and Chief Executive may not be exercised by the same person. (See Rule HC-1.3.9.)

              • HC-A.2.2

                The Board must approve a code of conduct for itself, senior management and employees, and define the responsibilities of itself and senior management. This should include procedures for dealing with conflicts of interest, and a prohibition on insider trading. (See Paragraphs HC-1.2.9 to HC-1.2.13.)

              • HC-A.2.3

                The Board should meet at least four times per year. (see Paragraph HC-1.3.3).

              • HC-A.2.4

                Boards must have an adequate number of members that are "independent" and "non-executive" to serve the interests of minority shareholders and other stakeholders. (See Paragraphs HC-1.3.5 and HC-1.3.6.)

              • HC-A.2.5

                The Board should consider the setting up of committees to assist it in fulfilling its responsibilities. The setting up of an Audit Committee is mandatory. (See Paragraphs HC-1.3.10 to HC-1.3.13.)

              • HC-A.2.6

                Conventional bank licensees are required to notify the BMA, in writing, of all major changes (regardless of type and/or effect) proposed to the strategy and/or corporate plan of the bank prior to implementation, as well as of any Special Purpose Vehicle they intend to establish as a subsidiary, or with respect to which they intend to act as sponsor or manager (see Section HC-1.5).

            • Approved Persons

              • HC-A.2.7

                Conventional bank licensees are required to secure prior BMA approval for those persons wishing to undertake a controlled function. Such persons are assessed against BMA's "fit and proper" requirements. Conventional bank licensees must also notify the BMA of any changes in their approved persons. (See Chapter HC-2)

            • Compliance officer/manager

              • HC-A.2.8

                Conventional bank licensees must appoint a senior member of staff with responsibility for compliance. The Compliance Officer is a controlled function. (See Chapter HC-3.)

          • HC-A.3 HC-A.3 Module history

            • Evolution of the Module

              • HC-A.3.1

                This Module was first issued in July 2004, as part of the initial release of Volume 1 of the BMA Rulebook. It was dated July 2004. All subsequent changes to this Module are shown with the month and year in which the change was made, at the base of the relevant page and in the Table of Contents. Chapter UG-3 provides further details on Rulebook maintenance and version control.

              • HC-A.3.2

                A list of recent changes made to this Module is shown below:

                Module Ref. Change Date Description of Changes
                HC-1.5 01/04/05 Transparency requirements formalised
                HC-1.6 01/04/05 Notification requirements formalised
                HC-1.1, HC-1.2 & HC-1.4 01/10/05 High level controls
                HC-1.5 01/10/05 New SPV requirements
                HC-3.1HC-3.2 01/10/05 Revised compliance function requirements
                HC-1.5.3, HC-1.5.5 & HC-4.1 01/01/06 Revised notification requirements for SPVs and dealing staff
                HC-2, HC-3 and HC-4 01/07/06 Requirements relating to controllers moved to Module GR; Remaining requirements relating to "fit and proper" re-drafted to ensure consistent terminology and procedures with other Rulebook Volumes (without changing the substance of the previous 'fit and proper' requirements); Requirements relating to dealers incorporated into the 'fit and proper' requirements.

            • Superseded Requirements

              • HC-A.3.3

                Prior to the development of this Rulebook, the BMA issued various circulars covering different aspects of corporate governance. These circulars were consolidated into the first version of this Module as shown below:

                Circular Ref. Date of Issue Module Ref. (July 2004 version) Circular Subject
                BC/23/99 8 Nov 1999 HC-1 'Enhancing Corporate Governance in Banking Organisations'
                BC/904/95 24 Jul 1995 HC-1.6 Notification to, and approval from the Agency for certain matters
                ODG/329/03 10 Sep 2003 HC-1.6 Corporate Governance Reporting
                BC/11/98 27 Jul 1998 HC-2 Terms and Definitions Applying to the Management of Banks and Financial Institutions
                BC/8/00 24 May 2000 HC-2 Controllers of, and holdings and transfers of significant ownership or controlling interests in, Agency licensees
                BC/13/99 15 Jun 1999 HC-3 Compliance, Risk Management and Internal Controls
                BMA/1287/94 6 Nov 1994 HC-4 Foreign Exchange, Securities and Other Dealers

              • HC-A.3.4

                The contents in this Module are effective from the dates depicted in HC-A.3.2 and HC-A.3.3, from which the requirements are compiled. Section HC-1.3 is effective from January 2007.

        • HC-B HC-B General guidance and best practice

          • HC-B.1 HC-B.1 Guidance provided by other international bodies

            • Basel Committee: Enhancing Corporate Governance in Banking Organisations and High Level Controls for Banks

              • HC-B.1.1

                These papers (see www.bis.org/publ/bcbs56.pdf) issued in September 1998 and September 1999 provide guidance on corporate governance and high-level controls in banks. These papers form part of an ongoing effort by the Committee to strengthen procedures for risk management and disclosure in banks.

              • HC-B.1.2

                The papers draw on supervisory experience with corporate governance problems at banking organisations and suggest the types of practices that could help to avoid such problems. They identify a number of practices as critical elements of any financial institution's corporate governance process.

              • HC-B.1.3

                The BMA draws banks' attention to the Basel papers as benchmarks of best practice for corporate governance standards and high-level controls to be followed by banks operating in the Kingdom of Bahrain.

          • HC-B.2 HC-B.2 Enforceability

            • HC-B.2.1

              The requirements of Chapter HC-1, Sections HC-1.1HC-1.4 are binding requirements, which banks and their Boards should follow on an "apply or explain" basis. If a Board or a bank elects not to follow these requirements, they must explain why to the Agency and document the reasons for not applying the concerned requirements in the Minutes of the Board. The remaining chapters are binding requirements except where shown as guidance.

            • HC-B.2.2

              This Module and Chapter HC-1 in particular supplements various provisions relating to Corporate Governance contained in Legislative Decree No. 21 of 2001 with respect to promulgating the Commercial Companies Law. In any cases of potential conflict, the Commercial Companies Law shall prevail. Compliance with this Module does not guarantee compliance with the Commercial Companies Law.

        • HC-1 HC-1 Corporate Governance

          • HC-1.1 HC-1.1 Scope

            • HC-1.1.1

              The contents of this Chapter are applicable to locally incorporated banks. Bahrain branches of foreign banks must satisfy the Agency that equivalent arrangements are in place at the parent level and that these arrangements provide for effective high level controls over activities conducted under the Bahrain licence.

            • HC-1.1.2

              This Chapter covers the high level controls aspects of corporate governance of banks, and therefore focuses on the functions of the constituent parts of high level controls, starting with the respective roles and responsibilities of the Board and senior management.

            • HC-1.1.3

              This Chapter therefore does not cover matters of corporate governance relating to the Commercial Companies Law (e.g. General Meetings, the role of shareholders and other administrative matters) or Listing Requirements.

            • HC-1.1.4

              The BMA has historically pursued a "best practice" guidance approach to high level controls and corporate governance, rather than a prescriptive rules-based approach. The Agency has chosen to notify licensees of international best practice standards, and allowed banks to interpret these, according to the scope of operations of the concerned bank. This Chapter blends a best practice-based approach with minimum requirements.

            • HC-1.1.5

              Banks must satisfy the BMA that financial services activities conducted in subsidiaries and other group members including foreign branches are subject to the same or equivalent arrangements for ensuring effective high-level controls over their activities. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.

            • HC-1.1.6

              Where a bank is unable to satisfy the BMA that its subsidiaries and other group members or foreign branches are subject to the same or equivalent arrangements, the BMA will assess the potential impact of risks — both financial and reputational — to the bank arising from inadequate high-level controls in the rest of the group of which it is a member. In such instances, the BMA may impose restrictions on dealings between the bank and other group members. Where weaknesses in controls are assessed by the BMA to pose a major threat to the stability of the bank, then its authorisation may be called into question.

          • HC-1.2 HC-1.2 The Board of Directors — Its Functions and Responsibilities

            • Strategy

              • HC-1.2.1

                In most banks, shareholders, creditors, employees, depositors and investment account holders ("stakeholders") are unable to closely monitor management, its strategies and the bank's performance due to a lack of information and resources. A key responsibility of the Board is to fill the gap between uninformed stakeholders to whom it owes a duty of care, and the more fully informed executive management by monitoring management closely on behalf of stakeholders.

              • HC-1.2.2

                The Board is ultimately accountable and responsible for the affairs and performance of the bank. The Board must establish the objectives of the bank and develop the strategies that direct the ongoing activities of the bank to achieve these objectives. The strategies should be communicated throughout the bank, and be disclosed publicly (e.g. via the website or in the annual report in an abbreviated form as applicable). In its strategy document, the Board must demonstrate that it is able to proactively identify and understand the significant risks that the bank faces in achieving its business objectives through its business strategies and plans.

              • HC-1.2.3

                The precise functions reserved for the Board, and those delegated to management and committees will vary, dependent upon the business of the institution, its size and ownership structure. However, at a minimum, the Board must establish and maintain a statement of its responsibilities for:

                a) The adoption and annual review of strategy;
                b) The adoption and review of management structure and responsibilities;
                c) The adoption and review of the systems and controls framework; and
                d) Monitoring the implementation of strategy by management.

              • HC-1.2.4

                In its strategy review process, the Board should:

                a) Review the bank's business plans and the inherent level of risk in these plans;
                b) Assess the adequacy of capital to support the business risks of the bank;
                c) Set performance objectives;
                d) Review the performance of executive management; and
                e) Oversee major capital expenditures, divestitures and acquisitions.

              • HC-1.2.5

                The BMA expects the Board to have effective policies and processes in place for:

                a) Ensuring a formal and transparent Board nomination process;
                b) Appointing senior managers, and ensuring that they have the necessary integrity, technical and managerial competence, and experience;
                c) Overseeing succession planning and replacing key executives when necessary, and ensuring appropriate resources are available, and minimising reliance on key individuals;
                d) Reviewing the remuneration and incentive packages of the executive management and members of the Board of Directors and ensuring that such packages are consistent with the corporate values and strategy of the bank;
                e) Effectively monitoring and making formal (annual) evaluations of senior management's performance in implementing agreed strategy and business plans;
                f) Approving budgets and reviewing performance against those budgets and key performance indicators; and
                g) The management of the bank's compliance risk.

            • Risk Recognition and Assessment

              • HC-1.2.6

                The Board is responsible for ensuring that the systems and controls framework, including the Board structure and organisational structure of the bank is appropriate for the bank's business and associated risks (see HC-1.2.3 c)). The Board must ensure that collectively it has sufficient expertise to identify, understand and measure the significant risks to which the bank is exposed in its business activities.

                In assessing the systems and controls framework, the BMA expects the Board to demonstrate that the bank's operations, individually and collectively:

                a) Are measured, monitored and controlled by appropriate, effective and prudent risk management systems commensurate with the scope of the bank's activities. The Board should ensure that senior management have put in place appropriate systems of control for the business of the bank and the information needs of the Board; in particular, there should be appropriate systems and functions for identifying as well as for monitoring risk, the financial position of the bank, and compliance with applicable laws, regulations and best practice standards. The systems should produce information on a timely basis; and
                b) Are supported by an appropriate control environment. The compliance, risk management and financial reporting functions must be adequately resourced, independent of business lines and must be run by individuals not involved with the day-to-day running of the various business areas. The Board must additionally ensure that management develops, implements and oversees the effectiveness of comprehensive know your customer standards, as well as ongoing monitoring of accounts and transactions, in keeping with the requirements of relevant law, regulations and best practice (with particular regard to anti-money laundering measures). The control environment should maintain necessary client confidentiality and ensure that the privacy of the bank is not violated, and ensure that client's rights and assets are properly safeguarded.

              • HC-1.2.7

                In its review of the systems and controls framework, the Board should:

                a) Effectively make use of the work of internal and external auditors. The Board should ensure the integrity of the bank's accounting and financial reporting systems through regular independent review (by internal and external audit). Audit findings should be used as an independent check on the information received from management about the bank's operations and performance and the effectiveness of internal controls; and
                b) Identify any significant issues related to the bank's adopted governance framework, processes and practices and ensure that appropriate and timely action is taken to address identified adverse deviations from the requirements of this Module.

                The determinations under HC-1.2.6 and this paragraph might be made through the use of self-assessments, stress/scenario tests, and/or independent judgments made by external advisors. The Board may appoint supporting committees, and engage senior management to assist it in the oversight of risk management, but the Board may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance process is in place.

            • Corporate Ethics, Conflicts of Interest and Code of Conduct

              • HC-1.2.8

                Banks are subject to a wide variety of laws, regulations and codes of best practice that directly affect the conduct of business. Such laws involve the Bahraini Stock Exchange Law, the Labour Law, the Commercial Companies Law, occupational health and safety, even environment and pollution laws, as well as codes of conduct and regulations of the Agency. The Board sets the "tone at the top" of a bank, and has a responsibility to oversee compliance with these various requirements. The Board should ensure that the staff conduct their affairs with a high degree of integrity, taking note of applicable laws, codes and regulations.

              • HC-1.2.9

                The Board should establish corporate standards for itself, senior management, and employees. This requirement should be met by way of a documented and published code of conduct or similar document. These values should be communicated throughout the bank, so that the Board and senior management and staff understand the importance of conducting business based on good corporate governance values and understand their accountabilities to the various stakeholders of the licensee. Banks' Boards, senior management and staff must be informed of and be required to fulfil their fiduciary responsibilities to the bank's stakeholders.

              • HC-1.2.10

                An internal code of conduct is separate from the business strategy of a bank. A code of conduct should outline the practices that Directors, senior management and staff should follow in performing their duties. Banks may wish to use procedures and policies to complement their codes of conduct. The suggested contents of a code of conduct are covered below:

                a) Commitment by the Board and management to the code. The code of conduct should be linked to the objectives of the bank, and its responsibilities and undertakings to customers, shareholders, staff and the wider community (see HC-1.2.8 and HC-1.2.9). The code should give examples or expectations of honesty, integrity, leadership and professionalism;
                b) Commitment to the law and best practice standards. This commitment would include commitments to following accounting standards, industry best practice (such as ensuring that information to clients is clear, fair, and not misleading), transparency, and rules concerning potential conflicts of interest (see HC-1.2.11);
                c) Employment practices. This would include rules concerning health and safety of employees, training, policies on the acceptance and giving of business courtesies, prohibition on the offering and acceptance of bribes, and potential misuse of company assets;
                d) How the company deals with disputes and complaints from clients and monitors compliance with the code; and
                e) Confidentiality. Disclosure of client or bank information should be prohibited, except where disclosure is required by law (see HC-1.2.6 b).

              • HC-1.2.11

                The Board must establish and disseminate to its members and management, policies and procedures for the identification, reporting, disclosure, prevention, or strict limitation of potential conflicts of interest. It is senior management's responsibility to implement these policies. Rules concerning connected party transactions and potential conflicts of interest may be dealt with in the Code of Conduct (see HC-1.2.9). In particular, the Agency requires that any decisions to enter into transactions, under which Board members or any member of management would have conflicts of interest that are material, should be formally and unanimously approved by the full Board. Best practice would dictate that a Board member or member of senior management should:

                a) Not enter into competition with the bank;
                b) Not demand or accept substantial gifts from the bank for himself or his associates;
                c) Not misuse the banks' assets;
                d) Not use company privileged information or take advantage of business opportunities to which the company is entitled for himself or his associates;
                e) Report to the Board any (potential) conflict of interest in their activities with, and commitments to other organisations. In any case, all Board members and members of senior management must declare in writing all of their other interests in other enterprises or activities (whether as a shareholder of more than 5% of the voting capital of a company, a manager, or other form of significant participation) to the Board (or the Nominations or Audit Committees) on an annual basis; and
                f) Absent themselves from any discussions or decision-making that involves a subject where they are incapable of providing objective advice, or which involves a subject or (proposed) transaction where a conflict of interest exists.

              • HC-1.2.12

                The Agency expects that the Board and its members individually and collectively:

                a) Act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the bank and its shareholders and other stakeholders (see paragraphs HC-1.2.8 to HC-1.2.11);
                b) Act within the scope of their responsibilities (which should be clearly defined — see HC-1.3.7 and HC-1.3.8 below) and not participate in the day-to-day management of the bank;
                c) Have a proper understanding of, and competence to deal with the affairs and products of the bank and devote sufficient time to their responsibilities;
                d) To independently assess and question the policies, processes and procedures of the bank, with the intent to identify and initiate management action on issues requiring improvement. (i.e. to act as checks and balances on management).

              • HC-1.2.13

                All Directors whether non-executive or executive should exercise independence in their decision-making. To facilitate independence, the Board should agree procedures whereby the Board or its individual members (or committees) may take independent professional advice at the bank's expense.

          • HC-1.3 HC-1.3 Board Composition and The Role of Committee

            • Board Composition & Frequency of Meetings

              • HC-1.3.1

                To fulfil its responsibility for the review of the systems and controls framework (HC-1.2.3 c), the Board must periodically assess its composition and size and, where appropriate, reconstitute itself and its committees by selecting new Directors to replace long-standing members or those members whose contribution to the bank or its committees (such as the audit committee) is not adequate.

              • HC-1.3.2

                No Board member may have more than one directorship of a Full Commercial Bank and an Offshore Banking Unit or Investment Bank. This would mean an effective cap of a maximum of two directorships of financial institutions inside Bahrain. Two directorships of licensees within the same category (e.g. "OBU") would not be permitted. Banks may approach the Agency for exemption from this limit where the directorships concern banks or financial institutions within the same group.

              • HC-1.3.3

                The Board must meet sufficiently often to enable it to discharge its responsibilities effectively, taking into account the bank's scale and complexity. The full Board should meet preferably no less than four times per year. The Agency recommends that meetings should take place once every quarter to address the Board's responsibilities for management oversight and performance monitoring.

              • HC-1.3.4

                Board rules should require members to step down if they are not actively participating in Board meetings.

            • Independent and Non-Executive Directors

              • HC-1.3.5

                Where there is the potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent non-executive Board members capable of exercising independent judgment. The Board should outline its criteria and materiality thresholds in the annual report for the definition of "independence". The Directors should be identified in the annual report as executive, non-executive, and independent non-executive, as follows:

                a) Executive Director (or "Managing Director" under the Commercial Companies Law "CCL") — A person who is involved in the day-to-day management and/or is in full-time employment of the bank and/or any of its affiliates or subsidiaries or parent companies. An executive Director may not occupy the post of "Chairman";
                b) Non-Executive Director — A person not involved in the day-to-day management and/or is not a full-time salaried employee of the bank and/or any of its affiliates, or subsidiaries or parent companies; and
                c) Independent Non-Executive Director — A non-executive Director (as defined above), who also:
                • Is not a "controller" of the bank (see Section HC-2.1).
                • Is not an Associate (see paragraph HC-2.1.4 (g)) of a Director or a member of senior management of the bank.
                • Is not a professional advisor to the bank or group (A partner or member of senior management of an accountancy or law firm that provides services to the bank would not be perceived by the Agency as an independent non-executive Director).
                • Is not a large depositor with, or large borrower from the bank (i.e. whose deposits or credit facilities exceed 10% of the capital base of the bank).
                • Has no significant contractual or business relationship with the bank or group which could be seen to materially interfere with the person's capacity to act in an independent manner.

              • HC-1.3.6

                Independent non-executive Directors should be permitted to meet periodically (for example at separate meetings from the main Board) without executive management present.

            • Checks and Balances

              • HC-1.3.7

                To ensure a clear segregation of duties, the Board should clearly define, document and enforce its own responsibilities, including those of its Chairman, as well as the delegated authorities, responsibilities and accountabilities of the Board and management committees, the bank's Chief Executive and senior management to the stakeholders of the bank.

              • HC-1.3.8

                In particular, the Board should issue formal letters of appointment both to senior management and Board members, outlining their specific responsibilities and accountabilities. Wherever possible, these documents or a summary of responsibilities should be disclosed publicly, for example in the annual report. Letters of appointment facilitate better understanding of the respective accountabilities of the Board and management.

            • Responsibilities of the Chairman

              • HC-1.3.9

                The Chairman is responsible for the leadership of the Board, and for the efficient functioning of the Board. The Chairman is responsible for ensuring that Board members are adequately briefed in sufficient time for issues arising at Board meetings; therefore it is vital that the Chairman commit sufficient time to perform his role effectively, taking into account the points below:

                a) First, the Chairman of the Board preferably should be non-executive and independent (see HC-1.3.5 for the definitions of "non-executive" and "independent");
                b) Also, the role of Chairman and Chief Executive may not be exercised by the same person; and
                c) Furthermore, there needs to be a clear division of responsibility between these two positions (see also HC-1.3.8 in this regard).

            • The benefits and functions of committees

              • HC-1.3.10

                In order to perform its duties more efficiently, the Board may set up committees where it feels appropriate with specific responsibilities, which must be documented. Where committees are set up, they should keep full minutes of their activities and meet regularly to fulfil their mandates. In particular, there are three areas where there is a need for checks and balances within the Board itself:

                a) The nomination of Directors;
                b) The remuneration of Directors; and
                c) The audit of the bank's financial performance.

                In these areas, executive Directors have clear potential conflicts of interest. Nomination is all about the continuation of their own jobs and the jobs of their colleagues and potential new colleagues. Remuneration is all about the rewards that executive Directors and/or senior management receive for their services to the bank. Audit concerns the probity of the financial and non-financial reporting of the performance of the company by the very same persons who are responsible for its performance.

                For larger banks that deal with the general public, committees can be a more efficient mechanism to assist the main Board in its monitoring and control of the activities of the bank. The establishment of committees should not mean that the role of the Board is diminished, or that the Board becomes fragmented. Each Committee must have a clear written mandate outlining its purpose, objectives and responsibilities, including composition, frequency of meetings and reporting relationships.

            • Audit Committee

              • HC-1.3.11

                The Agency requires all banks to establish an Audit Committee. The committee members must have sufficient technical expertise to enable the committee to perform its functions effectively. Preferably, there should be at least one qualified and appropriately experienced accountant in the committee. All members of the committee must be financially literate. The CEO may not be a member of this committee.

              • HC-1.3.12

                Responsibilities of the Audit Committee are as follows:

                a) To review the integrity of the bank's financial reporting (particularly with reference to information passed to the Board — see HC-1.2.6 a). This review should include the choice of accounting policies. The information needs of the Board to perform its monitoring responsibilities must be defined in writing, and regularly monitored by the Audit Committee;

                To oversee the selection and compensation of the external auditor for appointment and approval at the shareholders' meeting. The audit committee should oversee relations with the external auditors, including ensuring the external auditor's independence (in particular, making sure that the external audit firm and its partners have no other financial or business relationship without the Board's knowledge), the terms and conditions of the auditor's appointment and remuneration arrangements. The committee should monitor rotation arrangements for audit engagement partners. The audit committee should monitor the performance of the external auditor and the non-audit services provided by the external auditor. The committee should meet with the external auditor at least twice per year, and at least once per year in the absence of any members of executive management;
                b) To regularly review the activities and performance of the internal audit function;
                c) To review whether the bank complies with all relevant laws, regulations, codes and business practices, and ensure that the bank communicates with shareholders and relevant stakeholders (internal and external) openly and promptly, and with substance of compliance prevailing over form; and
                d) To review and supervise the implementation of, enforcement of and adherence to the bank's code of conduct.

              • HC-1.3.13

                Below the Audit Committee, the bank must set up an internal audit function, which reports directly to the Audit Committee (with a parallel reporting line to senior management for day-to-day matters as appropriate).

          • HC-1.4 HC-1.4 Transparency and Disclosure

            • Board's Responsibility for Disclosure

              • HC-1.4.1

                The Board should oversee the process of disclosure and communications with internal and external stakeholders. The Board should ensure that disclosures made by the bank are fair, transparent, comprehensive and timely and reflect the character of the bank and the nature, complexity and risks inherent in the bank's business activities. Disclosure policies must be reviewed for compliance with the Agency's disclosure requirements (see Rulebook Chapter PD-1).

          • HC-1.5 HC-1.5 Notification, reporting, and approval requirements for changes to activities, personnel and ownership, strategy, Board meetings and special purpose vehicles ("SPVs")

            • HC-1.5.1

              Banks must notify the Agency in writing of all major proposed changes to the strategy and/or corporate plan of the bank prior to implementation.

            • HC-1.5.2

              Banks must notify the Agency in writing of any proposed changes to senior positions or ownership changes mentioned in sections HC-2.1, HC-3.2 and HC-4.1 (whether in terms of structure or identity of personnel) prior to the change. The communication should include the reason for the departure of the personnel and the Curriculum Vitae of any new persons taking up the relevant positions in the bank. See also Section BR-5.1 for notification requirements concerning contact details of senior staff.

            • HC-1.5.3

              All locally incorporated banks, in addition to the requirements in paragraphs HC-1.5.1 and HC-1.5.2, should obtain the Agency's prior specific written approval before establishing any subsidiaries (including SPVs where the bank exercises a majority shareholding or has majority voting control by virtue of direct ownership or by proxy/nominee arrangements), branches and/or representative offices, either inside or outside of Bahrain. In order to avoid any delays and/or disruption in implementation of banks' plans in this context, the Agency should be approached as soon as possible, even at a very preliminary stage.

            • HC-1.5.4

              All locally incorporated banks are required to submit, on an annual basis, as an attachment to the year-end quarterly PIR, a report recording the meetings during the year by their Board of Directors. For a sample report, refer to Appendix BR-10.

            • HC-1.5.5

              All locally incorporated banks must notify the Agency if they intend to act as sponsor or manager of a special purpose vehicle ("SPV"), or if they intend to participate in the creation of an SPV, or if they intend to acquire shares in an SPV. All locally incorporated banks must notify the Agency if they are appointed as nominee shareholders of SPVs or hold votes by proxy arrangement in SPVs on behalf of other investors. In all cases listed above, the concerned bank must notify the Agency quarterly of any new commitments to, or engagements in business arrangements with SPVs. These reporting and notification arrangements apply in addition to arrangements under HC-1.5.3 where the SPV is a subsidiary.

            • HC-1.5.6

              The Agency requires any locally incorporated bank associated with an SPV to give the background to the following points in any notification under HC-1.5.5 above:

              a) the purpose of the SPV;
              b) the nature of the relationship between the bank and the SPV (i.e. sponsor, manager, investor, controller etc.);
              c) the external auditor's proposed consolidation/accounting treatment of the SPV;
              d) the availability of financial and other information relevant to the SPV and access to its business premises and records;
              e) whether the bank is providing any guarantees, warranties or financial/liquidity support of any kind to the SPV.

            • HC-1.5.7

              Where the SPV is consolidated into the accounts of a locally incorporated bank, the bank must provide separate accounting information on the SPV to the Agency on a quarterly basis. Furthermore, the annual audited financial statements of all consolidated SPVs must be submitted to the Agency within 3 months of the year end of the concerned SPV.

            • HC-1.5.8

              Where a locally incorporated bank has a controller or majority ownership relationship with an SPV, or acts as sponsor, the bank must obtain the prior approval of the Agency for any changes to the capital, ownership, management or control of the SPV. All locally incorporated banks must also notify the Agency of any significant events in relation to the SPV. If necessary, the Agency may require that formal information exchange arrangements are put in place (e.g. a memorandum of understanding) if the SPV is located in a foreign jurisdiction and its activities are not supervised locally.

        • HC-2 HC-2 Approved Persons

          • HC-2.1 HC-2.1 BMA Notification and Approval

            • General Requirement

              • HC-2.1.1

                All persons wishing to undertake a controlled function in a conventional bank licensee must be approved by the BMA prior to their appointment (subject to the variations contained in Rule HC-2.1.3).

              • HC-2.1.2

                Controlled functions are those of:

                (a) Director;
                (b) Chief Executive Officer or General Manager;
                (c) Senior Manager;
                (d) Compliance officer;
                (e) Money Laundering Reporting Officer; and
                (f) Financial Instruments Trader.

              • HC-2.1.3

                Prior approval is required for controlled functions (a), (b), (c), (d) and (e). Controlled functions (d) and (e) may be combined, however (see also FC-4.1, regarding the MLRO function). Controlled function (f) does not require prior approval: instead, notification only is required, once the person concerned has accepted to undertake that function.

            • Basis for Approval

              • HC-2.1.4

                Approval under Rule HC-2.1.1 is only granted by the BMA, if it is satisfied that the person is fit and proper to hold the particular position in the licensee concerned. "Fit and proper" is determined by the BMA on a case-by-case basis. The definition of "fit and proper" and associated guidance is provided in Sections HC-2.2 and HC-2.3 respectively.

            • Definitions

              • HC-2.1.5

                Director is any person who occupies the position of a Director, as defined in Article 173 of the Commercial Companies Law (Legislative Decree No. 21 of 2001).

              • HC-2.1.6

                The fact that a person may have "Director" in their job title does not of itself make them a Director within the meaning of the definition noted in Rule HC-2.1.5. For example, a 'Director of Marketing', is not necessarily a member of the Board of Directors and therefore may not fall under the definition of Rule HC-2.1.5.

              • HC-2.1.7

                The Chief Executive Officer or General Manager means a person who is responsible for the conduct of the licensee (regardless of actual title). The Chief Executive Officer or General Manager must be resident in Bahrain. This person is responsible, alone or jointly, for the conduct of the whole of the firm, or, in the case of an overseas conventional bank licensee, for all of the activities of the branch (in which case, he may hold the title of "Branch Manager").

              • HC-2.1.8

                Senior Manager means a person who, under the immediate authority of a Director or the Chief Executive Officer/General Manager, exercises major managerial responsibilities, is responsible for a significant business or operating unit, or has major managerial responsibility for maintaining accounts or other records of the licensee.

              • HC-2.1.9

                Whether a person is a Senior Manager will depend on the facts in each case and is not determined by the presence or absence of the word in their job title. Examples of Senior Managers might include, depending on the scale, nature and complexity of the business, a deputy Chief Executive Officer; and heads of departments such as Risk Management, or Internal Audit; or the Chief Financial Officer.

              • HC-2.1.10

                Financial Instruments Trader means a person who is engaged in buying or selling financial instruments.

              • HC-2.1.11

                Where a firm is in doubt as to whether a function should be considered a controlled function it must discuss the case with the BMA.

            • Notification Requirements and Process

              • HC-2.1.12

                Conventional bank licensees must obtain BMA approval before a person is formally appointed to a controlled function; the request for BMA approval must be made by submitting to BMA a duly completed Form 3 (Application for Approved Person status). In the case of a financial instruments trader, notification only is required (see Rule HC-2.1.3): this notification must also be made by submitting a Form 3.

              • HC-2.1.13

                In the case of license applications, the Form 3 must be marked for the attention of the Director, Licensing and Policy Directorate. When made by a conventional bank licensee, the Form 3 must be marked for the attention of either the Director, Retail Banks Supervision or the Director, Wholesale Banks Supervision, as appropriate.

              • HC-2.1.14

                Licensees should give the BMA a reasonable amount of notice in order for an application for approval to be reviewed. The BMA aims to respond within 2 weeks of receipt of an application, although in some cases, where referral to an overseas supervisor is required, the response time is likely to be longer.

              • HC-2.1.15

                Licensees seeking to appoint Board Directors should seek BMA approval for all the candidates to be put forward for election at a shareholder meeting, in advance of the agenda being issued to shareholders. BMA approval of the candidates does not in any way limit shareholders' rights to refuse those put forward for election.

              • HC-2.1.16

                All refusals by the BMA to grant a person approved person status have to be reviewed and approved by an Executive Director of the BMA. A notice of intent is issued to the person concerned, setting out the basis for the decision. The person has 30 calendar days from the date of the notice in which to appeal the decision. The BMA then has 30 calendar days from the date of the representation in which to make a final determination. See also Chapter EN-5.

              • HC-2.1.17

                Conventional bank licensees must immediately notify BMA when an approved person ceases to hold the controlled function for which they have been approved, for whatever reason.

              • HC-2.1.18

                Thus, licensees are required to notify BMA should an approved person transfer to another function within the licensee, or to another group entity; or else resign, be suspended or dismissed. BMA may require further clarification as to the reasons for the person's transfer or departure. BMA will automatically withdraw the individual's approved person status: should the person wish to undertake another controlled function, whether within the same licensee or in another licensee, then a new application should be resubmitted.

              • HC-2.1.19

                Conventional bank licensees must immediately notify the BMA should they become aware of information that could reasonably be viewed as calling into question an approved person's compliance with the BMA's "fit and proper" requirement (see HC-2.2).

          • HC-2.2 HC-2.2 "Fit and proper" requirement

            • HC-2.2.1

              Licensees seeking an approved person authorisation for an individual, must satisfy the BMA that the individual concerned is "fit and proper" to undertake the controlled function in question.

            • HC-2.2.2

              To be considered "fit and proper", those nominated must demonstrate:

              (a) personal integrity, honesty and good reputation;
              (b) professional competence, experience and expertise, sufficient for the controlled function for which authorisation is being applied for, and given the scale, complexity and nature of the conventional bank licensee concerned; and
              (c) financial soundness.

            • HC-2.2.3

              In assessing the conditions prescribed in Rule HC-2.2.2, the BMA will take into account the criteria contained in Section HC-2.3. The BMA reviews each application on a case-by-case basis, taking into account all relevant circumstances. A person may be considered "fit and proper" to undertake one type of controlled function but not another, depending on the function's job size and required levels of experience and expertise. Similarly, a person approved to undertake a controlled function in one conventional bank licensee may not be considered to have sufficient expertise and experience to undertake nominally the same controlled function but in a much bigger licensee.

            • HC-2.2.4

              Approved persons undertaking a controlled function must act prudently, and with honesty, integrity, care, skill and due diligence in the performance of their duties. They must avoid conflicts of interest arising whilst undertaking a controlled function.

            • HC-2.2.5

              In determining whether a conflict of interest may arise, factors that may be considered include whether:

              (a) a person has breached any fiduciary obligations to the company or terms of employment;
              (b) a person has undertaken actions that would be difficult to defend, when looked at objectively, as being in the interest of the licensee; and
              (c) a person has failed to declare a personal interest that has a material impact in terms of the person's relationship with the licensee.

          • HC-2.3 HC-2.3 Interpretative Guidance on "Fit and Proper" Requirement

            • HC-2.3.1

              In assessing a person's fitness and propriety, the BMA will consider previous professional and personal conduct (in Bahrain or elsewhere) including, but not limited to, the following:

              (a) the propriety of a person's conduct, whether or not such conduct resulted in a criminal offence being committed, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;
              (b) a conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;
              (c) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;
              (d) whether the person has been the subject of any disciplinary proceeding by any government authority, regulatory agency or professional body or association;
              (e) the contravention of any financial services legislation or regulation;
              (f) whether the person has ever been refused a license, authorisation, registration or other authority;
              (g) dismissal or a request to resign from any office or employment;
              (h) disqualification by a court, regulator or other competent body, as a Director or as a manager of a corporation;
              (i) whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;
              (j) the extent to which the person has been truthful and open with supervisors;
              (k) the extent to which the person has appropriate professional and other qualifications for the controlled function in question;
              (l) the extent to which the person has sufficient experience, or is otherwise able to perform the functions of the controlled function in question;
              (m) whether the person has ever been adjudged bankrupt, entered into any arrangement with creditors in relation to the inability to pay due debts, or failed to satisfy a judgment debt under a court order.

            • HC-2.3.2

              With respect to HC-2.3.1(b), (c), (d) and (e), the BMA will take into account the length of time since any such event occurred, as well as the seriousness of the matter in question.

            • HC-2.3.3

              Further guidance on the process for assessing a person's "fit and proper" status is given in Module EN (Enforcement): see Chapter EN-8.

          • HC-2.4 [This section deleted 07/2006]

            [This Section was deleted in 07/2006: it has been left blank.]

        • HC-3 HC-3 Compliance officer/manager

          • HC-3.1 HC-3.1 Introduction

            • HC-3.1.1

              In order to promote best practice with respect to banks' internal systems and controls and international banking supervision, the Agency, in this chapter, outlines its requirements for the compliance function of banks. The expression "Compliance Function" in this Chapter is used to describe staff carrying out compliance duties.

            • HC-3.1.2

              The expression 'Compliance Risk', in this chapter refers to the risk of legal or regulatory sanctions, material or financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, reporting requirements, standards and codes of conduct applicable to its activities, rather than compliance with a bank's internal limits or procedures.

            • HC-3.1.3

              For further information and guidance on compliance risk and the compliance function, banks should refer to the Basel Committee publication, "Compliance and the compliance function in banks" (www.bis.org/publ April 2005). The Agency expects banks to carry out a review of their compliance with the principles in this paper on a regular basis (either by way of a self-assessment or by way of a review by the internal or external audit function).

          • HC-3.2 HC-3.2 Requirement for and approval of a compliance officer/manager

            • HC-3.2.1

              All banks must appoint a senior member of staff with responsibility for the management of compliance risk as their Compliance Officer/Manager.

            • HC-3.2.2

              The compliance function must be independent (i.e. it must not be placed in a position where its other duties or responsibilities may cause a conflict of interest with its compliance risk management responsibilities). Therefore the compliance function must be separate from the internal audit function. The compliance officer or manager may however, perform other limited related compliance roles (e.g. the MLRO or legal advisor), subject to the Agency's prior approval.

            • HC-3.2.3

              The compliance officer/manager must be appropriately qualified and experienced and the compliance function must have adequate resources to carry out its functions effectively.

            • HC-3.2.4

              The appointment of a compliance manager/officer requires the Agency's prior approval and the submission of the appointee's Personal Questionnaire (Appendix LR 2) and Curriculum Vitae to the Agency. The bank must also outline how the compliance function fits into the bank's senior management reporting structure, and must give details of relevant reporting lines within the bank.

            • HC-3.2.5

              In the case of locally incorporated banks, the compliance officer/manager must have access to the Board of Directors in addition to the senior management.

        • HC-4 [This chapter deleted 07/2006]

          [This chapter deleted 07/2006 — left blank.]

      • HC HC High-level Controls [versions up to October 2010]

        • HC-A HC-A Introduction

          • HC-A.1 HC-A.1 Purpose

            • Executive Summary

              • HC-A.1.1

                This Module presents requirements that have to be met by conventional bank licensees with respect to:

                a) The role and composition of their Boards and Board Committees; and
                b) Related high-level controls and policies.
                October 07

              • HC-A.1.2

                In addition, this Module contains requirements for the notification and pre-approval of individuals, undertaking certain designated functions with respect to conventional bank licensees. These functions (called 'controlled functions'), include Directors and members of senior management. The controlled functions regime supplements the CBB's corporate governance requirements by ensuring that key persons involved in the running of conventional bank licensees are fit and proper. Those approved by the CBB to undertake controlled functions are called approved persons.

                October 07

              • HC-A.1.3

                Finally, this Module contains certain notification and approval requirements regarding the use of Special Purpose Vehicles ('SPVs'; see Section HC-1.5).

                October 07

              • HC-A.1.4

                This Module supplements various provisions relating to corporate governance contained in Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law ('Commercial Companies Law 2001'). In case of conflict, the Commercial Companies Law shall prevail. The Module also supplements (for companies listed on the Bahrain Stock Exchange), Stock Exchange regulations that are relevant to corporate governance and high-level controls. Compliance with this Module does not guarantee compliance with either the Commercial Companies Law 2001 or the BSE regulations.

                October 07

            • Legal Basis

              • HC-A.1.5

                This Module contains the CBB's Directive relating to high-level controls and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to conventional bank licensees.

                October 07

              • HC-A.1.6

                For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                October 07

          • HC-A.2 HC-A.2 Key requirements

            • Corporate governance

              • HC-A.2.1

                The Chairman of the Board should preferably be non-executive and independent. The role of Chairman and Chief Executive may not be exercised by the same person. (See Rule HC-1.3.9.)

                October 07

              • HC-A.2.2

                The Board must approve a code of conduct for itself, senior management and employees, and define the responsibilities of itself and senior management. This should include procedures for dealing with conflicts of interest, and a prohibition on insider trading. (See Paragraphs HC-1.2.9 to HC-1.2.13.)

                October 07

              • HC-A.2.3

                The Board should meet at least four times per year (see Paragraph HC-1.3.4).

                October 07

              • HC-A.2.4

                Boards must have an adequate number of members that are 'independent' and 'non-executive' to serve the interests of minority shareholders and other stakeholders. (See Paragraphs HC-1.3.5 and HC-1.3.6.)

                October 07

              • HC-A.2.5

                The Board should consider the setting up of committees to assist it in fulfilling its responsibilities. The setting up of an Audit Committee is mandatory. (See Paragraphs HC-1.3.11 to HC-1.3.14.)

                October 07

              • HC-A.2.6

                Conventional bank licensees are required to notify the CBB, in writing, of all major changes (regardless of type and/or effect) proposed to the strategy and/or corporate plan of the bank prior to implementation, as well as of any Special Purpose Vehicle they intend to establish as a subsidiary, or with respect to which they intend to act as sponsor or manager (see Section HC-1.5).

                October 07

            • Approved Persons

              • HC-A.2.7

                Conventional bank licensees are required to secure prior CBB approval for those persons wishing to undertake a controlled function. Such persons are assessed against CBB's 'fit and proper' requirements. Conventional bank licensees must also notify the CBB of any changes in their approved persons. (See Chapter HC-2)

                October 07

            • Compliance officer/manager

              • HC-A.2.8

                Conventional bank licensees must appoint a senior member of staff with responsibility for compliance. The Compliance Officer is a controlled function. (See Chapter HC-3.)

                October 07

          • HC-A.3 HC-A.3 Module History

            • Evolution of the Module

              • HC-A.3.1

                This Module was first issued in July 2004, as part of the initial release of Volume 1 of the CBB Rulebook. It was dated July 2004. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG 3 provides further details on Rulebook maintenance and version control.

                October 07

              • HC-A.3.2

                When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

                October 07

              • HC-A.3.3

                A list of recent changes made to this Module is shown below:

                Module Ref. Change Date Description of Changes
                HC-1.5 01/04/05 Transparency requirements formalized.
                HC-1.6 01/04/05 Notification requirements formalized.
                HC-1.1, 1.2 & HC-1.4 01/10/05 High-level controls enhanced.
                HC-1.5 01/10/05 New SPV requirements.
                HC-3.1 – HC-3.2 01/10/05 Revised compliance function requirements.
                HC-1.5.3, HC-1.5.5 & HC-4.1 01/01/06 Revised notification requirements for SPVs and dealing staff.
                HC-2, HC-3 and HC-4 01/07/06 Requirements relating to controllers moved to Module GR; Remaining requirements relating to 'fit and proper' re-drafted to ensure consistency with other Rulebook Volumes (without changing the substance of the previous 'fit and proper' requirements); Requirements relating to dealers incorporated into the 'fit and proper' requirements.
                HC-1.2 & HC-1.3 01/10/07 Reordering of Paragraphs to separate Rules from Guidance.
                HC-A.1 10/2007 New Rule HC-A.1.5 introduced, categorising this Module as a Directive.
                HC-1.3.5 04/2008 Mandatory requirement for at least one independent non-executive director
                HC-2.1.16 01/2009 Amendment to notification process for "approved person" status
                HC-1.5.3 01/2009 Requirement to appoint a permanent replacement within 120 days when a controlled function falls vacant.
                HC-2.1.2 10/2009 CBB prior approval requirement for appointment of Deputy MLRO

              • HC-A.3.4

                The contents in this Module are effective from July 2004 or the dates depicted in HC-A.3.3. Section HC-1.3 is effective from October 2007.

                October 07

        • HC-B HC-B General guidance and best practice

          • HC-B.1 HC-B.1 Guidance provided by other international bodies

            • Basel Committee: Enhancing Corporate Governance in Banking Organisations and High-level Controls for Banks

              • HC-B.1.1

                These papers (see www.bis.org/publ/bcbs56.pdf) issued in September 1998 and September 1999 provide guidance on corporate governance and high-level controls in banks. These papers form part of an on-going effort by the Committee to strengthen procedures for risk management and disclosure in banks.

                October 07

              • HC-B.1.2

                The papers draw on supervisory experience with corporate governance problems at banking organisations and suggest the types of practices that could help to avoid such problems. They identify a number of practices as critical elements of any financial institution's corporate governance process.

                October 07

              • HC-B.1.3

                The CBB draws banks' attention to the Basel papers as benchmarks of best practice for corporate governance standards and high-level controls to be followed by banks operating in the Kingdom of Bahrain.

                October 07

          • HC-B.2 HC-B.2 Enforceability

            • HC-B.2.1

              The requirements of Chapter 1, Sections HC-1.1–HC-1.4 are binding requirements, which banks and their Boards should follow on an 'apply or explain' basis. If a Board or a bank elects not to follow these requirements, they must explain why to the Central Bank and document the reasons for not applying the concerned requirements in the Minutes of the Board. The remaining Chapters are binding requirements except where shown as guidance.

              October 07

        • HC-1 HC-1 Corporate Governance

          • HC-1.1 HC-1.1 Scope

            • HC-1.1.1

              The contents of this Chapter are applicable to locally incorporated banks. Bahrain branches of foreign banks must satisfy the Central Bank that equivalent arrangements are in place at the parent level and that these arrangements provide for effective high-level controls over activities conducted under the Bahrain license.

              October 07

            • HC-1.1.2

              This Chapter covers the high-level controls aspects of corporate governance of banks, and therefore focuses on the functions of the constituent parts of high-level controls, starting with the respective roles and responsibilities of the Board and senior management.

              October 07

            • HC-1.1.3

              This Chapter therefore does not cover matters of corporate governance relating to the Commercial Companies Law (e.g. General Meetings, the role of shareholders and other administrative matters) or Listing Requirements.

              October 07

            • HC-1.1.4

              The CBB has historically pursued a 'best practice' guidance approach to high-level controls and corporate governance, rather than a prescriptive rules-based approach. The Central Bank has chosen to notify licensees of international best practice standards, and allowed banks to interpret these, according to the scope of operations of the concerned bank. This Chapter blends a best practice-based approach with minimum requirements.

              October 07

            • HC-1.1.5

              Banks must satisfy the CBB that financial services activities conducted in subsidiaries and other group members including foreign branches are subject to the same or equivalent arrangements for ensuring effective high-level controls over their activities. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.

              October 07

            • HC-1.1.6

              Where a bank is unable to satisfy the CBB that its subsidiaries and other group members or foreign branches are subject to the same or equivalent arrangements, the CBB will assess the potential impact of risks – both financial and reputational – to the bank arising from inadequate high-level controls in the rest of the group of which it is a member. In such instances, the CBB may impose restrictions on dealings between the bank and other group members. Where weaknesses in controls are assessed by the CBB to pose a major threat to the stability of the bank, then its authorisation may be called into question.

              October 07

          • HC-1.2 HC-1.2 The Board of Directors – Its Functions and Responsibilities

            • Strategy

              • HC-1.2.1

                In most banks, shareholders, creditors, employees, depositors and investment account holders ('stakeholders') are unable to closely monitor management, its strategies and the bank's performance due to a lack of information and resources. A key responsibility of the Board is to fill the gap between uninformed stakeholders to whom it owes a duty of care, and the more fully informed executive management by monitoring management closely on behalf of stakeholders.

                October 07

              • HC-1.2.2

                The Board is ultimately accountable and responsible for the affairs and performance of the bank. The Board must establish the objectives of the bank and develop the strategies that direct the on-going activities of the bank to achieve these objectives. The strategies must be communicated throughout the bank, and be disclosed publicly (e.g. via the website or in the annual report in an abbreviated form as applicable). In its strategy document, the Board must demonstrate that it is able to proactively identify and understand the significant risks that the bank faces in achieving its business objectives through its business strategies and plans.

                October 07

              • HC-1.2.3

                The precise functions reserved for the Board, and those delegated to management and committees will vary, dependent upon the business of the institution, its size and ownership structure. However, as a minimum, the Board must establish and maintain a statement of its responsibilities for:

                a) The adoption and annual review of strategy;
                b) The adoption and review of management structure and responsibilities;
                c) The adoption and review of the systems and controls framework; and
                d) Monitoring the implementation of strategy by management.

                The Board may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance process is in place.

                October 07

              • HC-1.2.4

                In its strategy review process under Paragraphs HC-1.2.3 a) and d), the Board must:

                a) Review the bank's business plans and the inherent level of risk in these plans;
                b) Assess the adequacy of capital to support the business risks of the bank;
                c) Set performance objectives;
                d) Review the performance of executive management; and
                e) Oversee major capital expenditures, divestitures and acquisitions.
                October 07

              • HC-1.2.5

                The CBB expects the Board to have effective policies and processes in place for:

                a) Ensuring a formal and transparent Board nomination process;
                b) Appointing senior managers, and ensuring that they have the necessary integrity, technical and managerial competence, and experience;
                c) Overseeing succession planning and replacing key executives when necessary, and ensuring appropriate resources are available, and minimising reliance on key individuals;
                d) Reviewing the remuneration and incentive packages of the executive management and members of the Board of Directors and ensuring that such packages are consistent with the corporate values and strategy of the bank;
                e) Effectively monitoring and making formal (annual) evaluations of senior management's performance in implementing agreed strategy and business plans;
                f) Approving budgets and reviewing performance against those budgets and key performance indicators; and
                g) The management of the bank's compliance risk.
                October 07

            • Risk Recognition and Assessment

              • HC-1.2.6

                The Board is responsible for ensuring that the systems and controls framework, including the Board structure and organisational structure of the bank, is appropriate for the bank's business and associated risks (see HC-1.2.3 c)). The Board must ensure that collectively it has sufficient expertise to identify, understand and measure the significant risks to which the bank is exposed in its business activities.

                The Board must regularly assess the systems and controls framework of the bank. In its assessments, the Board must demonstrate to the CBB that:

                a) The bank's operations, individually and collectively are measured, monitored and controlled by appropriate, effective and prudent risk management systems commensurate with the scope of the bank's activities; and
                b) The bank's operations are supported by an appropriate control environment. The compliance, risk management and financial reporting functions must be adequately resourced, independent of business lines and must be run by individuals not involved with the day-to-day running of the various business areas. The Board must additionally ensure that management develops, implements and oversees the effectiveness of comprehensive know your customer standards, as well as on-going monitoring of accounts and transactions, in keeping with the requirements of relevant law, regulations and best practice (with particular regard to anti-money laundering measures). The control environment must maintain necessary client confidentiality and ensure that the privacy of the bank is not violated, and ensure that clients' rights and assets are properly safeguarded.
                c) Where the Board has identified any significant issues related to the bank's adopted governance framework, appropriate and timely action is taken to address any identified adverse deviations from the requirements of this Module.
                October 07

              • HC-1.2.7

                In its review of the systems and controls framework in Paragraph HC-1.2.6, the Board must:

                a) Make effective use of the work of external and internal auditors. The Board must ensure the integrity of the bank's accounting and financial reporting systems through regular independent review (by internal and external audit). Audit findings must be used as an independent check on the information received from management about the bank's operations and performance and the effectiveness of internal controls; and
                b) Make use of self-assessments, stress/scenario tests, and/or independent judgements made by external advisors. The Board should appoint supporting committees, and engage senior management to assist it in the oversight of risk management; and
                c) Ensure that senior management have put in place appropriate systems of control for the business of the bank and the information needs of the Board; in particular, there must be appropriate systems and functions for identifying as well as for monitoring risk, the financial position of the bank, and compliance with applicable laws, regulations and best practice standards. The systems must produce information on a timely basis.
                October 07

            • Corporate Ethics, Conflicts of Interest and Code of Conduct

              • HC-1.2.8

                Banks are subject to a wide variety of laws, regulations and codes of best practice that directly affect the conduct of business. Such laws involve the Bahraini Stock Exchange Law, the Labour Law, the Commercial Companies Law, occupational health and safety, even environment and pollution laws, as well as codes of conduct and regulations of the Central Bank. The Board sets the 'tone at the top' of a bank, and has a responsibility to oversee compliance with these various requirements. The Board should ensure that the staff conduct their affairs with a high degree of integrity, taking note of applicable laws, codes and regulations.

                October 07

              • HC-1.2.9

                The Board must establish corporate standards for itself, senior management, and employees. This requirement should be met by way of a documented and published code of conduct or similar document. These values must be communicated throughout the bank, so that the Board and senior management and staff understand the importance of conducting business based on good corporate governance values and understand their accountabilities to the various stakeholders of the licensee. Banks' Boards, senior management and staff must be informed of and be required to fulfil their fiduciary responsibilities to the bank's stakeholders.

                October 07

              • HC-1.2.10

                An internal code of conduct is separate from the business strategy of a bank. A code of conduct should outline the practices that Directors, senior management and staff should follow in performing their duties. Banks may wish to use procedures and policies to complement their codes of conduct. The suggested contents of a code of conduct are covered below:

                a) Commitment by the Board and management to the code. The code of conduct should be linked to the objectives of the bank, and its responsibilities and undertakings to customers, shareholders, staff and the wider community (see HC-1.2.8 and HC-1.2.9). The code should give examples or expectations of honesty, integrity, leadership and professionalism;
                b) Commitment to the law and best practice standards. This commitment would include commitments to following accounting standards, industry best practice (such as ensuring that information to clients is clear, fair, and not misleading), transparency, and rules concerning potential conflicts of interest (see HC-1.2.11);
                c) Employment practices. This would include rules concerning health and safety of employees, training, policies on the acceptance and giving of business courtesies, prohibition on the offering and acceptance of bribes, and potential misuse of company assets;
                d) How the company deals with disputes and complaints from clients and monitors compliance with the code; and
                e) Confidentiality. Disclosure of client or bank information should be prohibited, except where disclosure is required by law (see HC-1.2.6 b).
                October 07

              • HC-1.2.11

                The Board must establish and disseminate to its members and management, policies and procedures for the identification, reporting, disclosure, prevention, or strict limitation of potential conflicts of interest. It is senior management's responsibility to implement these policies. Rules concerning connected party transactions and potential conflicts of interest may be dealt with in the Code of Conduct (see HC-1.2.9). In particular, the Central Bank requires that any decisions to enter into transactions, under which Board members or any member of management would have conflicts of interest that are material, should be formally and unanimously approved by the full Board. Best practice would dictate that a Board member or member of senior management must:

                a) Not enter into competition with the bank;
                b) Not demand or accept substantial gifts from the bank for himself or his associates;
                c) Not misuse the banks' assets;
                d) Not use company privileged information or take advantage of business opportunities to which the company is entitled for himself or his associates;
                e) Report to the Board any (potential) conflict of interest in their activities with, and commitments to other organisations. In any case, all Board members and members of senior management must declare in writing all of their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager, or other form of significant participation) to the Board (or the Nominations or Audit Committees) on an annual basis; and
                f) Absent themselves from any discussions or decision-making that involves a subject where they are incapable of providing objective advice, or which involves a subject or (proposed) transaction where a conflict of interest exists.
                October 07

              • HC-1.2.12

                The Central Bank expects that the Board and its members individually and collectively:

                a) Act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the bank and its shareholders and other stakeholders (see Paragraphs HC-1.2.8 to HC-1.2.11);
                b) Act within the scope of their responsibilities (which should be clearly defined – see HC-1.3.7 and HC-1.3.8 below) and not participate in the day-to-day management of the bank;
                c) Have a proper understanding of, and competence to deal with the affairs and products of the bank and devote sufficient time to their responsibilities;
                d) To independently assess and question the policies, processes and procedures of the bank, with the intent to identify and initiate management action on issues requiring improvement. (i.e. to act as checks and balances on management).
                October 07

              • HC-1.2.13

                All Directors whether non-executive or executive should exercise independence in their decision-making. To facilitate independence, the Board should agree procedures whereby the Board or its individual members (or committees) may take independent professional advice at the bank's expense.

                October 07

          • HC-1.3 HC-1.3 Board Composition and The Role of Committees

            • Board Composition & Frequency of Meetings

              • HC-1.3.1

                To fulfil its responsibility for the review of the systems and controls framework (HC-1.2.3 c), the Board must periodically assess its composition and size and, where appropriate, reconstitute itself and its committees by selecting new Directors to replace long-standing members or those members whose contribution to the bank or its committees (such as the audit committee) is not adequate.

                October 07

              • HC-1.3.2

                No Board member may have more than one Directorship of a Retail Bank or a Wholesale Bank. This would mean an effective cap of a maximum of two Directorships of financial institutions inside Bahrain. Two Directorships of licensees within the same Category (e.g. 'Retail Bank') would not be permitted. Banks may approach the Central Bank for exemption from this limit where the Directorships concern banks or financial institutions within the same group.

                October 07

              • HC-1.3.3

                The Board must meet sufficiently often to enable it to discharge its responsibilities effectively, taking into account the bank's scale and complexity.

                October 07

              • HC-1.3.4

                To meet its obligations under Rule HC-1.3.3 above, the full Board should meet preferably no less than four times per year. The Central Bank recommends that meetings should take place once every quarter to address the Board's responsibilities for management oversight and performance monitoring. Furthermore, Board rules should require members to step down if they are not actively participating in Board meetings.

                October 07

            • Independent and Non-Executive Directors

              • HC-1.3.5

                Where there is the potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent non-executive Board members capable of exercising independent judgement. At a minimum, all locally incorporated banks must appoint one independent non-executive director. The Board must outline its criteria and materiality thresholds in the annual report for the definition of 'independence'. The Directors must be identified in the annual report as executive, non-executive, and independent non-executive, as follows:

                a) Executive Director (or 'Managing Director' under the Commercial Companies Law 'CCL') - A person who is involved in the day-to-day management and/or is in full-time employment of the bank and/or any of its affiliates or subsidiaries or parent companies. An Executive Director may not occupy the post of 'Chairman';
                b) Non-Executive Director - A person not involved in the day-to-day management and/or is not a full-time salaried employee of the bank and/or any of its affiliates, or subsidiaries or parent companies; and
                c) Independent Non-Executive Director - A non-Executive Director (as defined above), who also:
                •  Is not a 'controller' of the bank (see Section GR-5.2).
                •  Is not an Associate (see Section GR-5.2) of a Director or a member of senior management of the bank.
                •  Is not a professional advisor to the bank or group (A partner or member of senior management of an accountancy or law firm that provides services to the bank would not be perceived by the Central Bank as an independent non-Executive Director).
                •  Is not a large depositor with, or large borrower from the bank (i.e. whose deposits or credit facilities exceed 10% of the capital base of the bank).
                •  Has no significant contractual or business relationship with the bank or group which could be seen to materially interfere with the person's capacity to act in an independent manner.
                October 07
                Amended: April 2008

              • HC-1.3.6

                Independent non-executive Directors should be permitted to meet periodically (e.g. at separate meetings from the main Board) without executive management present.

                October 07

            • Checks and Balances

              • HC-1.3.7

                To ensure a clear segregation of duties, the Board must clearly define, document and enforce its own responsibilities, including those of its Chairman, as well as the delegated authorities, responsibilities and accountabilities of the Board and management committees, the bank's Chief Executive and senior management to the stakeholders of the bank.

                October 07

              • HC-1.3.8

                In particular, the Board must issue formal letters of appointment both to senior management and Board members, outlining their specific responsibilities and accountabilities. Wherever possible, these documents or a summary of responsibilities should be disclosed publicly, for example in the annual report. Letters of appointment facilitate better understanding of the respective accountabilities of the Board and management.

                October 07

            • Responsibilities of the Chairman

              • HC-1.3.9

                The Chairman is responsible for the leadership of the Board, and for the efficient functioning of the Board. The Chairman is responsible for ensuring that Board members are adequately briefed in sufficient time for issues arising at Board meetings; therefore it is vital that the Chairman commit sufficient time to perform his role effectively, taking into account the points below.

                a) The role of Chairman and Chief Executive may not be exercised by the same person; and
                b) Furthermore, there needs to be a clear division of responsibility between these two positions (see also HC-1.3.8 in this regard).
                October 07

              • HC-1.3.10

                The Chairman of the Board preferably should be non-executive and independent (see HC-1.3.5 for the definitions of 'non-executive' and 'independent').

                October 07

            • The benefits and functions of committees

              • HC-1.3.11

                In order to perform its duties more efficiently, the Board may set up committees where it feels appropriate with specific responsibilities, which must be documented. Where committees are set up, they should keep full minutes of their activities and meet regularly to fulfil their mandates. In particular, there are three areas where there is a need for checks and balances within the Board itself:

                a) The nomination of Directors;
                b) The remuneration of Directors; and
                c) The audit of the bank's financial performance.

                In these areas, executive Directors have clear potential conflicts of interest. Nomination is all about the continuation of their own jobs and the jobs of their colleagues and potential new colleagues. Remuneration is all about the rewards that executive Directors and/or senior management receive for their services to the bank. Audit concerns the probity of the financial and non-financial reporting of the performance of the company by the very same persons who are responsible for its performance.

                For larger banks that deal with the general public, committees can be a more efficient mechanism to assist the main Board in its monitoring and control of the activities of the bank. The establishment of committees should not mean that the role of the Board is diminished, or that the Board becomes fragmented. Each Committee must have a clear written mandate outlining its purpose, objectives and responsibilities, including composition, frequency of meetings and reporting relationships.

                October 07

            • Audit Committee

              • HC-1.3.12

                The Central Bank requires all banks to establish an Audit Committee. The committee members must have sufficient technical expertise to enable the committee to perform its functions effectively. There must be at least one qualified and appropriately experienced accountant in the committee. All members of the committee must be financially literate. The CEO may not be a member of this committee.

                October 07

              • HC-1.3.13

                Responsibilities of the Audit Committee are as follows:

                a) To review the integrity of the bank's financial reporting (particularly with reference to information passed to the Board - see HC-1.2.6 a). This review must include the choice of accounting policies. The information needs of the Board to perform its monitoring responsibilities must be defined in writing, and regularly monitored by the Audit Committee;
                b) To oversee the selection and compensation of the external auditor for appointment and approval at the shareholders' meeting. The audit committee must oversee relations with the external auditors, including ensuring the external auditor's independence (in particular, making sure that the external audit firm and its partners have no other financial or business relationship without the Board's knowledge), the terms and conditions of the auditor's appointment and remuneration arrangements. The committee must monitor rotation arrangements for audit engagement partners. The audit committee must monitor the performance of the external auditor and the non-audit services provided by the external auditor. The committee must meet with the external auditor at least twice per year, and at least once per year in the absence of any members of executive management;
                c) To regularly review the activities and performance of the internal audit function;
                d) To review whether the bank complies with all relevant laws, regulations, codes and business practices, and ensure that the bank communicates with shareholders and relevant stakeholders (internal and external) openly and promptly, and with substance of compliance prevailing over form; and
                e) To review and supervise the implementation of, enforcement of and adherence to the bank's code of conduct.
                October 07

              • HC-1.3.14

                Below the Audit Committee, the bank must set up an internal audit function, which reports directly to the Audit Committee (with a parallel reporting line to senior management for day-to-day matters as appropriate).

                October 07

          • HC-1.4 HC-1.4 Transparency and Disclosure

            • Board's Responsibility for Disclosure

              • HC-1.4.1

                The Board must oversee the process of disclosure and communications with internal and external stakeholders. The Board must ensure that disclosures made by the bank are fair, transparent, comprehensive and timely and reflect the character of the bank and the nature, complexity and risks inherent in the bank's business activities. Disclosure policies must be reviewed for compliance with the Central Bank's disclosure requirements (see Rulebook Chapter PD-1).

                October 07

          • HC-1.5 HC-1.5 Notification, reporting, and approval requirements for changes to activities, personnel and ownership, strategy, Board meetings and special purpose vehicles ('SPVs')

            • HC-1.5.1

              Banks must notify the CBB in writing of all major proposed changes to the strategy and/or corporate plan of the bank prior to implementation.

              October 07

            • HC-1.5.2

              Banks must notify the Central Bank in writing of any proposed changes to senior positions or ownership changes mentioned in Sections HC-2.1, HC-3.2 and HC-4.1 (whether in terms of structure or identity of personnel) prior to the change. The communication should include the reason for the departure of the personnel and the Curriculum Vitae of any new persons taking up the relevant positions in the bank (see also HC-2.1.17). See also Section BR-5.1 for notification requirements concerning contact details of senior staff.

              Amended January 2009
              October 07

            • HC-1.5.3

              If a controlled function falls vacant, the conventional bank licensee must appoint a permanent replacement (after obtaining CBB approval), within 120 calendar days of the vacancy occurring. Pending the appointment of a permanent replacement, the conventional bank licensee must make immediate interim arrangements to ensure continuity of the duties and responsibilities of the controlled function affected. These interim arrangements must be approved by the CBB.

              Added January 2009

            • HC-1.5.4

              All locally incorporated banks, in addition to the requirements in Paragraphs HC-1.5.1 and HC-1.5.2, should obtain the Central Bank's prior specific written approval before establishing any subsidiaries (including SPVs where the bank exercises a majority shareholding or has majority voting control by virtue of direct ownership or by proxy/nominee arrangements), branches and/or representative offices, either inside or outside of Bahrain. In order to avoid any delays and/or disruption in implementation of banks' plans in this context, the Central Bank should be approached as soon as possible, even at a very preliminary stage.

              Renumbered January 2009
              October 07

            • HC-1.5.5

              All locally incorporated banks are required to submit, on an annual basis, as an attachment to the year-end quarterly PIR, a report recording the meetings during the year by their Board of Directors. For a sample report, refer to Appendix BR-10.

              Renumbered January 2009
              October 07

            • HC-1.5.6

              All locally incorporated banks must notify the Central Bank if they intend to act as sponsor or manager of a special purpose vehicle ('SPV'), or if they intend to participate in the creation of an SPV, or if they intend to acquire shares in an SPV. All locally incorporated banks must notify the Central Bank if they are appointed as nominee shareholders of SPVs or hold votes by proxy arrangement in SPVs on behalf of other investors. In all cases listed above, the concerned bank must notify the Central Bank quarterly of any new commitments to, or engagements in business arrangements with SPVs. These reporting and notification arrangements apply in addition to arrangements under HC-1.5.4 where the SPV is a subsidiary.

              Renumbered January 2009
              October 07

            • HC-1.5.7

              The Central Bank requires any locally incorporated bank associated with an SPV to give the background to the following points in any notification under HC-1.5.6 above:

              a) The purpose of the SPV;
              b) The nature of the relationship between the bank and the SPV (i.e. sponsor, manager, investor, controller etc.);
              c) The external auditor's proposed consolidation/accounting treatment of the SPV;
              d) The availability of financial and other information relevant to the SPV and access to its business premises and records;
              e) Whether the bank is providing any guarantees, warranties or financial/liquidity support of any kind to the SPV.
              Renumbered January 2009
              October 07

            • HC-1.5.8

              Where the SPV is consolidated into the accounts of a locally incorporated bank, the bank must provide separate accounting information on the SPV to the Central Bank on a quarterly basis. Furthermore, the annual audited financial statements of all consolidated SPVs must be submitted to the Central Bank within 3 months of the year end of the concerned SPV.

              Renumbered January 2009
              October 07

            • HC-1.5.9

              Where a locally incorporated bank has a controller or majority ownership relationship with an SPV, or acts as sponsor, the bank must obtain the prior approval of the Central Bank for any changes to the capital, ownership, management or control of the SPV. All locally incorporated banks must also notify the Central Bank of any significant events in relation to the SPV. If necessary, the Central Bank may require that formal information exchange arrangements are put in place (e.g. a memorandum of understanding) if the SPV is located in a foreign jurisdiction and its activities are not supervised locally.

              Renumbered January 2009
              October 07

        • HC-2 HC-2 Approved Persons

          • HC-2.1 HC-2.1 CBB Notification and Approval

            • General Requirement

              • HC-2.1.1

                All persons wishing to undertake a controlled function in a conventional bank licensee must be approved by the CBB prior to their appointment (subject to the variations contained in Rule HC-2.1.3).

                October 07

              • HC-2.1.2

                Controlled functions are those of:

                (a) Director;
                (b) Chief Executive or General Manager;
                (c) Senior Manager;
                (d) Compliance officer;
                (e) Money Laundering Reporting Officer;
                (f) Deputy Money Laundering Reporting Officer; and
                (g) Financial Instruments Trader.
                Amended: October 2009
                October 2007

              • HC-2.1.3

                Prior approval is required for controlled functions (a), (b), (c), (d), (e) and (f). Controlled functions (d) and (e) may be combined, however (see also FC-4.1, regarding the MLRO function). Controlled function (g) does not require prior approval: instead, notification only is required, once the person concerned has accepted to undertake that function.

                Amended: October 2009
                October 2007

            • Basis for Approval

              • HC-2.1.4

                Approval under Rule HC-2.1.1 is only granted by the CBB, if it is satisfied that the person is fit and proper to hold the particular position in the licensee concerned. 'Fit and proper' is determined by the CBB on a case-by-case basis. The definition of 'fit and proper' and associated guidance is provided in Sections HC-2.2 and HC-2.3 respectively.

                October 07

            • Definitions

              • HC-2.1.5

                Director is any person who occupies the position of a Director, as defined in Article 173 of the Commercial Companies Law (Legislative Decree No. 21 of 2001).

                October 07

              • HC-2.1.6

                The fact that a person may have 'Director' in their job title does not of itself make them a Director within the meaning of the definition noted in Rule HC-2.1.5. For example, a 'Director of Marketing', is not necessarily a member of the Board of Directors and therefore may not fall under the definition of Rule HC-2.1.5.

                October 07

              • HC-2.1.7

                The Chief Executive or General Manager means a person who is responsible for the conduct of the licensee (regardless of actual title). The Chief Executive or General Manager must be resident in Bahrain. This person is responsible, alone or jointly, for the conduct of the whole of the firm, or, in the case of an overseas conventional bank licensee, for all of the activities of the branch (in which case, he may hold the title of 'Branch Manager').

                October 07

              • HC-2.1.8

                Senior Manager means a person who, under the immediate authority of a Director or the Chief Executive/General Manager, exercises major managerial responsibilities, is responsible for a significant business or operating unit, or has major managerial responsibility for maintaining accounts or other records of the licensee.

                October 07

              • HC-2.1.9

                Whether a person is a Senior Manager will depend on the facts in each case and is not determined by the presence or absence of the word in their job title. Examples of Senior Managers might include, depending on the scale, nature and complexity of the business, a deputy Chief Executive; and heads of departments such as Risk Management, or Internal Audit; or the Chief Financial Officer.

                October 07

              • HC-2.1.10

                Financial Instruments Trader means a person who is engaged in buying or selling financial instruments.

                October 07

              • HC-2.1.11

                Where a firm is in doubt as to whether a function should be considered a controlled function it must discuss the case with the CBB.

                October 07

            • Notification Requirements and Process

              • HC-2.1.12

                Conventional bank licensees must obtain CBB approval before a person is formally appointed to a controlled function; the request for CBB approval must be made by submitting to CBB a duly completed Form 3 (Application for Approved Person status). In the case of a financial instruments trader, notification only is required (see Rule HC-2.1.3): this notification must also be made by submitting a Form 3.

                October 07

              • HC-2.1.13

                In the case of license applications, the Form 3 must be marked for the attention of the Director, Licensing and Policy Directorate. When made by a conventional bank licensee, the Form 3 must be marked for the attention of either the Director, Retail Banks Supervision or the Director, Wholesale Banks Supervision, as appropriate.

                October 07

              • HC-2.1.14

                Licensees should give the CBB a reasonable amount of notice in order for an application for approval to be reviewed. The CBB aims to respond within 2 weeks of receipt of an application, although in some cases, where referral to an overseas supervisor is required, the response time is likely to be longer.

                October 07

              • HC-2.1.15

                Licensees seeking to appoint Board Directors should seek CBB approval for all the candidates to be put forward for election at a shareholder meeting, in advance of the agenda being issued to shareholders. CBB approval of the candidates does not in any way limit shareholders' rights to refuse those put forward for election.

                October 07

              • HC-2.1.16

                All refusals by the CBB to grant a person approved person status have to be reviewed and approved by an Executive Director of the CBB. A notice of intent is issued to the licensee concerned, setting out the basis for the decision. The licensee has 30 calendar days from the date of the notice in which to appeal the decision. The CBB then has 30 calendar days from the date of the representation in which to make a final determination. See also Chapter EN-5.

                Amended January 2009
                October 07

              • HC-2.1.17

                Conventional bank licensees must immediately notify CBB when an approved person ceases to hold the controlled function for which they have been approved, for whatever reason (see also HC-1.5.2).

                Amended January 2009
                October 07

              • HC-2.1.18

                Thus, licensees are required to notify CBB should an approved person transfer to another function within the licensee, or to another group entity; or else resign, be suspended or dismissed. CBB may require further clarification as to the reasons for the person's transfer or departure. CBB will automatically withdraw the individual's approved person status: should the person wish to undertake another controlled function, whether within the same licensee or in another licensee, then a new application should be resubmitted.

                October 07

              • HC-2.1.19

                Conventional bank licensees must immediately notify CBB should they become aware of information that could reasonably be viewed as calling into question an approved person's compliance with CBB's 'fit and proper' requirement (see HC-2.2).

                October 07

          • HC-2.2 HC-2.2 'Fit and proper' requirement

            • HC-2.2.1

              Licensees seeking an approved person authorisation for an individual, must satisfy the CBB that the individual concerned is 'fit and proper' to undertake the controlled function in question.

              October 07

            • HC-2.2.2

              To be considered 'fit and proper', those nominated must demonstrate:

              (a) Personal integrity, honesty and good reputation;
              (b) Professional competence, experience and expertise, sufficient for the controlled function for which authorisation is being applied for, and given the scale, complexity and nature of the conventional bank licensee concerned; and
              (c) Financial soundness.
              October 07

            • HC-2.2.3

              In assessing the conditions prescribed in Rule HC-2.2.2, the CBB will take into account the criteria contained in Section HC-2.3. The CBB reviews each application on a case-by-case basis, taking into account all relevant circumstances. A person may be considered 'fit and proper' to undertake one type of controlled function but not another, depending on the function's job size and required levels of experience and expertise. Similarly, a person approved to undertake a controlled function in one conventional bank licensee may not be considered to have sufficient expertise and experience to undertake nominally the same controlled function but in a much bigger licensee.

              October 07

            • HC-2.2.4

              Approved persons undertaking a controlled function must act prudently, and with honesty, integrity, care, skill and due diligence in the performance of their duties. They must avoid conflicts of interest arising whilst undertaking a controlled function.

              October 07

            • HC-2.2.5

              In determining whether a conflict of interest may arise, factors that may be considered include whether:

              (a) A person has breached any fiduciary obligations to the company or terms of employment;
              (b) A person has undertaken actions that would be difficult to defend, when looked at objectively, as being in the interest of the licensee; and
              (c) A person has failed to declare a personal interest that has a material impact in terms of the person's relationship with the licensee.
              October 07

          • HC-2.3 HC-2.3 Interpretative Guidance on 'Fit and Proper' Requirement

            • HC-2.3.1

              In assessing a person's fitness and propriety, the CBB will consider previous professional and personal conduct (in Bahrain or elsewhere) including, but not limited to, the following:

              (a) The propriety of a person's conduct, whether or not such conduct resulted in a criminal offence being committed, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;
              (b) A conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;
              (c) Any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;
              (d) Whether the person has been the subject of any disciplinary proceeding by any government authority, regulatory agency or professional body or association;
              (e) The contravention of any financial services legislation or regulation;
              (f) Whether the person has ever been refused a license, authorisation, registration or other authority;
              (g) Dismissal or a request to resign from any office or employment;
              (h) Disqualification by a court, regulator or other competent body, as a Director or as a manager of a corporation;
              (i) Whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;
              (j) The extent to which the person has been truthful and open with supervisors;
              (k) The extent to which the person has appropriate professional and other qualifications for the controlled function in question;
              (l) The extent to which the person has sufficient experience, or is otherwise able to perform the functions of the controlled function in question;
              (m) Whether the person has ever been adjudged bankrupt, entered into any arrangement with creditors in relation to the inability to pay due debts, or failed to satisfy a judgement debt under a court order.
              October 07

            • HC-2.3.2

              With respect to HC-2.3.1(b), (c), (d) and (e), the CBB will take into account the length of time since any such event occurred, as well as the seriousness of the matter in question.

              October 07

            • HC-2.3.3

              Further guidance on the process for assessing a person's 'fit and proper' status is given in Module EN (Enforcement): see Chapter EN-8.

              October 07

        • HC-3 HC-3 Compliance officer/manager

          • HC-3.1 HC-3.1 Introduction

            • HC-3.1.1

              In order to promote best practice with respect to banks' internal systems and controls and international banking supervision, the Central Bank, in this Chapter, outlines its requirements for the compliance function of banks. The expression 'Compliance Function' in this Chapter is used to describe staff carrying out compliance duties.

              October 07

            • HC-3.1.2

              The expression 'Compliance Risk', in this Chapter refers to the risk of legal or regulatory sanctions, material or financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, reporting requirements, standards and codes of conduct applicable to its activities, rather than compliance with a bank's internal limits or procedures.

              October 07

            • HC-3.1.3

              For further information and guidance on compliance risk and the compliance function, banks should refer to the Basel Committee publication, 'Compliance and the compliance function in banks' (www.bis.org/publ April 2005). The Central Bank expects banks to carry out a review of their compliance with the principles in this paper on a regular basis (either by way of a self-assessment or by way of a review by the internal or external audit function).

              October 07

          • HC-3.2 HC-3.2 Requirement for and approval of a compliance officer/manager

            • HC-3.2.1

              All banks must appoint a senior member of staff with responsibility for the management of compliance risk as their Compliance Officer/Manager.

              October 07

            • HC-3.2.2

              The compliance function must be independent (i.e. it must not be placed in a position where its other duties or responsibilities may cause a conflict of interest with its compliance risk management responsibilities). Therefore the compliance function must be separate from the internal audit function. The compliance officer or manager may however, perform other limited related compliance roles (e.g. the MLRO or legal advisor), subject to the Central Bank's prior approval.

              October 07

            • HC-3.2.3

              The compliance officer/manager must be appropriately qualified and experienced and the compliance function must have adequate resources to carry out its functions effectively.

              October 07

            • HC-3.2.4

              The appointment of a compliance manager/officer requires the Central Bank's prior approval and the submission of the appointee's Personal Questionnaire (Appendix LR 2) and Curriculum Vitae to the Central Bank. The bank must also outline how the compliance function fits into the bank's senior management reporting structure, and must give details of relevant reporting lines within the bank.

              October 07

            • HC-3.2.5

              In the case of locally incorporated banks, the compliance officer/manager must have access to the Board of Directors in addition to the senior management.

              October 07

      • HC HC High-Level Controls [Versions Up To April 2023]

        • HC-A HC-A Introduction

          • HC-A.1 HC-A.1 Purpose

            • Executive Summary

              • HC-A.1.1

                This Module presents requirements that have to be met by conventional bank licensees with respect to:

                (a) Corporate governance principles issued by the Ministry of Industry and Commerce as "The Corporate Governance Code"; and
                (b) International best practice corporate governance standards set by bodies such as the Basel Committee for Banking Supervision; and
                (c) Related high-level controls and policies.
                Amended: April 2011
                October 2010

              • HC-A.1.2

                The Principles referred to in this Module are in line with the Principles relating to the Corporate Governance Code issued by the Ministry of Industry and Commerce.

                October 2010

              • HC-A.1.3

                The purpose of the Module is to establish best practice corporate principles in Bahrain, and to provide protection for investors and other conventional bank licensee's stakeholders through compliance with those principles.

                October 2010

              • HC-A.1.4

                Whilst the Module follows best practice, it is nevertheless considered as the minimum standard to be applied. This Module also includes additional rules and guidance issued by the CBB prior to the publication of the Code and previously contained in Module HC.

                October 2010

            • Structure of this Module

              • HC-A.1.5

                This Module follows the structure of the Corporate Governance Code and each Chapter deals with one of the eight Principles of corporate governance. The numbered directives included in the Code are Rules for purposes of this Module. Recommendations under the Code have been included as guidance. However, where the previous version of Module HC had a similar recommendation as a Rule, the Module retains this Paragraph as a Rule.

                October 2010

              • HC-A.1.6

                The Module also incorporates other high-level controls and policies that apply in particular to conventional bank licensees.

                October 2010

              • HC-A.1.7

                All references in this Module to 'he' or 'his' shall, unless the context otherwise requires, be construed as also being references to 'she' and 'her'.

                October 2010

            • The Comply or Explain Principle

              • HC-A.1.8

                This Module is issued as a Directive (as amended from time to time) in accordance with Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). In common with other Rulebook Modules, this Module contains a mixture of Rules and Guidance (See Module UG-1.2 for detailed explanation of Rules and Guidance). All Rulebook content that is categorised as a Rule must be complied with by those to whom the content is addressed. Other parts of this Module are Guidance; nonetheless every conventional bank licensee to whom Module HC applies, is expected to comply with recommendations made as Guidance in Module HC or explain its noncompliance in the Annual Report in accordance with Subparagraph PD-1.3.8(x) and to the CBB (see Chapter HC-8).

                Amended: April 2012
                Amended: January 2011
                October 2010

            • Monitoring and Enforcement of Module HC

              • HC-A.1.9

                Disclosure and transparency are underlying principles of Module HC. Disclosure is crucial to allow outside monitoring to function effectively. This Module looks to a combined monitoring system relying on the board, the conventional bank licensee's shareholders and the CBB.

                October 2010

              • HC-A.1.10

                It is the board's responsibility to see to the accuracy and completeness of the conventional bank licensee's corporate governance guidelines and compliance with Module HC. Failure to comply with this Module is subject to enforcement measures as outlined in Module EN (Enforcement).

                October 2010

            • Legal Basis Legal Basis

              • HC-A.1.11

                This Module contains the CBB's Directive (as amended from time to time) relating to high-level controls and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to conventional bank licensees (including their approved persons).

                Amended: January 2011
                October 2010

              • HC-A.1.12

                For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                October 2010

            • Effective Date

              • HC-A.1.13

                The previous version of Module HC is applicable until 31st December 2010. This updated Module issued in October 2010, is effective on 1st January 2011. All conventional bank licensees to which Module HC applies should be in full compliance by the financial year end 2011. At every conventional bank licensee's annual shareholder meeting held after 1st January 2011, corporate governance should be an item on the agenda for information and any questions from shareholders regarding the conventional bank licensee's governance. Where possible, the conventional bank licensee should also have corporate governance guidelines in place at that time and should have a "comply or explain" report as described in Paragraph HC-A.1.8.

                October 2010

          • HC-A.2 HC-A.2 Module History

            • HC-A.2.1

              This Module was first issued in June 2004 by the BMA and updated in October 2007 to reflect the switch to the CBB. Following the issuance of the Corporate Governance Code by the Ministry of Industry and Commerce in March 2010, the Module was amended in October 2010 to be in line with the new Corporate Governance Code and to include previous requirements that were in place in the originally issued Module HC. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

              October 2010

            • HC-A.2.2

              A list of recent changes made to this Module is detailed in the table below:

              Module Ref. Change Date Description of Changes
              HC-1 to HC-8 10/2010 Amendments due to introduction of new MOIC Corporate Governance Code.
              HC-1.3 10/2010 Prohibition of proxies and requirement to attend 75% of board meetings in a financial year.
              HC-A.1.8 and HC-A.1.11 01/2011 Clarified legal basis.
              HC-2.2.4, 2.2.5 and 3.2.1 01/2011 Corrected cross references.
              HC-2.3.2 01/2011 Corrected cross reference; reference changed to connected persons.
              Appendix C 01/2011 Corrected cross reference.
              Appendix A 04/2011 Clarified membership of audit committee to be in line with Rule HC-3.2.1.
              HC-6.2.1 10/2011 Clarified management structure.
              HC-B.2.2 01/2012 Clarified language related to corporate governance.
              HC-1.2.8 and HC-1.5.3 01/2012 Clarified that the Chairman of the Board may delegate specific duties dealt with in these Paragraphs.
              HC-1.3.12 01/2012 Amended Rule on Directorships.
              HC-1.9.1 01/2012 Deleted last sentence to be in line with other Volumes of the CBB Rulebook.
              HC-3.2.1(a) and HC-5.6.6 01/2012 Amended to be in line with other Volumes of the CBB Rulebook.
              HC-6.3.1 01/2012 Clarified Rule by following corporate governance code wording.
              Appendix A 01/2012 Amended criteria for audit committee member.
              HC-A.1.8 04/2012 Clarified the reporting of noncompliance with Module HC in the Annual Report.
              HC-7.2.5 04/2012 Clarified Guidance on election of board members.
              Appendices A, B and C 04/2012 Amended requirement for written report on performance evaluation for various Board committees.
              Appendix A 04/2012 Included reference to compliance under Committee Duties and Responsibilities.
              HC-2.2.6A and HC-2.2.6B 07/2012 Added Rule and guidance dealing with benefits received from approved persons from projects and investments.
              Appendices A, B and C 07/2012 Clarified requirement for written report on performance evaluation for various Board committees.
              HC-1.3.7A 10/2012 Added requirement on minimum number of Board meetings to take place in the Kingdom of Bahrain to be consistent with other Volumes of the CBB Rulebook.
              HC-2.2.6A 10/2012 Clarified Rule dealing with benefits received from approved persons from projects and investments.
              Appendix A 10/2012 Corrected minor typo.
              HC-2.2.2 and HC-2.4.1 01/2013 Clarified scope of application for Rules.
              HC-2.2.6A, HC-5 and Appendix C 01/2014 Amendments due to new rules on sound remuneration practices.
              HC-1.2.6 04/2014 Clarified CBB's requirements for proposed changes to strategy and/or corporate plans.
              HC-5.2, HC-5.4 and HC-5.5 07/2014 Updated Rules on remuneration.
              HC-1.2.11 10/2014 Corrected cross reference.
              HC-1.3.10 10/2014 Corrected typo.
              HC-6.4.3 10/2014 Clarified self assessment of compliance function.
              HC-5.4.2 01/2015 Clarified application of remuneration rules for Bahrain operations.
              HC-5.4.5 01/2015 Paragraph deleted.
              HC-5.5.2 04/2015 Clarified cap on board of directors' remuneration as per Article 188 of the Company Law.
              HC-5.4.3A 07/2015 Amended to allow for CBB-approved consultancy firm to prepare report on the bank's compliance with the remuneration Rules outlined in Chapter HC-5.
              HC-2.3.3 04/2016 Added a requirement for the conventional bank licensee to have in place a board approved policy on the employment of relatives of approved persons.
              HC-2.4.1A 04/2016 Added the requirement to disclose to the board on annual basis relatives of any approved persons occupying controlled functions.
              HC-7.2 04/2016 Added requirements dealing with shareholders' meetings.
              HC-2.3 and HC-2.4 07/2016 Clarified application of rules to overseas conventional bank licensees.
              HC-5.4.30(a) and HC-5.4.30A 10/2016 Amended Standard for all Remuneration
              HC-5.2.1 01/2017 Amendment in sub-paragraph (b)
              HC-7.2.4 04/2017 Amendment in paragraph on website requirement.
              HC-8.2.1 04/2017 Amendment in sub-paragraph (b) on website requirement.
              HC-7.2.3A 07/2017 Amended paragraph to be in line with Article (199) of the Commercial Companies law.
              HC-2.4.1A 10/2017 Amended paragraph.
              HC-6.5 04/2018 Added new Section on Internal Audit.
              HC-1.8.1 07/2018 Amended paragraph to be consistent with HC-6.6.
              HC-6.6 07/2018 Added new Section on Risk Management.
              HC-6.5.5 10/2018 Amended Paragraph.
              HC-6.4 01/2019 Amended Section and added new requirements on Compliance.
              HC-6.6.2A 10/2019 Added a new Paragraph on branches of foreign bank licensees.
              HC-6.6.6 10/2019 Deleted Paragraph.
              HC-6.6.7 10/2019 Amended Paragraph on branches of foreign bank licensees.
              HC-1.4.11 01/2020 Added a new Paragraph on independent directors.
              HC-1.4.12 01/2020 Added a new Paragraph on termination of Board membership of a retired, terminated CEO.
              HC-6.4.7 & HC-6.4.10 01/2020 Amended Paragraphs on policy and procedures approval.
              HC-5.4.9A 04/2020 Added a new Paragraph on KPIs compliance with AML/CFT requirements.
              HC-6.2.1 04/2020 Amended Paragraph on reporting line.
              HC-6.6.33 01/2022 Amended Paragraph.
              HC-6.6.34 01/2022 Amended Paragraph.
              HC-6.6.35 01/2022 Added a new Paragraph on the independent third-party review.
              HC-6.6.36 01/2022 Added a new Paragraph on the independent review reports.

        • HC-B HC-B Scope of Application

          • HC-B.1 HC-B.1 Scope of Application

            • HC-B.1.1

              The contents of this Module - unless otherwise stated - apply to all conventional bank licensees, incorporated under the Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law ('Company Law').

              October 2010

            • HC-B.1.2

              Overseas conventional bank licensees must satisfy the CBB that equivalent arrangements are in place at the parent entity level, and that these arrangements provide for effective high-level controls over activities conducted under the Bahrain license.

              October 2010

          • HC-B.2 HC-B.2 Subsidiaries and Foreign Branches

            • HC-B.2.1

              Bahraini conventional bank licensees must ensure that, as a minimum, the same or equivalent provisions of this Module apply to their foreign branches, located outside the Kingdom of Bahrain, such that these are also subject to effective high-level controls. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.

              October 2010

            • HC-B.2.2

              Bahraini conventional bank licensees must satisfy the CBB that financial services activities conducted in subsidiaries and other group members are subject to the same or equivalent arrangements for ensuring effective corporate governance over their activities.

              Amended: January 2012
              October 2010

            • HC-B.2.3

              Where a conventional bank licensee is unable to satisfy the CBB that its subsidiaries and other group members are subject to the same or equivalent arrangements, the CBB will assess the potential impact of risks — both financial and reputational — to the licensee arising from inadequate high-level controls in the rest of the group of which it is a member. In such instances, the CBB may impose restrictions on dealings between the licensee and other group members. Where weaknesses in controls are assessed by the CBB to pose a major threat to the stability of the licensee, then its authorisation may be called into question.

              October 2010

        • HC-1 HC-1 The Board

          • HC-1.1 HC-1.1 Principle

            • HC-1.1.1

              All Bahraini conventional bank licensees must be headed by an effective, collegial and informed Board of Directors ('the Board').

              October 2010

          • HC-1.2 HC-1.2 Role and Responsibilities

            • HC-1.2.1

              All directors must understand the board's role and responsibilities under the Commercial Companies Law and any other laws or regulations that may govern their responsibilities from time to time. In particular:

              (a) The board's role as distinct from the role of the shareholders (who elect the board and whose interests the board serves) and the role of officers (whom the board appoints and oversees); and
              (b) The board's fiduciary duties of care and loyalty to the conventional bank licensee and the shareholders (see HC-2.1).
              October 2010

            • HC-1.2.2

              The board's role and responsibilities include but are not limited to:

              (a) The overall business performance and strategy for the conventional bank licensee;
              (b) Causing financial statements to be prepared which accurately disclose the conventional bank licensee's financial position;
              (c) Monitoring management performance;
              (d) Convening and preparing the agenda for shareholder meetings;
              (e) Monitoring conflicts of interest and preventing abusive related party transactions;
              (f) Assuring equitable treatment of shareholders including minority shareholders; and
              (g) Establishing the objectives of the bank.
              October 2010

            • HC-1.2.3

              The precise functions reserved for the Board, and those delegated to management and committees will vary, dependent upon the business of the institution, its size and ownership structure. However, as a minimum, the Board must establish and maintain a statement of its responsibilities for:

              (a) The adoption and annual review of strategy;
              (b) The adoption and review of management structure and responsibilities;
              (c) The adoption and review of the systems and controls framework; and
              (d) Monitoring the implementation of strategy by management.
              Amended: April 2011
              October 2010

            • HC-1.2.4

              The directors are responsible both individually and collectively for performing the responsibilities outlined in HC-1.2.1 to HC-1.2.3. Although the Board may delegate certain functions to committees or management, it may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance framework is in place.

              October 2010

            • HC-1.2.5

              In its strategy review process under Paragraphs HC-1.2.3 a) and d), the Board must:

              (a) Review the bank's business plans and the inherent level of risk in these plans;
              (b) Assess the adequacy of capital to support the business risks of the bank;
              (c) Set performance objectives; and
              (d) Oversee major capital expenditures, divestitures and acquisitions.
              Amended: April 2011
              October 2010

            • HC-1.2.6

              Bahraini conventional bank licensees must obtain the CBB's prior written approval for all major proposed changes to the strategy and/or corporate plan of the Bahraini conventional bank licensee prior to implementation (see also Paragraph BR-5.2.6).

              Amended: April 2014
              October 2010

            • HC-1.2.7

              The Board is expected to have effective policies and processes in place for:

              (a) Approving budgets and reviewing performance against those budgets and key performance indicators; and
              (b) The management of the bank's compliance risk.
              Amended: April 2011
              October 2010

            • HC-1.2.8

              When a new director is inducted, the chairman of the board, or the conventional bank licensee's legal counsel or compliance officer, or other individual delegated by the chairman of the board, should review the board's role and duties with that person, particularly covering legal and regulatory requirements and Module HC (see also HC-4.5.1).

              Amended: January 2012
              October 2010

            • HC-1.2.9

              The conventional bank licensee must have a written appointment agreement with each director which recites the directors' powers, duties, responsibilities and accountabilities and other matters relating to his appointment including his term, the time commitment envisaged, the committee assignment if any, his remuneration and expense reimbursement entitlement, and his access to independent professional advice when that is needed.

              October 2010

            • Risk Recognition and Assessment

              • HC-1.2.10

                The Board is responsible for ensuring that the systems and controls framework, including the Board structure and organisational structure of the bank, is appropriate for the bank's business and associated risks (see HC-1.2.3 c). The Board must ensure that collectively it has sufficient expertise to identify, understand and measure the significant risks to which the bank is exposed in its business activities.

                The Board must regularly assess the systems and controls framework of the bank. In its assessments, the Board must demonstrate to the CBB that:

                (a) The bank's operations, individually and collectively are measured, monitored and controlled by appropriate, effective and prudent risk management systems commensurate with the scope of the bank's activities;
                (b) The bank's operations are supported by an appropriate control environment. The compliance, risk management and financial reporting functions must be adequately resourced, independent of business lines and must be run by individuals not involved with the day-to-day running of the various business areas. The Board must additionally ensure that management develops, implements and oversees the effectiveness of comprehensive know your customer standards, as well as on-going monitoring of accounts and transactions, in keeping with the requirements of relevant law, regulations and best practice (with particular regard to anti-money laundering measures). The control environment must maintain necessary client confidentiality and ensure that the privacy of the bank is not violated, and ensure that clients' rights and assets are properly safeguarded; and
                (c) Where the Board has identified any significant issues related to the bank's adopted governance framework, appropriate and timely action is taken to address any identified adverse deviations from the requirements of this Module.
                Amended: April 2011
                October 2010

              • HC-1.2.11

                The board must adopt a formal board charter or other statement specifying matters which are reserved to it, which should include but need not be limited to the specific requirements and responsibilities of directors. This charter must cover the points in HC-1.2.1 to HC-1.2.10. Wherever possible, the documents referred to in HC-1.2.3 to HC-1.2.10 or a summary of responsibilities should be disclosed publicly, for example in the annual report, which must be submitted to the CBB in line with the requirements of Module BR.

                Amended: October 2014
                October 2010

          • HC-1.3 HC-1.3 Decision Making Process

            • HC-1.3.1

              The board must be collegial and deliberative, to gain the benefit of each individual director's judgment and experience.

              October 2010

            • HC-1.3.2

              The chairman must take an active lead in promoting mutual trust, open discussion, constructive dissent and support for decisions after they have been made.

              October 2010

            • HC-1.3.3

              The board must meet frequently to enable it to discharge its responsibilities effectively but in no event less than four times a year. All directors must attend the meetings whenever possible and the directors must maintain informal communication between meetings.

              October 2010

            • HC-1.3.4

              Individual board members must attend at least 75% of all Board meetings in a given financial year to enable the Board to discharge its responsibilities effectively (see table below). Voting and attendance proxies for Board meetings are prohibited at all times.

              Meetings per year 75% Attendance requirement
              4 3
              5 4
              6 5
              7 5
              8 6
              9 7
              10 8
              October 2010

            • HC-1.3.5

              The absence of Board members at Board and committee meetings must be noted in the meeting minutes. In addition, Board attendance percentage must be reported during any general assembly meeting when board members stand for re-election (e.g. Board member XYZ attended 95% of scheduled meetings this year).

              October 2010

            • HC-1.3.6

              In the event that a Board member has not attended at least 75% of Board meetings in any given financial year, the bank must immediately notify the CBB indicating which member has failed to satisfy this requirement, his level of attendance and any mitigating circumstances affecting his non-attendance. The CBB shall then consider the matter and determine whether disciplinary action, including disqualification of that Board member pursuant to Article 65 of the CBB Law, is appropriate. Unless there are exceptional circumstances, it is likely that the CBB will take disciplinary action.

              October 2010

            • HC-1.3.7

              To meet its obligations under Rule HC-1.3.3 above, the full Board should meet once every quarter to address the Board's responsibilities for management oversight and performance monitoring Furthermore, Board rules should require members to step down if they are not actively participating in Board meetings. Board members are reminded that non attendance at board meetings does not absolve them of their responsibilities as directors. It is important that each individual director should allocate adequate time and effort to discharge his responsibilities. All Directors are expected to contribute actively to the work of the Board in order to discharge their responsibilities and should make every effort to attend board meetings where major issues are to be discussed. Banks are encouraged to amend their Articles of Association to provide for telephonic and videoconference meetings. Participation in board meetings by means of video or telephone conferencing is regarded as attendance and may be recorded as such.

              October 2010

            • HC-1.3.7A

              At least half the Board meetings of Bahraini conventional bank licensees in any twelve-month period must be held in the Kingdom of Bahrain.

              Added: October 2012

            • HC-1.3.8

              All locally incorporated banks are required to submit, on an annual basis, as an attachment to the year-end quarterly PIR, a report recording the meetings during the year by their Board of Directors. For a sample report, refer to Appendix BR-10.

              October 2010

            • HC-1.3.9

              The Chairman is responsible for the leadership of the Board, and for the efficient functioning of the Board. The chairman must ensure that all directors receive an agenda, minutes of prior meetings, and adequate background information in writing before each board meeting and when necessary between meetings. Therefore it is vital that the Chairman commit sufficient time to perform his role effectively. All directors must receive the same board information. At the same time, directors have a legal duty to inform themselves and they must ensure that they receive adequate and timely information and must study it carefully (See also HC-7 for other duties of the Chairman).

              October 2010

            • HC-1.3.10

              The board should have no more than 15 members, and should regularly review its size and composition to ensure that it is small enough for efficient decision making yet large enough to have members who can contribute from different specialties and viewpoints. The board should recommend changes in board size to the shareholders when a needed change requires amendment of the conventional bank licensee's Memorandum of Association.

              Amended: October 2014
              October 2010

            • HC-1.3.11

              Potential non-executive directors should be made aware of their duties before their nomination, particularly as to the time commitment required. The Nominating Committee should regularly review the time commitment required from each non-executive director and should require each non-executive director to inform the Committee before he accepts any board appointments to another company.

              October 2010

            • HC-1.3.12

              No Board member may have more than one Directorship of a Retail Bank or a Wholesale Bank. This means an effective cap of a maximum of two Directorships of banks inside Bahrain. Two Directorships of licensees within the same Category (e.g. 'Retail Bank') are not permitted. Banks may approach the CBB for exemption from this limit where the Directorships concern banks or financial institutions within the same group.

              Amended: January 2012
              October 2010

            • HC-1.3.13

              One person should not hold more than three directorships in public companies in Bahrain with the provision that no conflict of interest may exist, and the Board should not propose the election or reelection of any director who does.

              October 2010

          • HC-1.4 HC-1.4 Independence of Judgment

            • HC-1.4.1

              Every director must bring independent judgment to bear in decision making. No individual or group of directors must dominate the board's decision-making and no one individual should have unfettered powers of decision.

              October 2010

            • HC-1.4.2

              Executive directors must provide the board with all relevant business and financial information within their cognizance, and must recognise that their role as a director is different from their role as a member of management (see HC-2.3.2).

              October 2010

            • HC-1.4.3

              Non-executive directors must be fully independent of management and must constructively scrutinise and challenge management including the management performance of executive directors.

              October 2010

            • HC-1.4.4

              Where there is the potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent Board members capable of exercising independent judgement. At a minimum, all locally incorporated banks must appoint one independent director.

              October 2010

            • HC-1.4.5

              At least half of a conventional bank licensee's board should be non-executive directors and at least three of those persons should be independent directors. (Note the exception for controlled companies in Paragraph HC-1.5.2.)

              October 2010

            • HC-1.4.6

              The chairman of the board should be an independent director, so that there will be an appropriate balance of power and greater capacity of the board for independent decision making.

              October 2010

            • HC-1.4.7

              The Chairman and/or Deputy Chairman must not be the same person as the Chief Executive Officer.

              October 2010

            • HC-1.4.8

              The Chairman must not be an Executive Director.

              October 2010

            • HC-1.4.9

              The board should review the independence of each director at least annually in light of interests disclosed by them, and their conduct. Each independent director shall provide the board with all necessary and updated information for this purpose.

              October 2010

            • HC-1.4.10

              To facilitate free and open communication among independent directors, each board meeting should be preceded or followed with a session at which only independent directors are present, except as may otherwise be determined by the independent directors themselves.

              October 2010

            • HC-1.4.11

              Where an independent director has served three consecutive terms on the board, such director will lose his/her independence status and must not be classified as an independent director if reappointed.

              Added: January 2020

            • HC-1.4.12

              Where a Chief Executive Officer of a Bank, who is also a Board member, no longer occupies the CEO position, whether due to resignation, retirement or termination, his/her Board Membership must also be immediately terminated.

              Added: January 2020

          • HC-1.5 HC-1.5 Representation of all Shareholders

            • HC-1.5.1

              Each director must consider himself as representing all shareholders and must act accordingly. The board must avoid having representatives of specific groups or interests within its membership and must not allow itself to become a battleground of vested interests. If the conventional bank licensee has controllers (as defined by Module GR-5.2) (or a group of controllers acting in concert), the latter must recognise its or their specific responsibility to the other shareholders, which is direct and is separate from that of the board of directors.

              October 2010

            • HC-1.5.2

              In conventional bank licensees with a controller, at least one-third of the board must be independent directors. Minority shareholders must generally look to independent directors' diligent regard for their interests, in preference to seeking specific representation on the board.

              October 2010

            • HC-1.5.3

              In conventional bank licensees with controllers, both controllers and other shareholders should be aware of controllers' specific responsibilities regarding their duty of loyalty to the conventional bank licensee and conflicts of interest (see Chapter HC-2) and also of rights that minority shareholders may have to elect specific directors under the Company Law or if the conventional bank licensee has adopted cumulative voting for directors. The chairman of the board or other individual delegated by the chairman of the board should take the lead in explaining this with the help of the conventional bank licensee's lawyers.

              Amended: January 2012
              October 2010

          • HC-1.6 HC-1.6 Directors' Access to Independent Advice

            • HC-1.6.1

              The board must ensure by way of formal procedures that individual directors have access to independent legal or other professional advice at the conventional bank licensee's expense whenever they judge this necessary to discharge their responsibilities as directors and this must be in accordance with the conventional bank licensee's policy approved by the board.

              October 2010

            • HC-1.6.2

              Individual directors must also have access to the conventional bank licensee's corporate secretary, who must have responsibility for reporting to the board on board procedures. Both the appointment and removal of the corporate secretary must be a matter for the board as a whole, not for the CEO or any other officer.

              October 2010

            • HC-1.6.3

              Whenever a director has serious concerns which cannot be resolved concerning the running of the conventional bank licensee or a proposed action, he should consider seeking independent advice and should ensure that the concerns are recorded in the board minutes and that any dissent from a board action is noted or delivered in writing.

              October 2010

            • HC-1.6.4

              Upon resignation, a non-executive director should provide a written statement to the chairman, for circulation to the board, if he has any concerns such as those in Paragraph HC-1.6.3.

              October 2010

          • HC-1.7 HC-1.7 Directors' Communication with Management

            • HC-1.7.1

              The board must encourage participation by management regarding matters the board is considering, and also by management members who by reason of responsibilities or succession, the CEO believes should have exposure to the directors.

              October 2010

            • HC-1.7.2

              Non-executive directors should have free access to the conventional bank licensee's management beyond that provided in board meetings. Such access should be through the Chairman of the Audit Committee or CEO. The board should make this policy known to management to alleviate any management concerns about a director's authority in this regard.

              October 2010

          • HC-1.8 HC-1.8 Committees of the Board

            • HC-1.8.1

              The board must establish Audit, Remuneration, Nominating and Risk Committees described elsewhere in this Module.

              Amended: July 2018
              October 2010

            • HC-1.8.2

              The board should establish a corporate governance committee of at least three independent members which should be responsible for developing and recommending changes from time to time in the conventional bank licensee's corporate governance policy framework.

              Amended: January 2012
              October 2010

            • HC-1.8.3

              The board or a committee may invite non-directors to participate in, but not vote at, a committee's meetings so that the committee may gain the benefit of their advice and expertise in financial or other areas.

              October 2010

            • HC-1.8.4

              Committees must act only within their mandates and therefore the board must not allow any committee to dominate or effectively replace the whole board in its decision-making responsibility.

              October 2010

            • HC-1.8.5

              Committees may be combined provided that no conflict of interest might arise between the duties of such committees, subject to CBB prior approval.

              October 2010

            • HC-1.8.6

              Every committee must have a formal written charter similar in form to the model charters which are set forth in Appendices A, B and C of this Module for the Audit, Nominating and Remuneration Committees.

              October 2010

            • HC-1.8.7

              Where committees are set up, they should keep full minutes of their activities and meet regularly to fulfil their mandates. For larger banks that deal with the general public, committees can be a more efficient mechanism to assist the main Board in its monitoring and control of the activities of the bank. The establishment of committees should not mean that the role of the Board is diminished, or that the Board becomes fragmented.

              October 2010

          • HC-1.9 HC-1.9 Evaluation of the Board and Each Committee

            • HC-1.9.1

              At least annually the board must conduct an evaluation of its performance and the performance of each committee and each individual director.

              Amended: January 2012
              October 2010

            • HC-1.9.2

              The evaluation process must include:

              (a) Assessing how the board operates, especially in light of Chapter HC-1;
              (b) Evaluating the performance of each committee in light of its specific purposes and responsibilities, which shall include review of the self-evaluations undertaken by each committee;
              (c) Reviewing each director's work, his attendance at board and committee meetings, and his constructive involvement in discussions and decision making;
              (d) Reviewing the board's current composition against its desired composition with a view toward maintaining an appropriate balance of skills and experience and a view toward planned and progressive refreshing of the board; and
              (e) Recommendations for new Directors to replace long-standing members or those members whose contribution to the bank or its committees (such as the audit committee) is not adequate.
              October 2010

            • HC-1.9.3

              While the evaluation is a responsibility of the entire board, it should be organised and assisted by an internal board committee and, when appropriate, with the help of external experts.

              October 2010

            • HC-1.9.4

              The board should report to the shareholders, at each annual shareholder meeting, that evaluations have been done and report its findings.

              October 2010

        • HC-2 HC-2 Approved Persons Loyalty

          • HC-2.1 HC-2.1 Principle

            • HC-2.1.1

              The approved persons must have full loyalty to the conventional bank licensee.

              October 2010

          • HC-2.2 HC-2.2 Personal Accountability

            • HC-2.2.1

              Banks are subject to a wide variety of laws, regulations and codes of best practice that directly affect the conduct of business. Such laws involve the Bahraini Stock Exchange Law, the Labour Law, the Commercial Companies Law, occupational health and safety, even environment and pollution laws, as well as the Law, codes of conduct and regulations of the Central Bank. The Board sets the 'tone at the top' of a bank, and has a responsibility to oversee compliance with these various requirements. The Board should ensure that the staff conduct their affairs with a high degree of integrity, taking note of applicable laws, codes and regulations.

              October 2010

            • Corporate Ethics, Conflicts of Interest and Code of Conduct

              • HC-2.2.2

                Each member of the board must understand that under the Company Law he is personally accountable to the conventional bank licensee and the shareholders if he violates his legal duty of loyalty to the conventional bank licensee, and that he can be personally sued by the conventional bank licensee or the shareholders for such violations.

                Amended: January 2013
                October 2010

              • HC-2.2.3

                The Board must establish corporate standards for approved persons and employees. This requirement should be met by way of a documented and published code of conduct or similar document. These standards must be communicated throughout the bank, so that the approved persons and staff understand the importance of conducting business based on good corporate governance values and understand their accountabilities to the various stakeholders of the licensee. Banks' approved persons and staff must be informed of and be required to fulfil their fiduciary responsibilities to the bank's stakeholders.

                October 2010

              • HC-2.2.4

                An internal code of conduct is separate from the business strategy of a bank. A code of conduct should outline the practices that approved persons and staff should follow in performing their duties. Banks may wish to use procedures and policies to complement their codes of conduct. The suggested contents of a code of conduct are covered below:

                (a) Commitment by the Board and management to the code. The code of conduct should be linked to the objectives of the bank, and its responsibilities and undertakings to customers, shareholders, staff and the wider community (see HC-2.2.3 and HC-2.2.4). The code should give examples or expectations of honesty, integrity, leadership and professionalism;
                (b) Commitment to the law and best practice standards. This commitment would include commitments to following accounting standards, industry best practice (such as ensuring that information to clients is clear, fair, and not misleading), transparency, and rules concerning potential conflicts of interest (see HC-2.3);
                (c) Employment practices. This would include rules concerning health and safety of employees, training, policies on the acceptance and giving of business courtesies, prohibition on the offering and acceptance of bribes, and potential misuse of conventional bank licensee's assets;
                (d) How the conventional bank licensee deals with disputes and complaints from clients and monitors compliance with the code; and
                (e) Confidentiality. Disclosure of client or bank information should be prohibited, except where disclosure is required by law (see HC-1.2.10 b).
                Amended: April 2011
                Amended: January 2011
                October 2010

              • HC-2.2.5

                The Central Bank expects that the Board and its members individually and collectively:

                (a) Act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the bank and its shareholders and other stakeholders (see Paragraphs HC-2.2.2 to HC-2.2.4);
                (b) Act within the scope of their responsibilities (which should be clearly defined—see HC-1.2.9 and HC-1.2.11 and not participate in the day-to-day management of the bank;
                (c) Have a proper understanding of, and competence to deal with the affairs and products of the bank and devote sufficient time to their responsibilities; and
                (d) To independently assess and question the policies, processes and procedures of the bank, with the intent to identify and initiate management action on issues requiring improvement. (i.e. to act as checks and balances on management).
                Amended: April 2011
                Amended: January 2011
                October 2010

              • HC-2.2.6

                The duty of loyalty (mentioned in Paragraph HC-2.2.2 above) includes a duty not to use property of the conventional bank licensee for his personal needs as though it was his own property, not to disclose confidential information of the conventional bank licensee or use it for his personal profit, not to take business opportunities of the conventional bank licensee for himself, not to compete in business with the conventional bank licensee, and to serve the conventional bank licensee's interest in any transactions with a company in which he has a personal interest.

                October 2010

              • HC-2.2.6A

                [This Paragraph was moved to Paragraph HC-5.4.39].

                Amended: January 2014
                Amended: October 2012
                Added: July 2012

              • HC-2.2.6B

                [This Paragraph was moved to Paragraph HC-5.4.40].

                Amended: January 2014
                Added: July 2012

              • HC-2.2.7

                For purposes of Paragraph HC-2.2.6, an approved person should be considered to have a "personal interest" in a transaction with a company if:

                (a) He himself; or
                (b) A member of his family (i.e. spouse, father, mother, sons, daughters, brothers or sisters); or
                (c) Another company of which he is a director or controller,

                is a party to the transaction or has a material financial interest in the transaction. (Transactions and interests which are de minimis in value should not be included.)

                October 2010

          • HC-2.3 HC-2.3 Avoidance of Conflicts of Interest

            • HC-2.3.1

              Each approved person must make every practicable effort to arrange his personal and business affairs to avoid a conflict of interest with the conventional bank licensee.

              October 2010

            • HC-2.3.2

              The Board must establish and disseminate to its members and management, policies and procedures for the identification, reporting, disclosure, prevention, or strict limitation of potential conflicts of interest. It is senior management's responsibility to implement these policies. Rules concerning connected party transactions and potential conflicts of interest may be dealt with in the Code of Conduct (see HC-2.2.4). In particular, the CBB requires that any decisions to enter into transactions, under which approved persons would have conflicts of interest that are material, should be formally and unanimously approved by the full Board. Best practice would dictate that an approved person must:

              a) Not enter into competition with the bank;
              b) Not demand or accept substantial gifts from the bank for himself or connected persons;
              c) Not misuse the bank's assets;
              d) Not use the conventional bank licensee's privileged information or take advantage of business opportunities to which the conventional bank licensee is entitled, for himself or his associates; and
              e) Absent themselves from any discussions or decision-making that involves a subject where they are incapable of providing objective advice, or which involves a subject or (proposed) transaction where a conflict of interest exists.
              Amended: January 2011
              October 2010

            • HC-2.3.3

              Bahraini conventional bank licensees must have in place a board approved policy on the employment of relatives of approved persons and a summary of such policy must be disclosed in the annual report of the Bahraini conventional bank licensee.

              Amended: July 2016
              Added: April 2016

            • HC-2.3.4

              Overseas conventional bank licensees must have in place a policy on the employment of relatives of approved persons pertaining to their Bahrain operations.

              Added: July 2016

          • HC-2.4 HC-2.4 Disclosure of Conflicts of Interest

            • HC-2.4.1

              Each approved person must inform the entire board of (potential) conflicts of interest in their activities with, and commitments to other organisations as they arise. Board members must abstain from voting on the matter in accordance with the relevant provisions of the Company Law. This disclosure must include all material facts in the case of a contract or transaction involving the approved person. The approved persons must understand that any approval of a conflicted transaction is effective only if all material facts are known to the authorising persons and the conflicted person did not participate in the decision. In any case, all approved persons must declare in writing all of their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager, or other form of significant participation) to the Board (or the Nominations or Audit Committees) on an annual basis.

              Amended: January 2013
              Amended: January 2011
              October 2010

            • HC-2.4.1A

              The chief executive/general manager of the Bahraini conventional bank licensees must disclose to the board of directors on an annual basis those individuals who are occupying controlled functions and who are relatives of any approved persons within the Bahraini conventional bank licensee.

              Amended: October 2017
              Amended: July 2016
              Added: April 2016

            • HC-2.4.1B

              The chief executive/general manager of the overseas conventional bank licensees must disclose to a designated officer at its head office or regional manager on an annual basis those individuals who are occupying controlled functions and who are relatives of any approved persons within the overseas conventional bank licensee.

              Added: July 2016

            • HC-2.4.2

              The board of a Bahraini conventional bank licensee should establish formal procedures for:

              (a) Periodic disclosure and updating of information by each approved person on his actual and potential conflicts of interest; and
              (b) Advance approval by directors or shareholders who do not have an interest in the transactions in which a conventional bank licensee's approved person has a personal interest. The board should require such advance approval in every case.
              Amended: July 2016
              October 2010

          • HC-2.5 HC-2.5 Disclosure of Conflicts of Interest to Shareholders

            • HC-2.5.1

              The conventional bank licensee must disclose to its shareholders in the Annual Report any abstention from voting motivated by a conflict of interest and must disclose to its shareholders any authorisation of a conflict of interest contract or transaction in accordance with the Company Law.

              October 2010

        • HC-3 HC-3 Audit Committee and Financial Statements Certification

          • HC-3.1 HC-3.1 Principle

            • HC-3.1.1

              The Board must have rigorous controls for financial audit and reporting, internal control, and compliance with law.

              October 2010

          • HC-3.2 HC-3.2 Audit Committee

            • HC-3.2.1

              The board must establish an audit committee of at least three directors of which the majority must be independent including the Chairman. The committee must:

              (a) Review the conventional bank licensee's accounting and financial practices;
              (b) Review the integrity of the conventional bank licensee's financial and internal controls and financial statements (particularly with reference to information passed to the Board - see HC-1.2.10). The information needs of the Board to perform its monitoring responsibilities must be defined in writing, and regularly monitored by the Audit Committee;
              (c) Review the conventional bank licensee's compliance with legal requirements;
              (d) Recommend the appointment, compensation and oversight of the conventional bank licensee's external auditor; and
              (e) Recommend the appointment of the internal auditor.
              Amended: January 2012
              Amended: January 2011
              October 2010

            • HC-3.2.2

              In its review of the systems and controls framework in Paragraph HC-3.2.1, the audit committee must:

              (a) Make effective use of the work of external and internal auditors. The audit committee must ensure the integrity of the bank's accounting and financial reporting systems through regular independent review (by internal and external audit). Audit findings must be used as an independent check on the information received from management about the bank's operations and performance and the effectiveness of internal controls; and
              (b) Make use of self-assessments, stress/scenario tests, and/or independent judgements made by external advisors. The Board should appoint supporting committees, and engage senior management to assist the audit committee in the oversight of risk management; and
              (c) Ensure that senior management have put in place appropriate systems of control for the business of the bank and the information needs of the Board; in particular, there must be appropriate systems and functions for identifying as well as for monitoring risk, the financial position of the bank, and compliance with applicable laws, regulations and best practice standards. The systems must produce information on a timely basis.
              October 2010

            • HC-3.2.3

              The conventional bank licensee must set up an internal audit function, which reports directly to the Audit Committee and administratively to the CEO.

              October 2010

            • HC-3.2.4

              The CEO must not be a member of the audit committee.

              October 2010

          • HC-3.3 HC-3.3 Audit Committee Charter

            • HC-3.3.1

              The audit committee must adopt a written charter which shall, at a minimum, state the duties outlined in Paragraph HC-3.2.1 and the other matters included in Appendix A to this Module.

              October 2010

            • HC-3.3.2

              A majority of the audit committee must have the financial literacy qualifications stated in Appendix A.

              October 2010

            • HC-3.3.3

              The board should adopt a "whistleblower" program under which employees can confidentially raise concerns about possible improprieties in financial or legal matters. Under the program, concerns may be communicated directly to any audit committee member or, alternatively, to an identified officer or employee who will report directly to the Audit Committee on this point.

              October 2010

          • HC-3.4 HC-3.4 CEO and CFO Certification of Financial Statements

            • HC-3.4.1

              To encourage management accountability for the financial statements required by the directors, the conventional bank licensee's CEO and chief financial officer must state in writing to the audit committee and the board as a whole that the conventional bank licensee's interim and annual financial statements present a true and fair view, in all material respects, of the conventional bank licensee's financial condition and results of operations in accordance with applicable accounting standards.

              October 2010

        • HC-4 HC-4 Appointment, Training and Evaluation of the Board

          • HC-4.1 HC-4.1 Principle

            • HC-4.1.1

              The conventional bank licensee must have rigorous and transparent procedures for appointment, training and evaluation of the Board.

              October 2010

          • HC-4.2 HC-4.2 Nominating Committee

            • HC-4.2.1

              The board must establish a Nominating Committee of at least three directors which must:

              (a) Identify persons qualified to become members of the board of directors or Chief Executive Officer, Chief Financial Officer, Corporate Secretary and any other officers of the conventional bank licensee considered appropriate by the Board, with the exception of the appointment of the internal auditor which shall be the responsibility of the Audit Committee in accordance with Paragraph HC-3.2.1 above; and
              (b) Make recommendations to the whole board of directors including recommendations of candidates for board membership to be included by the board of directors on the agenda for the next annual shareholder meeting.
              October 2010

            • HC-4.2.2

              The committee must include only independent directors or, alternatively, only non-executive directors of whom a majority must be independent directors and the chairman must be an independent director. This is consistent with international best practice and it recognises that the Nominating Committee must exercise judgment free from personal career conflicts of interest.

              October 2010

          • HC-4.3 HC-4.3 Nominating Committee Charter

            • HC-4.3.1

              The Nominating Committee must adopt a formal written charter which must, at a minimum, state the duties outlined in Paragraph HC-4.2.1 and the other matters included in Appendix B to this Module.

              October 2010

          • HC-4.4 HC-4.4 Board Nominations to Shareholders

            • HC-4.4.1

              Each proposal by the board to the shareholders for election or reelection of a director must be accompanied by a recommendation from the board, a summary of the advice of the Nominating Committee, and the following specific information:

              (a) The term to be served, which may not exceed three years (but there need not be a limit on reelection for further terms);
              (b) Biographical details and professional qualifications;
              (c) In the case of an independent director, a statement that the board has determined that the criteria of independent director have been met;
              (d) Any other directorships held;
              (e) Particulars of other positions which involve significant time commitments, and
              (f) Details of relationships between:
              (i) The candidate and the conventional bank licensee, and
              (ii) The candidate and other directors of the conventional bank licensee.
              October 2010

            • HC-4.4.2

              The chairman of the board should confirm to shareholders when proposing re-election of a director that, following a formal performance evaluation, the person's performance continues to be effective and continues to demonstrate commitment to the role. Any term beyond six years (e.g. two three-year terms) for a director should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the board. Serving more than six years is relevant to the determination of a non-executive director's independence.

              October 2010

          • HC-4.5 HC-4.5 Induction and Training of Directors

            • HC-4.5.1

              The chairman of the board must ensure that each new director receives a formal and tailored induction to ensure his contribution to the board from the beginning of his term. The induction must include meetings with senior management, visits to the conventional bank licensee's facilities, presentations regarding strategic plans, significant financial, accounting and risk management issues, compliance programs, its internal and external auditors and legal counsel.

              October 2010

            • HC-4.5.2

              All continuing directors must be invited to attend orientation meetings and all directors must continually educate themselves as to the conventional bank licensee's business and corporate governance.

              October 2010

            • HC-4.5.3

              Management, in consultation with the chairman of the board, should hold programs and presentations to directors respecting the conventional bank licensee's business and industry, which may include periodic attendance at conferences and management meetings. The Nominating Committee shall oversee directors' corporate governance educational activities.

              October 2010

        • HC-5 HC-5 Remuneration of Approved Persons and Material Risk-Takers

          • HC-5.1 HC-5.1 Principle

            • HC-5.1.1

              The conventional bank licensee must remunerate approved persons and material risk-takers fairly and responsibly.

              Amended: January 2014
              October 2010

          • HC-5.2 HC-5.2 Role of the Board of Directors and Remuneration Committee

            • HC-5.2.1AA

              The board of directors must actively oversee the remuneration system s design and operation for approved persons as well as for material risk-takers. The CEO and senior management must not primarily control the remuneration system.

              Added: January 2014

            • HC-5.2.1

              The Board must establish a remuneration committee of at least three directors which must:

              (a) Review the conventional bank licensee's remuneration policies for the approved persons and material risk-takers, which must be approved by the shareholders and be consistent with the corporate values and strategy of the bank;
              (b) Approve the remuneration package and amounts for each approved person and material risk-taker, as well as the total variable remuneration to be distributed, taking account of total remuneration including salaries, fees, expenses, bonuses and other employee benefits;
              (c) Approve, monitor and review the remuneration system to ensure the system operates as intended; and
              (d) Recommend Board member remuneration based on their attendance and performance and in compliance with Article 188 of the Company Law.
              Amended: January 2017
              Amended: July 2014
              Amended: January 2014
              October 2010

            • HC-5.2.1A

              In reviewing the remuneration system (see Subparagraph HC-5.2.1(c)), the remuneration committee should ensure that the system includes effective controls, including back testing and stress testing of the remuneration policy. The practical operation of the system should be regularly reviewed for compliance with regulations, internal policies and bank procedures. In addition, remuneration outcomes, risk measurements, and risk outcomes should be regularly reviewed by the Board for consistency with Board's approved risk appetite.

              Added: January 2014

            • HC-5.2.1B

              Stress testing or stressed measures might be used by banks to help ex-ante risk adjustments take into account severe but plausible scenarios, based on possible expected loss on loans, as an example. Due to the uncertainty of payoffs, there will always be a need for ex-post adjustments so as to back-test actual performance against risk assumptions.

              Added: January 2014

            • HC-5.2.1C

              As part of the duties noted under Paragraph HC-5.2.1, the remuneration committee must carefully evaluate practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain. It must demonstrate that its decisions are consistent with an assessment of the bank's financial condition and future prospects.

              Added: January 2014

            • HC-5.2.2

              The committee may be merged with the nominating committee.

              October 2010

          • HC-5.3 HC-5.3 Remuneration Committee Charter

            • HC-5.3.1

              The committee must adopt a written charter which must, at a minimum, state the duties in Paragraph HC-5.2.1 and other matters in Appendix C of this Module.

              October 2010

            • HC-5.3.1A

              Members of the remuneration committee must have independence of any risk taking function or committees.

              Added: January 2014

            • HC-5.3.2

              The committee should include only independent directors or, alternatively, only non-executive directors of whom a majority are independent directors and the chairman is an independent director. This is consistent with international best practice and it recognises that the remuneration committee must exercise judgment free from personal career conflicts of interest.

              October 2010

          • HC-5.4 HC-5.4 Standard for all Remuneration

            • HC-5.4.1

              Remuneration of approved persons and material risk-takers must be sufficient enough to attract, retain and motivate persons of the quality needed to run the conventional bank licensee successfully, but the conventional bank licensee must avoid paying more than is necessary for that purpose.

              Amended: January 2014
              October 2010

            • HC-5.4.2

              While this Section applies to all approved persons and material risk-takers for the Bahrain operations, the rules on the proportion of fixed and variable remuneration (Paragraph HC-5.4.30) as well as those rules related to the deferral of variable remuneration (Paragraphs HC-5.4.31 and HC-5.4.32) and the obligation to have part of the variable remuneration in shares (Paragraphs HC-5.4.33 and HC-5.4.34) apply only to:

              (a) Approved persons; or
              (b) Material risk-takers

              whose total annual remuneration (including all benefits) is in excess of BD100,000, unless the board of directors requires the application of these Rules to all staff.

              Amended: January 2015
              Amended: July 2014
              Added: January 2014

            • HC-5.4.2A

              The reference to 'Bahrain operations' in Paragraph HC-5.4.2 refers to any activities carried on from an establishment in Bahrain.

              Added: April 2015

            • HC-5.4.3

              All policies for performance-based incentives should be approved by the shareholders, but the approval should be only of the plan itself and not of the grant to specific individuals of benefits under the plan.

              Added: January 2014

            • HC-5.4.3A

              As noted in Sections AU-3.6 and BR-4A.3, the external auditor or a CBB approved consultancy firm must undertake an annual review of the bank's compliance with the remuneration Rules outlined in this Chapter. The results of this review are to be submitted to the CBB within 3 months from the financial year end.

              Amended: July 2015
              Moved from HC-5.4.6 to HC-5.4.3A: January 2015
              Added: January 2014

            • Application to Overseas Conventional Banks

              • HC-5.4.4

                Banks operating as overseas conventional bank licensees in Bahrain must apply the most stringent set of remuneration rules to which they may be subject to. Such rules are:

                (a) The requirements imposed in Bahrain with respect to remuneration as outlined in Volume 1 CBB Rulebook; and
                (b) The requirements imposed by their home supervisor and head office.
                Added: January 2014

            • HC-5.4.5

              [This Paragraph was deleted in January 2015.]

              Deleted: January 2015
              Added: January 2014

            • HC-5.4.6

              [Moved to Paragraph HC-5.4.3A in January 2015.]

              Amended: January 2015
              Added: January 2014

            • Approved Persons in Risk Management, Internal Audit, Operations, Financial Controls, Internal Shari'a Review/Audit, AML and Compliance Functions

              • HC-5.4.7

                The bank's approved persons engaged in risk management, internal audit, operations, financial controls, internal Shari'a review/audit, AML and compliance functions must be independent, have appropriate authority, and be remunerated in a manner that is independent of the business areas they oversee and commensurate with their key role in the bank. Effective independence and appropriate authority of such staff are necessary to preserve the integrity of financial risk and management's influence on incentive remuneration.

                Amended: July 2014
                Added: January 2014

              • HC-5.4.8

                The performance measures of approved persons referred to in Paragraph HC-5.4.7 must be based principally on the achievement of the objectives and targets of their functions.

                Added: January 2014

              • HC-5.4.9

                The mix of fixed and variable remuneration for risk management, internal audit, operations, financial controls, internal Shari'a review/audit, AML and compliance functions personnel must be weighted in favour of fixed remuneration.

                Amended: July 2014
                Added: January 2014

            • Alignment of All Staff Remuneration with Compliance with AML/CFT Requirements

              • HC-5.4.9A

                The performance evaluation and remuneration of senior management and staff of the conventional bank licensees must be based on the achievement of the Key Performance Indicators (KPIs) relevant to ensuring compliance with AML/CFT requirements as specified in Paragraphs FC-2.1.3 and FC-2.1.4.

                Added: April 2020

            • Effective Alignment of Remuneration with Prudent Risk-Taking

              • HC-5.4.10

                Remuneration must be adjusted for all types of risks.

                Added: January 2014

              • HC-5.4.11

                In relation to Paragraph HC-5.4.10, two employees who generate the same short-run profit but take different amounts of risk on behalf of their bank should not be treated the same by the remuneration system.

                Added: January 2014

              • HC-5.4.12

                Both quantitative measures and human judgement must play a role in determining risk adjustments.

                Added: January 2014

              • HC-5.4.13

                Risk adjustments must account for all types of risk, including intangible and other risks such as reputation risk, liquidity risk and the cost of capital.

                Added: January 2014

              • HC-5.4.14

                Banks' remuneration policies and practices must be designed to reduce employees' incentives to take excessive and undue risk.

                Added: January 2014

              • HC-5.4.15

                Remuneration outcomes must be symmetric with risk outcomes.

                Added: January 2014

              • HC-5.4.16

                The mix of cash, equity and other forms of remuneration must be consistent with risk alignment. The mix will vary depending on the employee's position and role and the bank must be able to explain the rationale for its mix to the CBB.

                Added: January 2014

              • HC-5.4.17

                Existing contractual payments related to a termination of employment must be re-examined, and kept in place only if there is a clear basis for concluding that they are aligned with long-term value creation and prudent risk-taking. Prospectively, any such payments must be related to performance achieved over time and designed in a way that does not reward failure.

                Added: January 2014

              • HC-5.4.18

                Banks must ensure that their employees commit themselves not to use personal hedging strategies or remuneration- and liability-related insurance to undermine the risk alignment effects embedded in their remuneration arrangements. Banks must ensure that appropriate compliance mechanisms are in place to monitor their employees commitment in this regard such as signed adherence by staff to the bank's code of ethics which should include the conditions outlined in this Paragraph.

                Added: January 2014

            • Variable Remuneration

              • HC-5.4.19

                Remuneration systems must link the size of the bonus pool to the overall performance of the bank.

                Added: January 2014

              • HC-5.4.20

                Employees' incentive payments must be linked to the contribution of the individual and business to such performance.

                Added: January 2014

              • HC-5.4.21

                As profits and losses of different activities of a bank are realised over different periods of time, remuneration payout schedules must be sensitive to the time horizon of risks and variable remuneration must therefore be deferred accordingly. Variable remuneration must not be finalised over short periods where risks are realised over long periods.

                Added: January 2014

              • HC-5.4.22

                The remuneration committee of the bank must question payouts for income that cannot be realised or whose likelihood of realisation remains uncertain at the time of payout.

                Amended: July 2014
                Added: January 2014

              • HC-5.4.23

                Banks must ensure that total variable remuneration does not limit their ability to strengthen their capital base. The extent to which capital needs to be built up must be a function of a bank's current capital position and its ICAAP.

                Added: January 2014

              • HC-5.4.24

                The size of the variable remuneration pool and its allocation within the bank must take into account the full range of current and potential risks, including:

                (a) The cost and quantity of capital required to support the risks taken;
                (b) The cost and quantity of the liquidity risk assumed in the conduct of business; and
                (c) Consistency with the timing and likelihood of potential future revenues incorporated into current earnings.
                Amended: July 2014
                Added: January 2014

              • HC-5.4.25

                Paragraph HC-5.4.24 focuses on the overall size of the variable remuneration, at the overall bank level, in order to ensure that the recognition and accrual of variable remuneration will not compromise the financial soundness of the bank.

                Added: January 2014

              • HC-5.4.26

                Bonuses must diminish or be deferred in the event of poor bank, divisional or business unit performance.

                Added: January 2014

              • HC-5.4.27

                Subdued or negative financial performance of the bank should generally lead to a considerable contraction of the bank's total variable remuneration, taking into account both current remuneration and reductions in payouts of amounts previously earned, including through malus and clawback arrangements. Recognition of staff who have achieved their targets or better, may take place by way of deferred compensation, which may be paid once the bank's performance improves.

                Added: January 2014

              • HC-5.4.28

                If the bank and/or relevant line of business is incurring losses in any year during the vesting period, any unvested portions must be subject to malus.

                Amended: July 2014
                Added: January 2014

              • HC-5.4.29

                Accrual and deferral of variable remuneration does not oblige the bank to pay the variable remuneration, particularly when the anticipated outcome has not materialised or the bank's financial position does not support such payments.

                Added: January 2014

              • HC-5.4.30

                For approved persons and material risk-takers, other than those covered under Paragraphs HC-5.4.9 and Section HC-5.5, as their actions have a material impact on the risk exposure of the bank:

                (a) An appropriate ratio between the fixed and variable components of total remuneration must be set to ensure that fixed and variable components of total remuneration are appropriately balanced and paid on the basis of individual, business-unit and bank-wide measures that adequately measure performance; and
                (b) The variable proportion of remuneration must increase significantly along with the level of seniority and/or responsibility.
                Amended: October 2016
                Amended: July 2014
                Added: January 2014

              • HC-5.4.30A

                The Level of the fixed component referred to in Subparagraph HC-5.4.30(a) should represent a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable component.

                Amended: October 2016
                Added: July 2014

              • HC-5.4.31

                For purposes of Paragraph HC-5.4.30:

                (a) At least 40% of the variable remuneration must be payable under deferral arrangements over a period of at least 3 years; and
                (b) For the CEO, his deputies and the other 5 most highly paid business line employees, at least 60% of the variable remuneration must be payable under deferral arrangements over a period of at least 3 years.
                Amended: July 2014
                Added: January 2014

              • HC-5.4.32

                The deferral period referred to under Subparagraph HC-5.4.31(a) must be aligned with the nature of the business, its risks and the activities of the employee in question. Remuneration payable under deferral arrangements should generally vest no faster than on a pro rata basis.

                Added: January 2014

              • HC-5.4.33

                As a minimum, 50% of variable remuneration (including both the deferred and undeferred portions of the variable remuneration) must be awarded in shares or share-linked instruments or where appropriate, other non-cash instruments.

                Added: January 2014

              • HC-5.4.34

                The remaining portion (other than that mentioned under Paragraph HC-5.4.33) of the deferred remuneration can be paid as cash remuneration vested over a minimum 3-year period.

                Added: January 2014

              • HC-5.4.34A

                The only instance where deferred remuneration can be paid out before the end of the vesting period is in the case of the death of the employee where the beneficiaries would receive any unpaid deferred remuneration.

                Added: July 2014

              • HC-5.4.35

                Banks must not provide any form of guaranteed variable remuneration as part of the overall remuneration package. Exceptional minimum variable remuneration must only occur in the context of hiring new staff and limited to the first year.

                Amended: July 2014
                Added: January 2014

            • Remuneration in the Form of Shares or Share-Linked Instruments

              • HC-5.4.36

                Awards in shares or share-linked instruments must be subject to a minimum share retention policy of 6 months from the time the shares are awarded, unless the bank's policy requires a longer period.

                Amended: July 2014
                Added: January 2014

              • HC-5.4.37

                For Bahraini conventional bank licensees, where fixed or variable remuneration include common shares, banks must limit the shares awarded to an annual aggregate limit of 10% of the total issued shares outstanding of the bank, at all times.

                Amended: July 2014
                Added: January 2014

              • HC-5.4.38

                For Bahraini conventional bank licensees, all share incentive plans must be approved by the shareholders.

                Amended: July 2014
                Added: January 2014

            • Remuneration from Projects and Investments

              • HC-5.4.39

                In reference to Paragraph HC-2.2.6, for greater certainty, approved persons are not allowed to take any benefits from any projects or investments which are managed by the conventional bank licensee or promoted to its customers or potential customers except for board related remuneration (declared as per Paragraph HC-2.4.1) linked to their fiduciary duties to the investors of the project/investment. This Rule applies to all approved persons including those appointed as members of the board of special purpose vehicles or other operating companies set up by the conventional bank licensee for projects or investments.

                Added: January 2014

              • HC-5.4.40

                The reference to benefits in Paragraph HC-5.4.39 includes commission, fees, shares, consideration in kind, or other remuneration or incentives in respect of the performance of the project or investment

                Added: January 2014

          • HC-5.5 HC-5.5 Board of Directors' Remuneration

            • HC-5.5.1

              Remuneration of non-executive directors must not include performance-related elements such as grants of shares, share options or other deferred stock-related incentive schemes, bonuses, or pension benefits.

              October 2010

            • HC-5.5.2

              The Board of Directors' remuneration must be capped so that total remuneration is in line with Article 188 of the Company Law, in any financial year and has been approved by the shareholders.

              Amended: April 2015
              Amended: July 2014
              Added: January 2014

            • HC-5.5.3

              If a senior manager is also a director, his remuneration as a senior manager must take into account compensation received in his capacity as a director.

              Added: January 2014

            • HC-5.5.4

              In the years where the bank has not generated any profits it must comply with the approval requirements of Article 188 of the Company Law.

              Added: January 2014

            • HC-5.5.5

              In addition to the requirements of Article 188 of the Company Law, the articles of association regarding remuneration of the board of directors must be in line with the Rules outlined in this Chapter.

              Added: January 2014

          • HC-5.6 HC-5.6 [This Section was deleted and is replaced with requirements contained under Section HC-5.4]

            Deleted: January 2014

            • HC-5.6.1

              [This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]

              Deleted: January 2014

            • HC-5.6.2

              [This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]

              Deleted: January 2014

            • HC-5.6.3

              [This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]

              Deleted: January 2014

            • HC-5.6.4

              [This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]

              Deleted: January 2014

            • HC-5.6.5

              [This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]

              Deleted: January 2014

            • HC-5.6.6

              [This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]

              Deleted: January 2014

        • HC-6 HC-6 Management Structure

          • HC-6.1 HC-6.1 Principle

            • HC-6.1.1

              The board must establish a clear and efficient management structure.

              October 2010

          • HC-6.2 HC-6.2 Establishment of Management Structure

            • HC-6.2.1

              The board must appoint senior management whose authority must include management and operation of current activities of the conventional bank licensee under the direction and oversight of the board. The senior management must include at a minimum:

              (a) A CEO;
              (b) A chief financial officer;
              (c) A corporate secretary; and
              (d) An internal auditor,

              and must also include such other approved persons as the board considers appropriate.

              Amended: April 2020
              Amended: October 2011
              Added: October 2010

          • HC-6.3 HC-6.3 Titles, Authorities, Duties and Reporting Responsibilities

            • HC-6.3.1

              The board must adopt by-laws prescribing each senior manager's title, authorities, duties, accountabilities and internal reporting responsibilities. This must be done with the advice of the Nominating Committee and in consultation with the CEO, to whom the other senior managers should normally report.

              Amended: January 2012
              October 2010

            • HC-6.3.2

              These provisions must include but should not be limited to the following:

              (a) The CEO must have authority to act generally in the conventional bank licensee's name, representing the conventional bank licensee's interests in concluding transactions on the conventional bank licensee's behalf and giving instructions to other senior managers and conventional bank licensee employees;
              (b) The chief financial officer must be responsible and accountable for:
              (i) The complete, timely, reliable and accurate preparation of the conventional bank licensee's financial statements, in accordance with the accounting standards and policies of the conventional bank licensee (see also HC-3.4.1); and
              (ii) Presenting the board with a balanced and understandable assessment of the conventional bank licensee's financial situation;
              (c) The corporate secretary's duties must include arranging, recording and following up on the actions, decisions and meetings of the Board and of the shareholders (both at annual and extraordinary meetings) in books to be kept for that purpose; and
              (d) The internal auditor's duties must include providing an independent and objective review of the efficiency of the conventional bank licensee's operations. This would include a review of the accuracy and reliability of the conventional bank licensee's accounting records and financial reports as well as a review of the adequacy and effectiveness of the conventional bank licensee's risk management, control, and governance processes.
              October 2010

            • HC-6.3.3

              The board should also specify any limits which it wishes to set on the authority of the CEO or other senior managers, such as monetary maximums for transactions which they may authorise without separate board approval.

              October 2010

            • HC-6.3.4

              The corporate secretary should be given general responsibility for reviewing the conventional bank licensee's procedures and advising the board directly on such matters (see Rule HC-6.3.2(c)). Whenever practical, the corporate secretary should be a person with legal or similar professional experience and training.

              October 2010

            • HC-6.3.5

              At least annually the board shall review and concur in a succession plan addressing the policies and principles for selecting a successor to the CEO, both in emergencies and in the normal course of business. The succession plan should include an assessment of the experience, performance, skills and planned career paths for possible successors to the CEO.

              October 2010

          • HC-6.4 HC-6.4 Compliance

            • HC-6.4.1

              Compliance starts at the top. It will be most effective in a corporate culture that emphasises standards of honesty and integrity and in which the board of directors and senior management lead by example. It concerns everyone within the bank and should be viewed as an integral part of the bank's business activities. A bank should hold itself to high standards when carrying on business, and at all times strive to observe the spirit as well as the letter of the law. Failure to consider the impact of its actions on its shareholders, customers, employees and the markets may result in significant adverse publicity and reputational damage, even if no law has been broken.

              Amended: January 2019
              October 2010

            • HC-6.4.2

              Conventional bank licensees must establish an effective compliance framework, which is appropriate for the size and complexity of their operations, for managing their compliance risks.

              Amended: January 2019
              October 2010

            • HC-6.4.3

              The term "Compliance risk" refers to the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, directives, directions, reporting requirements and codes of conduct, including internal code of conduct.

              Amended: January 2019
              Amended: October 2014
              October 2010

            • HC-6.4.4

              Compliance laws, rules and standards generally cover matters such as observing proper prudential standards, standards of market conduct, managing conflicts of interest, treating customers fairly and ensuring suitability of customer advice, as well as matters specified in HC-6.4.3 above. They typically include specific areas such as the prevention of money laundering and terrorist financing, and may extend to tax laws that are relevant to the structuring of banking products or customer advice.

              Added: January 2019

            • HC-6.4.5

              It is important that banks do not consider compliance function as a cost center rather it is an activity that enhances the reputation of the bank and promotes the right environment for better financial performance.

              Added: January 2019

            • HC-6.4.6

              The relationship between a bank's business units, the support functions and the compliance function can be explained using the three lines of defence model.

              a) The business units are the first line of defence. They undertake the management of risks within assigned limits of risk exposure and are responsible and accountable for identifying, assessing and controlling the risks of their business.
              b) The second line of defence includes the support functions, such as risk management, compliance, legal, human resources, finance, operations, and technology. Each of these functions, in close relationship with the business units, ensures that risks in the business units have been appropriately identified and managed. The business support functions work closely to help define strategy, implement bank policies and procedures, and collect information to create a bank-wide view of risks.
              c) The third line of defence is the internal audit function that independently assesses the effectiveness of the controls over the processes created in the first and second lines of defence and provides assurance on these processes. The responsibility for internal control does not transfer from one line of defence to the next line.
              Added: January 2019

            • Responsibilities of the Board of Directors

              • HC-6.4.7

                The board of directors of a conventional bank licensee is responsible for overseeing the management of the bank's compliance risk. The board must establish a permanent and effective compliance function and approve the bank's compliance policies for identifying, assessing, monitoring, reporting and advising on compliance risk. At least once a year, the board or a designated board committee must assess the extent to which the bank is managing its compliance risk effectively. The board must also ensure that the agenda for the meetings of the board or the designated board committee include compliance as a topic at least every quarter.

                Amended: January 2020
                Added: January 2019

              • HC-6.4.8

                The board designated committee referred to in HC-6.4.7 may be the audit committee, the governance committee, the risk committee, or other committee which does not have a role in the business or executive roles, such as those relevant to executive committees and investment committees. For branches of foreign bank licensees, all references in this Section to the Board/the designated board committee should be interpreted as the Group Compliance Officer or a sufficiently senior level Regional Compliance Committee or Officer.

                Added: January 2019

            • Responsibilities of the Senior Management

              • HC-6.4.9

                Senior management is responsible for effective management of bank's compliance risk.

                Added: January 2019

              • HC-6.4.10

                Senior management is responsible for establishing the operating framework and the processes to support a permanent and an effective compliance function. It is responsible for establishing and communicating a written compliance policy through all levels of the organisation for ensuring that it is adhered to in practice. It is responsible also for approving the bank's compliance procedures for identifying, assessing, monitoring, reporting and advising on compliance risk.

                Amended: January 2020
                Added: January 2019

              • HC-6.4.11

                The compliance policy must be approved by the Board/the designated board committee and must address the following:

                (a) The role and responsibilities of the compliance function;
                (b) Measures to ensure its independence;
                (c) Its relationship with other risk management functions within the bank and with the internal audit function;
                (d) In cases where compliance responsibilities are carried out by staff in different departments, how these responsibilities are to be allocated among the departments;
                (e) Its right to obtain access to information necessary to carry out its responsibilities, and the corresponding duty of bank staff to cooperate in supplying this information;
                (f) Its right to conduct investigations of possible breaches of the relevant laws and regulations and the compliance policy and to appoint outside experts to perform this task if appropriate; and
                (g) Its right to be able freely to express and disclose its findings to the board of directors or to the designated board committee, e.g. the audit committee or the governance committee of the board.
                (h) The basic principles to be followed by management and staff describing the main processes by which compliance risks are to be identified and managed through all levels of the organization.
                Added: January 2019

              • HC-6.4.12

                The Board and the designated Board committee must ensure that all compliance findings and recommendations are resolved within six months for high risk/critical issues and 9 months for any other issues from the issue date of the subject compliance report unless otherwise agreed with the CBB taking into consideration time required for specific issues that may require substantive changes to technology, systems and/or processes.

                Added: January 2019

              • HC-6.4.13

                Senior management must assess the training needs of staff taking into account the existing skills and competencies, the nature of changes to laws and regulations in developing a training plan for compliance across all levels throughout the organisation. Training must be provided by competent and skilled personnel, whether available internally or externally. Training that is provided must reflect the seniority, role and responsibilities of the individuals for whom it is intended.

                Added: January 2019

            • Compliance Function

              • HC 6.4.14

                Conventional bank licensees must organise their compliance function and set priorities for the management of their compliance risk in a way that is consistent with their own risk management strategy and structures.

                Added: January 2019

              • HC-6.4.15

                The compliance function must be independent and effective. It must be headed by an executive or senior staff member with overall responsibility for co-ordinating the identification and management of the bank's compliance risk and for supervising the activities of other compliance function staff

                Added: January 2019

              • HC-6.4.16

                The Head of Compliance, with the assistance of senior management must:

                (a) report to the board of directors or the designated committee of the board on a quarterly basis, even if there are no issues to highlight,
                (b) report to the board or the designated committee of the board on the bank's management of its compliance risk, in such a manner as to assist board members to make an informed judgment on whether the bank is managing its compliance risk effectively;
                (c) report promptly to the board or the designated committee of the board on any material compliance failures as they arise (e.g. failures that may attract a significant risk of legal or regulatory sanctions, material financial loss, or loss to reputation); and
                (d) ensure that senior management develop remedial action plans to address compliance breaches.
                Added: January 2019

              • HC-6.4.17

                The role of head of compliance may be combined with those of the head of risk if the size and nature of the bank justifies a single function for both roles. Banks which carry out limited operations or are small branches of foreign banks would qualify for such a practice.

                Added: January 2019

              • HC-6.4.18

                The compliance function should assist senior management, the board and the designated committee of the board in their compliance obligations and help promote the right culture within the bank. While the board and management are accountable for the bank's compliance, the compliance function has an important role in supporting corporate values, policies and processes that help ensure that the bank acts responsibly and fulfils all applicable obligations.

                Added: January 2019

              • HC-6.4.19

                The independence and effectiveness of the function must be based on the following related elements:

                (a) The compliance function must have a formal status with sufficient authority within the bank;
                (b) There must be a group compliance officer or head of compliance with overall responsibility for co-ordinating the management of the bank's compliance risk;
                (c) Compliance function staff, and in particular, the head of compliance, must not be placed in a position where there is a possible conflict of interest between their compliance responsibilities and any other responsibilities they have;
                (d) Compliance function staff must have access to the information and personnel necessary to carry out their responsibilities; and
                (e) The compliance function must directly report to the board or a designated board committee in the case of Bahraini conventional bank licensees) and administratively to the CEO; and
                (f) In the case of branches of foreign bank licensees, the reporting must be to the Group Compliance Officer or Regional Compliance Officer and may report administratively to the CEO/GM of the branch.
                Added: January 2019

              • HC-6.4.20

                The concept of independence does not mean that the compliance function cannot work closely with management and staff in the various business units. Indeed, a co-operative working relationship between compliance function and business units should help to identify and manage compliance risks at an early stage. Rather, the various elements described above should be viewed as safeguards to help ensure the effectiveness of the compliance function, notwithstanding the close working relationship between the compliance function and the business units. The way in which the safeguards are implemented will depend to some extent on the specific responsibilities of individual compliance function staff.

                Added: January 2019

              • HC-6.4.21

                The compliance function should be free to highlight to senior management on any irregularities or possible breaches disclosed by its investigations, without fear of retaliation or disfavour from management or other staff members.

                Added: January 2019

              • HC-6.4.22

                Appointment, dismissal and other changes to the head of compliance must be approved by the board or the designated board committee. Appointments of head of compliance must be approved by the CBB in accordance with paragraph LR-IA.1.17. If the head of compliance is removed from his or her position for any reason, this must be notified to the CBB, describing fully the reasons as required under paragraph LR-1A.1.22.

                Added: January 2019

              • HC-6.4.23

                Conventional bank licensees must ensure that the compliance risk management framework is subject to an independent review by a third party consultant, other than the external auditor, every three years and when there are material changes to the business. The results of the independent review and action must be provided to the CBB by 30th September of the relevant year.

                Added: January 2019

              • HC-6.4.24

                The responsibilities of the compliance function must be carried out under a compliance programme that sets out its planned activities, such as the implementation and review of specific policies and procedures, compliance risk assessment, compliance testing, and educating staff on compliance matters. The compliance programme must be risk based and subject to oversight by the head of compliance to ensure appropriate coverage across businesses and co-ordination among risk management functions.

                Added: January 2019

              • HC-6.4.25

                The Compliance function must on a pro-active basis, identify, measure, document and assess the compliance risks associated with the bank's business activities including the development of new products and business practices; the proposed establishment of new types of business or customer relationships, or material changes in the nature of such relationships. If the bank has a new products committee, the compliance function staff should be represented on the committee.

                Added: January 2019

              • HC-6.4.26

                While the Compliance function is responsible for oversight and compliance checks across the full spectrum of compliance risk areas, it is recognised that many areas of compliance require specialist skills which can be found in different parts of the organisation, example, the skill sets for compliance with ICAAP can be found either with financial control or with risk management, for compliance with labour laws, the specialist skills are with human resources departments etc. In such cases, the compliance function ensures that the right levels of checks and balances and compliance reporting are available to get comfort that the licensee has adhered to the relevant requirements. In certain instances, it may use external experts with the approval of the relevant authority within the bank.

                Added: January 2019

              • HC-6.4.27

                The compliance function should consider ways to measure compliance risk (e.g. by using performance indicators) and use such measurements to enhance compliance risk assessment.

                Added: January 2019

              • HC-6.4.28

                In case of new regulations, the compliance function must assess the appropriateness of the bank's compliance procedures and guidelines, promptly follow up any identified deficiencies, and, where necessary, formulate proposals for amendments.

                Added: January 2019

            • Monitoring, testing and reporting

              • HC-6.4.29

                The compliance function must monitor and test compliance by performing sufficient and representative compliance testing. The results of the compliance testing must be reported to the board or designated committee of the board.

                Added: January 2019

              • HC-6.4.30

                The compliance function must advise senior management and the designated committee of the board on all relevant laws, rules and standards, in all jurisdictions in which the bank conducts its business, and inform them on developments in the subject.

                Added: January 2019

            • Guidance and education

              • HC-6.4.31

                The compliance function must assist senior management in:

                a) Educating staff on compliance issues, and acting as a contact point within the bank for compliance queries from staff members; and
                b) Establishing written guidance to staff on the appropriate implementation of laws, rules and standards through policies and procedures and other documents such as manuals, internal codes of conduct and practice guidelines.
                Added: January 2019

            • Statutory responsibilities and liaison

              • HC-6.4.32

                The compliance function must have specific statutory responsibilities (e.g. fulfilling the role of anti-money laundering officer). It may also liaise with relevant external bodies, including regulators, standard setters and external experts.

                Added: January 2019

            • Right of access

              • HC-6.4.33

                The compliance function must have access across the entire organisation to carry out its responsibilities on its own initiative where compliance risk exists. It must, additionally, have the right to communicate with any staff member and to obtain access to any records or files necessary to conduct its responsibilities and to conduct investigations of possible breaches of the compliance policy and to request assistance from specialists within the bank (e.g. legal or internal audit) or engage outside specialists subject to appropriate internal approval to perform this task if appropriate.

                Added: January 2019

            • Competent Resources

              • HC-6.4.34

                The compliance function must have adequate resources to carry out its functions effectively commensurate with the size and complexity of the organisation. The resources to be provided for the compliance function must be both sufficient and appropriate to ensure that compliance risk within the bank is managed effectively.

                Added: January 2019

              • HC-6.4.35

                The compliance function staff must have the necessary qualifications, experience and professional and personal qualities to enable them to carry out their specific duties. Compliance function staff must have a sound understanding of laws, rules and standards and their practical impact on the bank's operations.

                Added: January 2019

              • HC-6.4.36

                The professional skills of compliance function staff, especially with respect to keeping up-to-date with developments in compliance laws, rules and standards, must be maintained through regular and systematic education and training.

            • Relationship with Internal Audit

              • HC-6.4.37

                The scope and breadth of the activities of the compliance function must be subject to periodic review by the internal audit function.

                Added: January 2019

              • HC-6.4.38

                Compliance risk must be included in the risk assessment methodology of the internal audit function, and an audit programme that covers the adequacy and effectiveness of the bank's compliance function should be established, including testing of controls commensurate with the perceived level of risk.

                Added: January 2019

              • HC-6.4.39

                The compliance function and the internal audit function must be separate, to ensure that the activities of the compliance function are subject to independent review. It is important, therefore, that there is a clear understanding within the bank as to how risk assessment and testing activities are divided between the two functions, and that this is documented (e.g. in the bank's compliance policy or in a related document such as a protocol). The internal audit function must, of course, keep the head of compliance informed of any audit findings relating to compliance.

                Added: January 2019

            • Cross-border Issues

              • HC-6.4.40

                Conventional bank licensees that conduct business through a branch or subsidiary in other jurisdictions must through the Group Compliance Function:

                (a) comply with local laws and regulations;
                (b) have Group Compliance policy and procedures;
                (c) Conduct annual compliance testing on overseas operations whose total revenue represents 20% or more of the Group's total revenue and on every two years basis for other overseas operations.
                Added: January 2019

              • HC-6.4.41

                Conventional bank licensees must have procedures in place to identify and assess the possible increased reputational risk to the bank if it offers products or carries out activities in certain jurisdictions.

                Added: January 2019

              • HC-6.4.42

                Conventional bank licensees with overseas operations must establish a Group Compliance Function which must oversee the compliance activities on a group-wide basis. The Group Compliance Officer must ensure that compliance reviews and checks are carried out at branches and subsidiaries. As legal and regulatory requirements may differ from jurisdiction to jurisdiction, compliance issues specific to each jurisdiction must be coordinated within the structure of the bank's group-wide compliance policy.

                Added: January 2019

              • HC-6.4.43

                The senior management with assistance of Group Compliance Officer must ensure that adequate resources, commensurate with the scale and complexity of the operations, are assigned for compliance activities at, the head office, branches and subsidiaries.

                Added: January 2019

              • HC-6.4.44

                The Group Compliance Officer must ensure that adequate reports and information is received from overseas branches and subsidiaries on compliance related issues.

                Added: January 2019

            • Outsourcing

              • HC-6.4.45

                Compliance function or its activities must not be outsourced.

                Added: January 2019

            • Other requirements

              • HC-6.4.46

                Every application/request for approval to the CBB must be accompanied by a compliance assessment report confirming that all related requirements pertaining to the request have been thoroughly checked by the compliance function including the impact of such a request on the licensee's financial position and compliance status. In addition, reference must be made to any previously approved arrangements by the CBB.

                Added: January 2019

              • HC6.4.47

                In cases where the requests have a potential financial impact on the licensee a report from the financial control function in consultation with external auditors must also be submitted as part of the compliance assessment report, whereas in case of any legal implication of such a request a legal opinion on the matter must be submitted.

                Added: January 2019

              • HC-6.4.48

                Where breaches or deficiencies have occurred due to failures by approved persons, the CBB may consider re-assessing the fitness and propriety of such persons.

                Added: January 2019

          • HC-6.5 HC-6.5 Internal Audit

            • Introduction

              • HC-6.5.1

                Conventional bank licensees must establish and implement an effective internal audit function which provides an independent and objective assurance to the board of directors and senior management on the quality and effectiveness of a bank's internal control, risk management and governance systems and processes, to protect the bank and its reputation.

                Added: April 2018

              • HC-6.5.2

                The internal audit function must develop an independent and informed view of the risks faced by the bank based on its access to all bank records and data, its enquiries, and its professional competence. The internal audit function must discuss its views, findings and conclusions directly with the audit committee and, if necessary with the board of directors at their routine quarterly meetings, thereby helping the board to oversee senior management.

                Added: April 2018

              • HC-6.5.3

                In this Section, all references to the board of directors may also be taken as referring to the bank's audit committee where the audit committee is mandated to carry out such functions on the board's behalf.

                Added: April 2018

              • HC-6.5.4

                For branches of foreign bank licensees, and where no local board of directors exists, all references in this Module to the board of directors should be interpreted as the Head Office/ Regional Office.

                Added: April 2018

              • HC-6.5.5

                Branches should ensure that equivalent arrangements are in place at the parent level for the requirements in this Section and these arrangements provide for an effective internal audit function over activities conducted under the Bahrain license.

                Amended: October 2018
                Added: April 2018

              • HC-6.5.6

                The extent of application of this Section must be commensurate with the significance, complexity and international presence of the bank (principle of proportionality).

                Added: April 2018

              • HC-6.5.7

                The key features for the effective operation of an internal audit function are:

                (a) Independence and objectivity;
                (b) Professional competence and due professional care; and
                (c) Professional ethics
                Added: April 2018

            • Independence and Objectivity

              • HC-6.5.8

                Conventional bank licensees internal audit function must be independent of the audited activities. This means that the internal audit is independent of all functions including compliance, risk management and financial control functions. The internal audit function must also have sufficient standing and authority within the bank and must operate according to sound principles.

                Added: April 2018

              • HC-6.5.9

                The internal audit function must report directly to the audit committee and administratively to the CEO, thereby providing a framework for internal auditors to carry out their assignments with objectivity.

                Added: April 2018

              • HC-6.5.10

                The internal audit function must be able to perform its assignments on its own initiative in all areas and functions of the bank based on the audit plan established by the head of the internal audit function and approved by the board of directors or audit committee. It must be free to report its findings and assessments internally through clear reporting lines. The head of internal audit must demonstrate appropriate leadership and have the necessary personal characteristics and professional skills to fulfill his or her responsibility for maintaining the function's independence and objectivity.

                Added: April 2018

              • HC-6.5.11

                The internal audit function must not be involved in designing, selecting, implementing or operating specific internal control measures. However, the independence of the internal audit function must not prevent senior management from requesting input from internal audit on matters related to risk and internal controls. Nevertheless, the development and implementation of internal controls must remain the responsibility of management.

                Added: April 2018

              • HC-6.5.12

                Conventional bank licensees should, whenever practicable and without jeopardising competence and expertise, periodically rotate internal audit staff within the internal audit function.

                Added: April 2018

            • Professional Competence and Due Professional Care

              • HC-6.5.13

                The head of internal audit must have the responsibility for acquiring human resources with sufficient qualifications and skills to effectively deliver on the mandate for professional competence and to audit to the required level. He/she must continually assess and monitor the skills necessary to do so. The skills required for senior internal auditors must include the abilities to judge outcomes and make an impact at the highest level of the organisation.

                Added: April 2018

              • HC-6.5.14

                For purposes of Paragraph HC-6.5.13, professional competence depends on the auditor's capacity to collect and understand information, to examine and evaluate audit evidence and to communicate with the stakeholders of the internal audit function.

                Added: April 2018

              • HC-6.5.15

                The head of internal audit must ensure that internal audit staff acquire appropriate ongoing training in order to meet the growing technical complexity of the Conventional Bank licensee's activities and the increasing diversity of tasks that need to be undertaken as a result of the introduction of new products and processes within the Conventional Bank licensee and other developments in the financial sector.

                Added: April 2018

              • HC-6.5.16

                The internal audit function collectively must be competent to examine all areas in which the bank operates. When internal audit is outsourced, the head of internal audit/coordinator must ensure that the use of those experts does not compromise the independence and objectivity of the internal audit function.

                Added: April 2018

              • HC-6.5.17

                For purposes of Paragraph HC-6.5.16, the coordinator must be an approved person within the Conventional Bank licensee.

                Added: April 2018

              • HC-6.5.18

                The head of internal audit/coordinator should ensure that, whenever practical, the relevant knowledge input from an expert is assimilated into the organisation. This may be possible by having one or more members of the bank's internal audit staff participate in the external expert's work.

                Added: April 2018

              • HC-6.5.19

                Internal auditors must apply the care and skills expected of a reasonably prudent and competent professional. Due professional care does not imply infallibility; however, internal auditors having limited competence and experience in a particular area must be appropriately supervised by more experienced internal auditors.

                Added: April 2018

            • Professional Ethics

              • HC-6.5.20

                Internal auditors must act with integrity. Integrity includes, being straightforward, honest and truthful.

                Added: April 2018

              • HC-6.5.21

                Internal auditors must respect the confidentiality of information acquired in the course of their duties. They must not use that information (particularly 'confidential information' as defined in Article 116 of the CBB Law) for personal gain or malicious action and must be diligent in the protection of information acquired.

                Added: April 2018

              • HC-6.5.22

                The head of the internal audit function and all internal auditors must avoid conflicts of interest (see Section HC-2.3). Internally recruited internal auditors must not engage in auditing activities for which they have had previous responsibility before a one year "cooling off" period has elapsed.

                Added: April 2018

              • HC-6.5.23

                Internal auditors must adhere to the code of ethics of both the bank and The Institute of Internal Auditors (see Section HC-2.2).

                Added: April 2018

            • Internal Audit Charter

              • HC-6.5.24

                All Bahraini conventional bank licensees must have an internal audit charter that articulates the purpose, standing and authority of the internal audit function within the bank in a manner that promotes an effective internal audit function as described in Paragraph HC-6.5.1.

                Added: April 2018

              • HC-6.5.25

                The charter must be drawn up and reviewed annually by the head of internal audit and approved by the board of directors or audit committee. It must be available to all internal stakeholders and, in certain circumstances, such as listed entities, to external stakeholders.

                Added: April 2018

              • HC-6.5.26

                At a minimum, the internal audit charter must establish:

                (a) The internal audit function's standing within the bank, its authority, its responsibilities and its relations with other control functions in a manner that promotes the effectiveness of the function as described in Paragraphs HC-6.5.1 and HC-6.5.2;
                (b) The purpose and scope of the internal audit function;
                (c) The key features of the internal audit function described in Paragraphs HC-6.5.8 to HC-6.5.23;
                (d) The obligation of the internal auditors to communicate the results of their engagements and a description of how and to whom this must be done (reporting line);
                (e) The criteria for when and how the internal audit function may outsource some of its engagements to external experts;
                (f) The terms and conditions according to which the internal audit function can be called upon to provide consulting or advisory services or to carry out other special tasks;
                (g) The responsibility and accountability of the head of internal audit;
                (h) A requirement to comply with sound internal auditing standards; and
                (i) Procedures for the coordination of the internal audit function with the external auditor.
                Added: April 2018

              • HC-6.5.27

                The charter must empower the internal audit function, whenever relevant to the performance of its assignments and discharge of its duties, to initiate direct communication with any member of staff, to examine any activity or entity of the bank, and to have full and unconditional access to any records, files, data and physical properties of the bank. This includes access to management information systems and records and the minutes of board and sub-board committee meetings and all consultative and decision-making committees.

                Added: April 2018

            • Scope of Activity

              • HC-6.5.28

                The scope of internal audit activities must include the examination and evaluation of the effectiveness of the internal control, risk management and governance systems and processes of the entire bank, including the bank's outsourced activities and its subsidiaries (including SPVs) and branches.

                Added: April 2018

              • HC-6.5.29

                The internal audit function must independently evaluate the:

                (a) Effectiveness and efficiency of internal control, risk management and governance systems and processes created by the business units and support functions in the context of both current and potential or actual emerging risks and provide assurance on these systems and processes;
                (b) Reliability, effectiveness and integrity of management information systems and processes (including relevance, accuracy, completeness, availability, confidentiality and comprehensiveness of data);
                (c) Monitoring of compliance with laws and regulations, including any requirements from the CBB; and
                (d) Safeguarding of assets.
                Added: April 2018

              • HC-6.5.30

                The head of internal audit must establish, prior to year-end an annual internal audit plan. It must be based on a robust risk assessment (including direct or indirect input from senior management and the board).

                Added: April 2018

              • HC-6.5.31

                The audit committee's approval of the audit plan also requires that an appropriate budget will be available to support the internal audit function's activities.

                Added: April 2018

              • HC-6.5.32

                The scope of the internal audit function's activities must ensure adequate coverage of matters of regulatory interest within the audit plan.

                Added: April 2018

            • Risk Management

              • HC-6.5.33

                Internal audit must include in its scope the following aspects of risk management:

                (a) The organisation and mandates of the risk management function including market, credit, liquidity, interest rate and operational risks;
                (b) Evaluation of risk appetite, escalation and reporting of issues and decisions taken by the risk management function;
                (c) The adequacy of risk management systems and processes for identifying, measuring, assessing, controlling, responding to, and reporting on all the risks resulting from the bank's activities;
                (d) The integrity of the risk management information systems, including the accuracy, reliability and completeness of the data used;
                (e) The approval and maintenance of risk models including verification of the consistency, timeliness, independence and reliability of data sources used in such models;
                (f) Information technology and information security;
                (g) The bank's system for identifying and measuring its regulatory capital and assessing the adequacy of its capital resources in relation to the bank's risk exposures and established minimum ratios; and
                (h) The review of management's process for stress testing its capital levels, taking into account the frequency of such exercises, their purpose (e.g., internal monitoring vs. regulator imposed), the reasonableness of scenarios and the underlying assumptions employed, and the reliability of the processes used.
                Added: April 2018

              • HC-6.5.34

                When the risk management function has not informed the board of directors about the existence of a significant divergence of views between senior management and the risk management function regarding the level of risk faced by the bank, the head of internal audit must inform the audit committee about this divergence.

                Added: April 2018

            • Capital Adequacy and Liquidity

              • HC-6.5.35

                The internal audit must review the bank's system for identifying and measuring its regulatory capital and assessing the adequacy of its capital resources in relation to the bank's risk exposures and established minimum ratios.

                Added: April 2018

              • HC-6.5.36

                Internal audit must review management's process for stress testing its capital levels.

                Added: April 2018

              • HC-6.5.37

                Internal audit must review the effectiveness of the bank's systems and processes for measuring and monitoring its liquidity positions in relation to its risk profile, external environment, and minimum regulatory requirements including the requirement set out in Paragraph CA-1.3.4.

                Added: April 2018

            • Regulatory and Internal Reporting

              • HC-6.5.38

                The internal audit function must regularly evaluate the effectiveness of the process by which the risk and reporting functions interact to produce timely, accurate, reliable and relevant reports for both internal management and the CBB. Such reports include, but not limited to, the PIR and public disclosure requirements included in the CBB Rulebook, Module PD.

                Added: April 2018

            • Compliance

              • HC-6.5.39

                The internal audit function must periodically review the scope of the activities of the compliance function using the risk-based approach. The audit of the compliance function must include an assessment of how effectively it fulfils its responsibilities.

                Added: April 2018

            • Finance

              • HC-6.5.40

                The internal audit function must periodically review the controls over the bank's finance function using the risk-based approach.

                Added: April 2018

              • HC-6.5.41

                The internal audit function must devote sufficient resources to evaluate the valuation control environment, availability and reliability of information or evidence used in the valuation process and the reliability of estimated fair values. This is achieved through reviewing the independent price verification processes and testing valuations of significant transactions.

                Added: April 2018

              • HC-6.5.42

                The internal audit function must, as a minimum, also include the following aspects in its scope:

                (a) The organisation and mandate of the finance function;
                (b) The adequacy and integrity of underlying financial data and finance systems and processes for completely identifying, capturing, measuring and reporting key data such as profit or loss, valuations of financial instruments and impairment allowances;
                (c) The approval and maintenance of pricing models including verification of the consistency, timeliness, independence and reliability of data sources used in such models;
                (d) Controls in place to prevent and detect trading irregularities;
                (e) Balance sheet controls including key reconciliations performed and actions taken (e.g. adjustments).
                Added: April 2018

            • Permanency of the Internal Audit Function

              • HC-6.5.43

                The internal audit function must be structured consistent with

                Paragraphs HC-6.5.61 to HC-6.5.65. Senior management and the board must ensure that the internal audit function is permanent and commensurate with the size, the nature and complexity of the bank's operations.

                Added: April 2018

              • HC-6.5.44

                Where the head of internal audit function ceases to act in this capacity, the CBB will meet with him/her to discuss the reasons.

                Added: April 2018

            • Responsibilities of the Board of Directors and Senior Management

              • HC-6.5.45

                Conventional bank licensees board of directors must ensure that senior management establishes and maintains an adequate, effective and efficient internal control system (see HC-1.2.3(c)) and accordingly, the board must support the internal audit function in discharging its duties effectively.

                Added: April 2018

              • HC-6.5.46

                The board of directors must review at least annually, the effectiveness and efficiency of the internal control system based, in part, on information provided by the internal audit function (see HC-1.2.10).

                Added: April 2018

              • HC-6.5.47

                The board of directors, its audit committee and senior management must promote a strong internal control environment supported and assessed by a sound internal audit function.

                Added: April 2018

              • HC-6.5.48

                As part of their oversight responsibilities, the audit committee must review the performance of the internal audit function.

                Added: April 2018

              • HC-6.5.49

                Every five years, the audit committee must commission an independent external quality assurance review of the internal audit function.

                Added: April 2018

              • HC-6.5.50

                Senior management must inform the internal audit function of new developments, initiatives, projects, products and operational changes.

                Added: April 2018

              • HC-6.5.51

                Senior management must ensure that all internal audit findings and recommendations are resolved within six months for high risk/critical issues and 12 months for any other issues from the issue date of the subject internal audit report.

                Added: April 2018

              • HC-6.5.52

                Senior management must ensure that the head of internal audit has the necessary resources, financial and otherwise, available to carry out his or her duties commensurate with the annual internal audit plan, scope and budget approved by the audit committee.

                Added: April 2018

            • Responsibilities of the Audit Committee in relation to the Internal Audit Function

              • HC-6.5.53

                The audit committee must oversee the bank's internal audit function (see also Paragraph HC-3.2.3).

                Added: April 2018

              • HC-6.5.54

                The bank's audit committee and the internal audit function must develop and maintain their own tools to assess the quality of the internal audit function.

                Added: April 2018

              • HC-6.5.55

                The audit committee must ensure that the internal audit function is able to discharge its responsibilities in an independent manner, consistent with Paragraph HC-6.5.8. It must review and approve the audit plan, its scope, and the budget of the internal audit function. It must also review audit reports and ensure that senior management is taking necessary and timely corrective actions to address control weaknesses, compliance issues with policies, laws and regulations, and other concerns identified and reported by the internal audit function.

                Added: April 2018

            • Management of the Internal Audit Function

              • HC-6.5.56

                The head of the internal audit function must ensure that the function complies with The Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing.

                Added: April 2018

              • HC-6.5.57

                The audit committee must ensure that the head of the internal audit function is a person of integrity. This means that he or she will be able to perform his or her work with honesty, diligence and responsibility. It also implies that this person observes the law and has not been a party to any illegal activity. The head of internal audit must also ensure that the members of internal audit staff are persons of integrity.

                Added: April 2018

            • Reporting Lines of the Internal Audit Function

              • HC-6.5.58

                The internal audit function must be accountable to the audit committee, on all matters related to the performance of its mandate as described in the internal audit charter. It must also promptly inform the CEO and other related Heads of Functions about its findings.

                Added: April 2018

              • HC-6.5.59

                The internal audit function must inform senior management of all significant findings so that timely corrective actions can be taken. Subsequently, the internal audit function must follow up with senior management on the outcome of these corrective measures. The head of the internal audit function must quarterly report to the audit committee, the status of pending findings.

                Added: April 2018

            • The Relationship between the Internal Audit, Compliance and Risk Management Functions

              • HC-6.5.60

                The relationship between a bank's business units, the support functions and the internal audit function can be explained using the three lines of defence model. The business units are the first line of defence. They undertake the management of risks within assigned limits of risk exposure and are responsible and accountable for identifying, assessing and controlling the risks of their business. The second line of defence includes the support functions, such as risk management, compliance, legal, human resources, finance, operations, and technology. Each of these functions, in close relationship with the business units, ensures that risks in the business units have been appropriately identified and managed. The business support functions work closely to help define strategy, implement bank policies and procedures, and collect information to create a bank-wide view of risks. The third line of defence is the internal audit function that independently assesses the effectiveness of the controls over the processes created in the first and second lines of defence and provides assurance on these processes. The responsibility for internal control does not transfer from one line of defence to the next line.

                Added: April 2018

            • Internal Audit within a Group or Holding Company Structure

              • HC-6.5.61

                The internal auditors who perform the internal audit work at the bank must report to the bank's audit committee, or its equivalent, and to the group or holding company's head of internal audit.

                Added: April 2018

              • HC-6.5.62

                To facilitate a consistent approach to internal audit across all the banks within a banking organisation, the board of directors of each bank within a banking group or holding company structure should ensure that either:

                (a) The bank has its own internal audit function, which should be accountable to the bank's board and should report to the banking group or holding company's head of internal audit; or
                (b) The banking group or holding company's internal audit function performs internal audit activities of sufficient scope at the bank to enable the board to satisfy its fiduciary and legal responsibilities.
                Added: April 2018

              • HC-6.5.63

                The board of directors and senior management of the parent bank in a banking group must ensure that an adequate and effective internal audit function is established across the banking organisation and must ensure that internal audit policies and practices are appropriate to the structure, business activities and risks of all of the components of the group or holding company.

                Added: April 2018

              • HC-6.5.64

                The head of internal audit at the level of the parent bank must define the group or holding company's internal audit strategy, determine the organisation of the internal audit function both at the parent and subsidiary bank levels (in consultation with these entities' respective audit committees and in accordance with local laws) and formulate the internal audit principles, which include the audit methodology and quality assurance measures.

                Added: April 2018

              • HC-6.5.65

                The group or holding company's internal audit function must determine the audit scope for the banking organisation. In doing so, it must comply with local legal and regulatory provisions and incorporate local knowledge and experience.

                Added: April 2018

            • Outsourcing of Internal Audit Activities

              • HC-6.5.66

                Regardless of whether internal audit activities are outsourced, the board of directors remains ultimately responsible for the internal audit function.

                Added: April 2018

              • HC-6.5.67

                The head of internal audit/coordinator must maintain adequate oversight and ensure that any outsourcing providers comply with the principles of the bank's internal audit charter.

                Added: April 2018

              • HC-6.5.68

                To preserve independence, the head of internal audit/coordinator must ensure that the outsourcing provider has not been previously engaged in a consulting engagement in the same area within the bank unless a one year "cooling-off" period has elapsed. Subsequently, those experts who participated in an internal audit engagement must not provide consulting services to a function of the bank they have audited within the previous 12 months. Additionally, banks must not outsource internal audit activities to their own external audit firm (see OM-3).

                Added: April 2018

            • Communication between the CBB and the Internal Audit Function

              • HC-6.5.69

                The bank's internal auditor must have formal regular communication with the CBB to (i) discuss the risk areas identified, (ii) understand the risk mitigation measures taken by the bank, and (iii) monitor the bank's response to weaknesses identified.

                Added: April 2018

              • HC-6.5.70

                At least two weeks prior to the prudential meeting date, all internal audit reports issued since the last prudential meeting must be submitted to the CBB supervisory point of contact.

                Added: April 2018

          • HC-6.6 HC-6.6 Risk Management

            • Bank-wide Risk Management Framework

              • HC-6.6.1

                Conventional bank licensees must establish a sound risk management framework commensurate with the bank's size, complexity and risk profile. A risk management framework must have the following key features:

                (a) active Board and senior management oversight;
                (b) independent risk management function;
                (c) a Board driven sound risk management culture that is established throughout the bank;
                (d) appropriate policy, procedures and limits;
                (e) comprehensive and timely identification, measurement, mitigation, controlling, monitoring and reporting of risks;
                (f) appropriate management information systems ('MIS') at a business and bank-wide level; and
                (g) comprehensive internal controls.
                Added: July 2018

              • HC-6.6.2

                More specifically, the risk management framework generally encompasses the process of:

                (a) developing and implementing the enterprise-wide risk governance framework, subject to the review and approval of the board, which includes the bank's risk culture, risk appetite and risk limits;
                (b) identifying key risks to the bank including material individual, aggregate and emerging risks;
                (c) assessing the key risks and measuring the bank's exposures to them;
                (d) ongoing monitoring and assessing of the risk taking activities, decisions and risk exposures in line with the board-approved risk strategy, risk appetite, risk limits and determining the corresponding capital or liquidity needs (i.e. capital planning) on an ongoing basis;
                (e) reporting to senior management, and the board or risk committee as appropriate, on all the items noted in this Paragraph including but not limited to proposing appropriate risk-mitigating actions;
                (f) establishing an early warning or trigger system for breaches of the bank's risk appetite or limits; and
                (g) influencing and, when necessary, challenging decisions that give rise to material risk.
                Added: July 2018

              • HC-6.6.2A

                Further to the requirement in Paragraph HC-B.1.2, branches of foreign bank licensees must demonstrate that the activities of the Bahrain branch are subject to appropriate risk management oversight commensurate with the size, complexity, nature and the risk profile of the branch.

                Added: October 2019

              • HC-6.6.3

                Senior management must establish a risk management process that is not limited to credit, market, Interest rate risk in the banking book (IRRBB), liquidity and operational risks, but which incorporates all material risks. This includes reputational and strategic risks, as well as risks that do not appear to be significant in isolation, but when combined with other risks, could lead to material losses.

                Added: July 2018

            • Independent Risk Management Function and Chief Risk Officer

              • HC-6.6.4

                All Conventional bank licensees must establish an independent Risk Management function and appoint a head of risk management function, referred to as Chief Risk Officer ('CRO') or any equivalent title. The function must be independent of the individual business lines and report directly to the Board of Directors or its Audit or Risk Committees and administratively to the Chief Executive Officer ('CEO'). The role of the CRO must be independent and distinct from other executive functions and business line responsibilities, and there must be no 'dual hatting' (i.e. the chief operating officer, CFO, chief auditor or other senior management personnel must not also serve as the CRO).

                Added: July 2018

              • HC-6.6.5

                For branches of foreign bank licensees, and where no local board of directors exists, all references in this Module to the board of directors should be interpreted as the Head Office/ Regional Office.

                Added: July 2018

              • HC-6.6.6

                [This Paragraph was deleted in October 2019].

                Deleted: October 2019
                Added: July 2018

              • HC-6.6.7

                Branches of foreign bank licensees operating in Bahrain have the choice of having an in-house risk management function in Bahrain or to outsource such role to their regional or Head offices.

                Amended: October 2019
                Added: July 2018

              • HC-6.6.8

                The CRO should have the ability to interpret and articulate risk in a clear and understandable manner and to effectively engage the board and management in constructive dialogue on key risk issues. The CRO should also not have any management or financial responsibility in respect of any operational business lines or revenue-generating functions. Interaction between the CRO and the board should occur regularly and be documented adequately. Non-executive board members should have the right to meet regularly — in the absence of senior management — with the CRO.

                Added: July 2018

              • HC-6.6.9

                The CRO has primary responsibility for overseeing the development and implementation of the bank's risk management framework. This includes the ongoing strengthening of risk management staff skills and enhancements to risk management systems, policies, processes, quantitative models and reports as necessary to ensure that the bank's risk management capabilities are sufficiently robust and effective to fully support its strategic objectives and all of its risk-taking activities. The CRO is responsible for supporting the board and the Risk Committee, as appropriate, in its engagement with and oversight of the development of the bank's risk strategy, risk appetite statement ('RAS') and for translating the risk appetite into a risk limits structure.

                Added: July 2018

              • HC-6.6.10

                The risk management function must have access to all business lines that have the potential to generate material risk to the Conventional bank licensee as well as to relevant risk-bearing subsidiaries.

                Added: July 2018

              • HC-6.6.11

                The CRO, together with management, must be actively engaged in monitoring performance relative to risk-taking and risk limit adherence. The CRO's responsibilities also include participating in key decision-making processes (e.g. strategic planning, capital and liquidity planning, new products and services development and compensation design and operation).

                Added: July 2018

              • HC-6.6.12

                The CRO must have sufficient organisational stature, authority, seniority within the organisation and necessary skills to oversee the Conventional bank licensee's risk management activities.

                Added: July 2018

              • HC-6.6.13

                Appointment, dismissal and other changes to the CRO position must be approved by the board or its Risk/ Audit Committee. If the CRO is removed from his or her position for any reason, this must be disclosed publicly. The bank must also discuss the reasons for such removal with the CBB. The CRO's performance, compensation and budget must be reviewed and approved by the board Remuneration Committee.

                Added: July 2018

            • Board Risk Committee

              • HC-6.6.14

                Further to HC-1.8.1, all Bahraini conventional bank licensees must establish a board risk committee composed of at least three independent directors. Such board risk committee must be responsible for supporting the board in its oversight and decisions related to the bank's risk management framework.

                Added: July 2018

              • HC-6.6.15

                The risk committee must meet the following requirements:

                (a) must be chaired by an independent director;
                (b) include a majority of members who are independent of day to day risk taking activities;
                (c) include members who have experience in risk management issues and practices;
                (d) develop a committee charter which among other matters include its role in the discussions of risk strategies, both at an aggregated basis and by type of risk and make recommendations to the board thereon, and on the risk appetite and risk limits;
                (e) review and revise as may be required, the bank's policies from a risk management perspective, at least every three years, unless there are material changes in the relevant Rulebook requirements or to the business conducted by the bank and / or its risk profile;
                (f) review and recommend the appointment or removal of Chief Risk Officer; and
                (g) oversee that the bank has in place processes to promote the bank's adherence to the approved risk policies.
                Added: July 2018

            • Role of Board and Senior Management

              • HC-6.6.16

                The Board must define the Conventional bank licensee's risk appetite and ensure that the bank's risk management framework is aligned with the bank's strategic, capital strategies and financial plans and compensation practices and includes detailed policy that sets specific bank-wide prudential limits on the bank's activities. The bank's risk appetite must be clearly conveyed through an RAS that can be easily understood by all relevant parties: the board itself, senior management and bank employees.

                Added: July 2018

              • HC-6.6.17

                The Conventional bank licensee's RAS must:

                (a) include both quantitative and qualitative considerations;
                (b) establish the individual and aggregate level and types of risk that the bank is willing to assume in advance of and in order to achieve its business activities within its risk capacity;
                (c) define the boundaries and business considerations in accordance with which the bank is expected to operate when pursuing the business strategy; and
                (d) be communicated effectively throughout the bank, linking it to daily operational decision-making and establishing the means to raise risk issues and strategic concerns across the bank.
                Added: July 2018

              • HC-6.6.18

                Developing and conveying the Conventional bank licensee's risk appetite is essential to reinforcing a strong risk culture. The risk governance framework should outline actions to be taken when stated risk limits are breached, including disciplinary actions for excessive risk-taking, escalation procedures and board of director notification.

                Added: July 2018

              • HC-6.6.19

                The development of an effective RAS should be driven by both top-down board leadership and bottom-up management involvement. While the definition of risk appetite may be initiated by senior management, successful implementation depends upon effective interactions between the board, senior management, risk management and operating businesses, including the chief financial officer (CFO).

                Added: July 2018

              • HC-6.6.20

                The Board must ensure that:

                (a) a sound risk management culture is established throughout the bank;
                (b) appropriate limits are established that are consistent with the bank's risk appetite, risk profile and capital strength, and that are understood by, and regularly communicated to, relevant staff;
                (c) policy and processes are developed for risk-taking, that are consistent with the Risk Management Strategy and the established risk appetite;
                (d) uncertainties attached to risk measurement are recognised; and
                (e) senior management is taking all necessary steps to monitor and control all material risks consistent with the approved strategies and risk appetite.
                Added: July 2018

              • HC-6.6.21

                The Board of Directors and senior management must possess sufficient knowledge of all major business lines to ensure that appropriate policy, controls and risk monitoring systems are implemented effectively. They must have the necessary expertise to understand the activities in which the Conventional bank licensee is involved — such as securitisation and off-balance sheet activities — and the associated risks. The Board and senior management must remain informed, on an on-going basis, about these risks as financial markets, risk management practices and the bank's activities evolve. In addition, the Board and senior management must ensure that accountability and lines of authority are clearly delineated.

                Added: July 2018

              • HC-6.6.22

                Before embarking on new lines of business or activities, the Board and senior management must identify and review the changes in risk profile arising from these potential new activities and ensure that the infrastructure and internal controls necessary to manage any related risks, are in place.

                Added: July 2018

              • HC-6.6.23

                Before embarking on new or complex products, senior management must identify and review the changes in risk profile arising from these potential new products and ensure that the infrastructure and internal controls necessary to manage any related risks, are in place.

                Added: July 2018

              • HC-6.6.24

                For purposes of paragraph HC-6.6.22 and HC-6.6.23, senior management must understand the underlying assumptions regarding accounting treatment, business models, valuation and risk management practices. In addition, senior management must evaluate the potential risk exposure if those assumptions fail.

                Added: July 2018

              • HC-6.6.25

                As part of the Board members annual training program, Conventional bank licensees must include training to enable Board members to better analyse risk and question strategic decisions, policy and transactions. Banks must also provide adequate training for all staff across the business units on risk management related matters.

                Added: July 2018

            • Policy, Procedures, Limits and Controls

              • HC-6.6.26

                A Conventional bank licensee's policy and procedures must provide specific guidance for the implementation of broad risk management strategies and must establish, where appropriate, internal limits for the various types of risk to which the bank may be exposed. These limits must consider the bank's role in the financial system and be defined in relation to the bank's capital, total assets, earnings or, where adequate measures exist, its overall risk level.

                Added: July 2018

              • HC-6.6.27

                A Conventional bank licensee's policy, procedures and limits must:

                (a) provide for adequate and timely identification, measurement, monitoring, control and mitigation of all risks, including the risks posed by its lending, investing, trading, securitisation, off-balance sheet, fiduciary and other significant activities at the business line and bank-wide levels;
                (b) ensure that the economic substance of a bank's risk exposures, including reputational risk and valuation uncertainty, are fully recognised and incorporated into the bank's risk management processes;
                (c) be consistent with the bank's stated goals and objectives, as well as its overall financial strength;
                (d) clearly delineate accountability and lines of authority across the bank's various business activities, and ensure there is a clear separation between business lines and the Risk Management function;
                (e) escalate and address breaches of internal position limits;
                (f) provide for the review of new businesses and products by bringing together all relevant risk management, control and business lines, to ensure that the bank is able to manage and control the activity, prior to it being initiated; and
                (g) include a schedule and process for reviewing the policy, procedures and limits, and for updating them as appropriate.
                Added: July 2018

            • Monitoring and Reporting of Risk

              • HC-6.6.28

                A Conventional bank licensee's MIS must provide the Board and senior management with timely and relevant information concerning their risk profile, in a clear and concise manner. This information must include all risk exposures, including those that are off-balance sheet. Senior management must understand the assumptions behind, and limitations inherent in, specific risk measures.

                Added: July 2018

              • HC-6.6.29

                Conventional bank licensees must establish appropriate risk management methodologies, tools and models and systems commensurate with the nature and complexity of their business.

                Added: July 2018

              • HC-6.6.30

                Where conventional bank licensees use models to measure components of risk, they must establish model governance frameworks including regulatory validation and testing.

                Added: July 2018

              • HC-6.6.31

                Conventional bank licensees must have information systems that are adequate (both under normal circumstances and in periods of stress) for measuring, assessing and reporting on the size, composition and quality of exposures on a bank-wide basis across all risk types, products, countries, region, etc. and counterparties. These reports must reflect the bank's risk profile, capital and liquidity needs, and are provided on a timely basis to the bank's Board and senior management. A bank's MIS must be capable of capturing limit breaches, and there must be procedures in place to promptly report such breaches to senior management, as well as to ensure that the appropriate follow-up actions are taken.

                Added: July 2018

              • HC-6.6.32

                The CRO must consistently remind staff, through a regular process, under the sponsorship of the CEO, of the risk management requirements and enhance a common understanding of these requirements across the bank in order to create a culture of risk awareness.

                Added: July 2018

            • Independent Review

              • HC-6.6.33

                Conventional bank licensees must ensure that their risk management frameworks are subject to a comprehensive independent review by a third-party consultant, other than their external auditors:

                (a) Upon first implementation of a new or revised module on specific risk management requirements;
                (b) When there are material changes to certain Rulebook requirements and the CBB requires such a review;
                (c) When there are material changes to the business conducted by the bank or its risk profile and the CBB requires such a review; or
                (d) In case of a major failure of controls or major adverse changes in relevant business environment and the CBB requires such a review.
                Amended: January 2022
                Added: July 2018

              • HC-6.6.34

                With regards to HC-6.6.33(a), the relevant Modules are the following:

                (a) Module IC;
                (b) Module CA;
                (c) Module DS;
                (d) Module CM;
                (e) Module OM;
                (f) Module ST;
                (g) Module LM; and
                (h) Module RR.
                Amended: January 2022
                Added: July 2018

              • HC-6.6.35

                Resources involved in the independent third-party review must be competent and appropriately trained. The independent third-party must not have been previously involved in the development, implementation and operation of the bank’s risk management framework.

                Added: January 2022

              • HC-6.6.36

                The independent review reports must be presented to the Board or a designated committee of the Board. The agreed action planning steps to remedy any material weaknesses must be documented. The independent report together with the action plan must be provided to the CBB within one month of the date of the report.

                Added: January 2022

        • HC-7 HC-7 Communication between Board and Shareholders

          • HC-7.1 HC-7.1 Principle

            • HC-7.1.1

              The conventional bank licensee must communicate with shareholders, encourage their participation, and respect their rights.

              October 2010

          • HC-7.2 HC-7.2 Conduct of Shareholders' Meetings

            • HC-7.2.1

              The board must observe both the letter and the intent of the Company Law's requirements for shareholder meetings. Among other things:

              (a) Notices of meetings must be honest, accurate and not misleading. They must clearly state and, where necessary, explain the nature of the business of the meeting;
              (b) Meetings must be held during normal business hours and at a place convenient for the greatest number of shareholders to attend;
              (c) Notices of meetings must encourage shareholders to attend shareholder meetings and, if not possible, to participate by proxy and must refer to procedures for appointing a proxy and for directing the proxy how to vote on a particular resolution. The proxy agreement must list the agenda items and must specify the vote (such as "yes," "no" or "abstain");
              (d) Notices must ensure that all material information and documentation is provided to shareholders on each agenda item for any shareholder meeting, including but not limited to any recommendations or dissents of directors;
              (e) The board must propose a separate resolution at any meeting on each substantially separate issue, so that unrelated issues are not "bundled" together;
              (f) In meetings where directors are to be elected or removed the board must ensure that each person is voted on separately, so that the shareholders can evaluate each person individually;
              (g) The chairman of the meeting must encourage questions from shareholders, including questions regarding the conventional bank licensee's corporate governance guidelines;
              (h) The minutes of the meeting must be made available to shareholders upon their request as soon as possible but not later than 30 days after the meeting; and
              (i) Disclosure of all material facts must be made to the shareholders by the Chairman prior to any vote by the shareholders.
              Amended: April 2011
              October 2010

            • HC-7.2.2

              The Bahraini conventional bank licensee should require all directors to attend and be available to answer questions from shareholders at any shareholder meeting and, in particular, ensure that the chairs of the audit, remuneration and nominating committees are ready to answer appropriate questions regarding matters within their committee's responsibility (it being understood that confidential and proprietary business information may be kept confidential).

              Amended: April 2016
              Added: October 2010

            • HC-7.2.3

              The Bahraini conventional bank licensee should require its external auditor to attend the annual shareholders' meeting and be available to answer shareholders' questions concerning the conduct and conclusions of the audit.

              Amended: April 2016
              Added: October 2010

            • HC-7.2.3A

              Bahraini conventional bank licensees must provide to the CBB, for its review and comment, at least 5 business days prior to communicating with the shareholders or publishing in the press, the draft agenda for any shareholders' meetings referred to in Paragraph HC-7.2.3C.

              Amended: July 2017
              Added: April 2016

            • HC-7.2.3B

              Bahraini conventional bank licensees must ensure that any agenda items to be discussed or presented during the course of meetings which require the CBB's prior approval, have received the necessary approval, prior to the meeting taking place.

              Added: April 2016

            • HC-7.2.3C

              The Bahraini conventional bank licensee must invite a representative of the CBB to attend any shareholders' meetings (i.e. ordinary and extraordinary general assembly) taking place. The invitation must be provided to the CBB at least 5 business days prior to the meeting taking place.

              Added: April 2016

            • HC-7.2.3D

              Within a maximum of 15 calendar days of any shareholders' meetings referred to in Paragraph HC-7.2.3C, the Bahraini conventional bank licensee must provide to the CBB a copy of the minutes of the meeting.

              Added: April 2016

            • HC-7.2.4

              The conventional bank licensee should maintain a website. The conventional bank licensee should dedicate a specific section of its website to describing shareholders' rights to participate and vote at each shareholders' meeting, and should post significant documents relating to meetings including the full text of notices and minutes. The conventional bank licensee may also consider establishing an electronic means for shareholders' communications including appointment of proxies. For confidential information, the conventional bank licensee should grant a controlled access to such information to its shareholders.

              Amended: April 2017
              October 2010

            • HC-7.2.5

              In notices of meetings at which directors are to be elected or removed the conventional bank licensee should ensure that:

              (a) Where the number of candidates exceeds the number of available seats, the notice of the meeting should explain the voting method by which the successful candidates will be selected and the method to be used for counting of votes; and
              (b) The notice of the meeting should present a factual and objective view of the candidates so that shareholders may make an informed decision on any appointment to the board.
              Amended: April 2012
              October 2010

          • HC-7.3 HC-7.3 Direct Shareholder Communication

            • HC-7.3.1

              The chairman of the board (and other directors as appropriate) must maintain continuing personal contact with controllers to solicit their views and understand their concerns. The chairman must ensure that the views of shareholders are communicated to the board as a whole. The chairman must discuss governance and strategy with controllers. Given the importance of market monitoring to enforce the "comply or explain" approach of this Module, the board should encourage investors, particularly institutional investors, to help in evaluating the conventional bank licensee's corporate governance (see also HC-1.2 and 1.3 for other duties of the Chairman).

              October 2010

          • HC-7.4 HC-7.4 Controllers

            • HC-7.4.1

              In conventional bank licensees with one or more controllers, the chairman and other directors must actively encourage the controllers to make a considered use of their position and to fully respect the rights of minority shareholders (see also HC-1.2 and 1.3 for other duties of the Chairman).

              October 2010

        • HC-8 HC-8 Corporate Governance Disclosure

          • HC-8.1 HC-8.1 Principle

            • HC-8.1.1

              The conventional bank licensee must disclose its corporate governance.

              October 2010

          • HC-8.2 HC-8.2 Disclosure under the Company Law and CBB Requirements

            • HC-8.2.1

              In each conventional bank licensee:

              (a) The board must adopt written corporate governance guidelines covering the matters stated in this Module and Module PD and other corporate governance matters deemed appropriate by the board. Such guidelines must include or refer to the principles and rules of Module HC;
              (b) The conventional bank licensee must publish the guidelines on its website;
              (c) At each annual shareholders' meeting the board must report on the conventional bank licensee's compliance with its guidelines and Module HC, and explain the extent if any to which it has varied them or believes that any variance or noncompliance was justified; and
              (d) At each annual shareholders' meeting the board must also report on further items listed in Module PD. Such information should be maintained on the conventional bank licensee's website or held at the conventional bank licensee's premises on behalf of the shareholders.
              Amended: April 2017
              October 2010

            • HC-8.2.2

              The CBB may issue a template as a guide for a conventional bank licensee's annual meeting corporate governance discussion.

              October 2010

            • Board's Responsibility for Disclosure

              • HC-8.2.3

                The Board must oversee the process of disclosure and communications with internal and external stakeholders. The Board must ensure that disclosures made by the bank are fair, transparent, comprehensive and timely and reflect the character of the bank and the nature, complexity and risks inherent in the bank's business activities. Disclosure policies must be reviewed for compliance with the Central Bank's disclosure requirements (see Chapter PD-1).

                October 2010

        • Appendix A Appendix A Audit Committee

          • Committee Duties

            The Committee's duties shall include those stated in Paragraph HC-3.2.1.

            October 2010

          • Committee Membership and Qualifications

            The Committee shall have at least three members. Such members must have no conflict of interest with any other duties they have for the conventional bank licensee.

            A majority of the members of the committee including the Chairman shall be independent directors.

            The CEO must not be a member of this committee.

            The committee members must have sufficient technical expertise to enable the committee to perform its functions effectively. Technical expertise means that members must have recent and relevant financial ability and experience, which includes:

            (a) An ability to read and understand corporate financial statements including a conventional bank licensee's balance sheet, income statement and cash flow statement and changes in shareholders' equity;
            (b) An understanding of the accounting principles which are applicable to the conventional bank licensee's financial statements;
            (c) Experience in evaluating financial statements that have a level of accounting complexity comparable to that which can be expected in the conventional bank licensee's business;
            (d) An understanding of internal controls and procedures for financial reporting; and
            (e) An understanding of the audit committee's controls and procedures for financial reporting.
            Amended: January 2012
            Amended: April 2011
            October 2010

          • Committee Duties and Responsibilities

            In serving those duties, the Committee shall:

            (a) Be responsible for the selection, appointment, remuneration, oversight and termination where appropriate of the external auditor, subject to ratification by the conventional bank licensee's board and shareholders. The external auditor shall report directly to the committee;
            (b) Make a determination at least once each year of the external auditor's independence, including:
            (i) Determining whether its performance of any non-audit services compromised its independence (the committee may establish a formal policy specifying the types of non-audit services which are permissible) and;
            (ii) Obtaining from the external auditor a written report listing any relationships between the external auditor and the conventional bank licensee or with any other person or entity that may compromise the auditor's independence;
            (c) Review and discuss with the external auditor the scope and results of its audit, any difficulties the auditor encountered including any restrictions on its access to requested information and any disagreements or difficulties encountered with management;
            (d) Review and discuss with management and the external auditor each annual and each quarterly financial statements of the conventional bank licensee including judgments made in connection with the financial statements;
            (e) Review and discuss and make recommendations regarding the selection, appointment and termination where appropriate of the head of internal audit and head of compliance and the budget allocated to the internal audit and compliance function, and monitor the responsiveness of management to the committee's recommendations and findings;
            (f) Review and discuss the activities, performance and adequacy of the conventional bank licensee's internal auditing and compliance personnel and procedures and its internal controls and compliance procedures, risk management systems, and any changes in those;
            (g) Oversee the conventional bank licensee's compliance with legal and regulatory requirements, codes and business practices, and ensure that the bank communicates with shareholders and relevant stakeholders (internal and external) openly and promptly, and with substance of compliance prevailing over form; and
            (h) Review and discuss possible improprieties in financial reporting or other matters, and ensure that arrangements are in place for independent investigation and follow-up regarding such matters;
            (i) The committee must monitor rotation arrangements for audit engagement partners. The audit committee must monitor the performance of the external auditor and the non-audit services provided by the external auditor; and
            (j) The review and supervision of the implementation of, enforcement of and adherence to the bank's code of conduct.
            Amended: October 2012
            Amended: April 2012
            Amended: April 2011
            October 2010

          • Committee Structure and Operations

            The committee shall elect one member as its chair.

            The committee shall meet at least four times a year. Its meetings may be scheduled in conjunction with regularly-scheduled meetings of the entire board.

            The committee may meet without any other director or any officer of the conventional bank licensee present. Only the committee may decide if a non-member of the committee should attend a particular meeting or a particular agenda item. Non-members who are not directors of the conventional bank licensee may attend to provide their expertise, but may not vote. It is expected that the external auditor's lead representative will be invited to attend regularly but that this shall always be subject to the committee's decision.

            The committee must meet with the external auditor at least twice per year, and at least once per year in the absence of any members of executive management.

            The committee shall report regularly to the full board on its activities.

            October 2010

          • Committee Resources and Authority

            The committee shall have the resources and authority necessary for its duties and responsibilities, including the authority to select, retain, terminate and approve the fees of outside legal, accounting or other advisors as it deems necessary or appropriate, without seeking the approval of the board or management. The conventional bank licensee shall provide appropriate funding for the compensation of any such persons.

            October 2010

          • Committee Performance Evaluation

            The committee shall prepare and review with the board an annual performance evaluation of the committee, which shall compare the committee's performance with the above requirements and shall recommend to the board any improvements deemed necessary or desirable to the committee's charter. The report must be in the form of a written report provided at any regularly scheduled board meeting.

            Amended: July 2012
            Amended: April 2012
            October 2010

        • Appendix B Appendix B Nominating Committee

          • Committee Duties

            The committee's duties shall include those stated in Paragraph HC-4.2.1.

            October 2010

          • Committee Duties and Responsibilities

            In serving those duties with respect to board membership:

            (a) The committee shall make recommendations to the board from time to time as to changes the committee believes to be desirable to the size of the board or any committee of the board;
            (b) Whenever a vacancy arises (including a vacancy resulting from an increase in board size), the committee shall recommend to the board a person to fill the vacancy either through appointment by the board or through shareholder election;
            (c) In performing the above responsibilities, the committee shall consider any criteria approved by the board and such other factors as it deems appropriate. These may include judgment, specific skills, experience with other comparable businesses, the relation of a candidate's experience with that of other board members, and other factors;
            (d) The committee shall also consider all candidates for board membership recommended by the shareholders and any candidates proposed by management;
            (e) The committee shall identify board members qualified to fill vacancies on any committee of the board and recommend to the board that such person appoint the identified person(s) to such committee; and
            (f) Assuring that plans are in place for orderly succession of senior management.

            In serving those purposes with respect to officers the committee shall:

            (a) Make recommendations to the board from time to time as to changes the committee believes to be desirable in the structure and job descriptions of the officers including the CEO, and prepare terms of reference for each vacancy stating the job responsibilities, qualifications needed and other relevant matters including integrity, technical and managerial competence, and experience;
            (b) Overseeing succession planning and replacing key executives when necessary, and ensuring appropriate resources are available, and minimising reliance on key individuals;
            (c) Design a plan for succession and replacement of officers including replacement in the event of an emergency or other unforeseeable vacancy; and
            (d) If charged with responsibility with respect to conventional bank licensee's corporate governance guidelines, the committee shall develop and recommend to the board corporate governance guidelines, and review those guidelines at least once a year.
            Amended: April 2011
            October 2010

          • Committee Structure and Operations

            The committee shall elect one member as its chair.

            The committee shall meet at least twice a year. Its meetings may be scheduled in conjunction with regularly-scheduled meetings of the entire board.

            October 2010

          • Committee Resources and Authority

            The committee shall have the resources and authority necessary for its duties and responsibilities, including the authority to select, retain, terminate and approve the fees of outside legal, consulting or search firms used to identify candidates, without seeking the approval of the board or management. The conventional bank licensee shall provide appropriate funding for the compensation of any such persons.

            October 2010

          • Performance Evaluation

            The committee shall preview and review with the board an annual performance evaluation of the committee, which shall compare the committee's performance with the above requirements and shall recommend to the board any improvements deemed necessary or desirable to the committee's charter. The report must be in the form of a written report provided at any regularly scheduled board meeting.

            Amended: July 2012
            Amended: April 2012
            October 2010

        • Appendix C Appendix C Remuneration Committee

          • Committee Duties

            The committee's duties shall include those stated in Paragraph HC-5.2.1.

            Amended: January 2011
            October 2010

          • Committee Duties and Responsibilities

            In serving those duties the committee shall consider, and make specific recommendations to the board on, both remuneration policy and individual remuneration packages for the approved persons and other material risk-takers as well as the total variable remuneration to be distributed. This remuneration policy should cover at least:

            a) The following components:
            i) Salary;
            ii) The specific terms of performance-related plans including any stock compensation, stock options, or other deferred-benefit compensation;
            iii) Pension plans;
            iv) Fringe benefits such as non-salary perks; and
            v) Termination policies including any severance payment policies; and
            b) Policy guidelines to be used for determining remuneration in individual cases, including on:
            i) The relative importance of each component noted in a) above;
            ii) Specific criteria to be used in evaluating a senior manager's performance.

            The committee shall evaluate the approved persons and material risk-takers' performance in light of the bank's corporate goals, agreed strategy, objectives and business plans and may consider the conventional bank licensee's performance and shareholder return relative to comparable conventional bank licensees, the value of awards to CEOs at comparable conventional bank licensees, and awards to the CEO in past years.

            The committee should also be responsible for retaining and overseeing outside consultants or firms for the purpose of determining approved persons and material risk-takers' remuneration, administering remuneration plans, or related matters.

            Amended: January 2014
            October 2010

          • Committee Structure and Operations

            The committee shall elect one member as its chair.

            The committee shall meet at least twice a year. Its meetings may be scheduled in conjunction with regularly-scheduled meetings of the entire board.

            October 2010

          • Committee Resources and Authority

            The committee shall have the resources and authority necessary for its duties and responsibilities, including the authority to select, retain, terminate and approve the fees of outside legal, consulting or compensation firms used to evaluate the compensation of directors, the CEO or other approved persons, without seeking the approval of the board or management. The conventional bank licensee shall provide appropriate funding for the compensation of any such persons.

            October 2010

          • Performance Evaluation

            The committee shall preview and review with the board an annual performance evaluation of the committee, which shall compare the committee's performance with the above requirements and shall recommend to the board any improvements deemed necessary or desirable to the committee's charter. The report must be in the form of a written report provided at any regularly scheduled board meeting.

            Amended: July 2012
            Amended: April 2012
            October 2010

      • AU AU Auditors and Accounting Standards

        • AU-A AU-A Introduction

          • AU-A.1 AU-A.1 Purpose

            • AU-A.1.1

              This Module presents requirements that have to be met by conventional bank licensees with respect to the appointment of external auditors. This Module also sets out certain obligations that external auditors have to comply with, as a condition of their appointment by conventional bank licensees.

            • AU-A.1.2

              This Module is issued under the powers given the BMA under Article 41 of the BMA Law 1973. It supplements Article 79 of the BMA Law, which requires licensees to appoint an external auditor acceptable to the BMA.

          • AU-A.2 AU-A.2 Module History

            • Evolution of Module

              • AU-A.2.1

                This Module was first issued as Module AU (Audit Firms) in July 2004, as part of the first release of Volume 1 (conventional banks) of the BMA Rulebook. It was subsequently reissued in full in July 2006 (and renamed "Auditors and Accounting Standards").

              • AU-A.2.2

                The reissued Module was one of several Modules modified to reflect the introduction of the BMA's new integrated license framework. Although the new framework did not change the substance of the requirements contained in this Module, the Module was re-issued in order to simplify its drafting and layout and align it with equivalent Modules in other Volumes of the BMA Rulebook.

              • AU-A.2.3

                This Module is dated July 2006. Pages that are subsequently changed in this Module are updated with the end-calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

              • AU-A.2.4

                A list of changes made to this Module is provided below:

                Module Reference Change Date Description of Changes
                Whole Module July 2006 Module renamed as Module AU (Auditors and Accounting Standards). Text redrafted but substance of requirements left unchanged.
                AU-A.1 10/2007 New Rule AU-A.1.3 introduced, categorising this Module as a Directive.
                AU-1.2 10/2007 Rule AU-1.2.3 redrafted to clarify reporting obligation.
                AU-1.5 10/2007 Paragraphs AU-1.5.4 and AU-1.5.6 updated to reflect CBB Law requirements on auditor independence.
                Amended: October 2007

            • Superseded Requirements

              • AU-A.2.5

                This Module supersedes the following provisions contained in circulars or other regulatory instruments, issued prior to the introduction of Volume 1 (conventional banks) of the BMA Rulebook:

                Circular Ref. Date of Issue Module Ref. (July 2004 version) Circular Subject
                BC/5/82 5 Aug 1982 AU-1.1 Approval of Appointment of Auditors
                ODG/59/99 15 Jul 1999 AU-1.1–AU-1.2 Audit Partners of External Auditors and Reporting Accountants of Locally Incorporated Banks
                BC/3/02 13 Mar 2002 AU-1.3 Additional Public Disclosure Requirements Amended Version — 2002
                BC/12/01
                (partial)
                26 Nov 2001 AU-1.4 The Monitoring and Control of Large Exposures of Banks Licensed by the Agency
                ODG/162/03
                (partial)
                21 May 2003 AU-2.2 Outsourcing
                BS/9/03
                (partial)
                14 Sep 2003 AU-1.4 Operational Risk Management
                BC/1/97 12 Feb 1997 AU-1.5 Request for Approval for Dividend Distribution
                14/86 19 Jun 1986 AU-2.1 Auditors' Relationship with Supervisors
                BC/2/99 21 Feb 1999 AU-3.2 Public Disclosure
                BMA/751/93
                (partial)
                8 Jul 1993 AU-3.2 Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange.
                BC/1/99 22 Feb 1999 AU-3.3 Enhancing Bank Transparency
                BC/07/02 26 Jun 2002 AU-3.4 Review of PIR by External Auditors
                ODG/50/98
                (partial)
                11 Sep 1998 AU-3.5 Market Risk Capital Regulations
                EDBC/6/01
                (partial)
                14 Oct 2001 AU-3.6 Money laundering Regulation
                BC/3/02 13 Mar 2002 AU-3.7 Additional Public Disclosure Requirements Amended Version — 2002
                BC/7/01
                (partial)
                23 Oct 2001 AU-3.7 Audited Financial Statement of Locally Incorporated Banks for the Year Ending 31 December 2001 and Subsequent Years.
                BC/8/01
                (partial)
                23 Oct 2001 AU-3.7 Audited Financial Statement of Branches of Foreign Banks for the Year Ending 31 December 2001 and Subsequent Years.
                BC/6/97 21 Apr 1997 AU-4 Reporting Accountants

        • AU-B AU-B Scope of Application

          • AU-B.1 AU-B.1 Conventional bank Licensees

            • AU-B.1.1

              The contents of this Module — unless otherwise stated — apply to all conventional bank licensees.

            • AU-B.1.2

              The contents of Chapters AU-1 to AU-4 apply to both Bahraini conventional bank licensees and overseas conventional bank licensees.

          • AU-B.2 AU-B.2 Auditors

            • AU-B.2.1

              Certain requirements in this Module extend to auditors, by virtue of their appointment by conventional bank licensees. Auditors appointed by conventional bank licensees must be independent (cf. Sections AU-1.4 and AU-1.5). Auditors who resign or are otherwise removed from office must inform the BMA in writing of the reasons for the termination of their appointment (cf. Sections AU-1.2). Other requirements are contained in Sections AU-1.3 (Audit partner rotation) and AU-3 (Auditor reports).

        • AU-1 AU-1 Auditor Requirements

          • AU-1.1 AU-1.1 Appointment of Auditors

            • AU-1.1.1

              Conventional bank licensees must obtain prior written approval from the BMA before appointing or re-appointing their auditors.

            • AU-1.1.2

              As the appointment of auditors normally takes place during the course of the firm's annual general meeting, conventional bank licensees should notify the BMA of the proposed agenda for the annual general meeting in advance of it being circulated to shareholders. The BMA's approval of the proposed auditors does not limit in any way shareholders' rights to subsequently reject the Board's choice.

            • AU-1.1.3

              The BMA, in considering the proposed (re-) appointment of an auditor, takes into account the expertise, resources and reputation of the audit firm, relative to the size and complexity of the licensee. The BMA will also take into account the track record of the audit firm in auditing conventional bank licensees within Bahrain; the degree to which it has generally demonstrated independence from management in its audits; and the extent to which it has identified and alerted relevant persons of significant matters. Finally, the BMA will also consider the audit firm's compliance with applicable laws and regulations (including legislative Decree No. 26 of 1996; the Ministry of Industry and Commerce's Ministerial Resolution No. 6 of 1998; and relevant Bahrain Stock Exchange regulations).

            • AU-1.1.4

              In the case of overseas conventional bank licensees, the BMA will also take into account who acts as the auditors of the parent firm. As a general rule, the BMA does not favour different parts of a banking firm or group having different auditors.

          • AU-1.2 AU-1.2 Removal or Resignation of Auditors

            • AU-1.2.1

              Conventional bank licensees must notify the BMA as soon as they intend to remove their auditors, with an explanation of their decision, or as soon as their auditors resign.

            • AU-1.2.2

              Conventional bank licensees must ensure that a replacement auditor is appointed (subject to BMA approval as per Section AU-1.1), as soon as reasonably practicable after a vacancy occurs, but no later than three months.

            • AU-1.2.3

              An auditor who resigns or is otherwise removed from the office of auditor must, within 30 days of the resignation or removal, write to the BMA setting out the reasons for the resignation or removal.

          • AU-1.3 AU-1.3 Audit Partner Rotation

            • AU-1.3.1

              Unless otherwise exempted by the BMA, conventional bank licensees must ensure that the audit partner responsible for their audit does not undertake that function more than five years in succession.

            • AU-1.3.2

              Conventional bank licensees must notify the BMA of any change in audit partner.

          • AU-1.4 AU-1.4 Auditor Independence

            • AU-1.4.1

              Before a conventional bank licensee appoints an auditor, it must take reasonable steps to ensure that the auditor has the required skill, resources and experience to carry out the audit properly, and is independent of the licensee.

            • AU-1.4.2

              For an auditor to be considered independent, it must, amongst other things, comply with the restrictions in Section AU-1.5.

            • AU-1.4.3

              If a conventional bank licensee becomes aware at any time that its auditor is not independent, it must take reasonable steps to remedy the matter and notify the BMA of the fact.

            • AU-1.4.4

              If in the opinion of the BMA, independence has not been achieved within a reasonable timeframe, then the BMA may require the appointment of a new auditor.

          • AU-1.5 AU-1.5 Licensee/Auditor Restrictions

            • Financial Transactions with Auditors

              • AU-1.5.1

                Conventional bank licensees must not lend to their auditors, nor enter into any contracts of professional indemnity insurance with their auditors.

            • Outsourcing to Auditors

              • AU-1.5.2

                Section OM-2.7 generally prohibits conventional bank licensees from outsourcing their internal audit function to the same firm that acts as their external auditors. However, the BMA may allow short-term outsourcing of internal audit operations to a conventional bank licensee's external auditor, to meet unexpected urgent or short-term needs (for instance, on account of staff resignation or illness). Any such arrangement will normally be limited to a maximum period of one year and is subject to BMA prior approval.

            • Other Relationships

              • AU-1.5.3

                Conventional bank licensees and their auditors must comply with the restrictions contained in Article 217(c) of the Commercial Companies Law (Legislative Decree No. (21) of 2001).

              • AU-1.5.4

                Article 217(c) prohibits an auditor from (i) being the chairman or a member of the Board of Directors of the company he/she audits; (ii) holding any managerial position in the company he/she audits; and (iii) acquiring any shares in the company he/she audits, or selling any such shares he/she may already own, during the period of his audit. Furthermore, the auditor must not be a relative (up to the second degree) of a person assuming management or accounting duties in the company.

              • AU-1.5.5

                The restriction in Paragraph AU-1.5.3 applies to overseas conventional bank licensees as well as Bahraini conventional bank licensees.

              • AU-1.5.6

                A partner, Director or manager on the engagement team of auditing a conventional bank licensee may not serve on the Board or in a controlled function of the licensee, for two years following the end of their involvement in the audit, without prior authorisation of the BMA.

              • AU-1.5.7

                Chapter HC-2 sets out the BMA's "controlled functions" requirements.

            • Definition of "Auditor"

              • AU-1.5.8

                For the purposes of Section AU-1.5, "auditor" means the partners, Directors and managers on the engagement team responsible for the audit of the conventional bank licensee.

        • AU-2 AU-2 Access

          • AU-2.1 AU-2.1 BMA Access to Auditors

            • AU-2.1.1

              Conventional bank licensees must waive any duty of confidentiality on the part of their auditors, such that their auditors may report to the BMA any concerns held regarding material failures by the conventional bank licensee to comply with BMA requirements.

            • AU-2.1.2

              The BMA may, as part of its on-going supervision of conventional bank licensees, request meetings with a licensee's auditors. If necessary, the BMA may direct that the meeting be held without the presence of the licensee's management or Directors.

          • AU-2.2 AU-2.2 Auditor Access to Outsourcing Providers

            • AU-2.2.1

              Rule OM-2.5.1(c) on outsourcing agreements between conventional bank licensees and outsourcing providers requires licensees to ensure that their internal and external auditors have timely access to any relevant information they may require to fulfil their responsibilities. Such access must allow them to conduct on-site examinations of the outsourcing provider, if required.

        • AU-3 AU-3 Auditor Reports

          • AU-3.1 AU-3.1 Review of Quarterly Prudential Information Returns

            • AU-3.1.1

              Conventional bank licensees must arrange for their auditors to review the licensee's quarterly Prudential Information Returns to the BMA, prior to their submission, unless otherwise exempted in writing by the BMA.

            • AU-3.1.2

              Conventional bank licensees are required to submit a quarterly Prudential Information Return (PIR). Conventional bank licensees may apply in writing to the BMA for an exemption from the requirement that the PIR be reviewed by the licensee's external auditors: this exemption would normally only be given where the licensee had established a track record of accurate and timely reporting, and there were no other supervisory issues of concern. Further details on the BMA's reporting and related requirements, including the precise scope of the auditor's review and attestation, are contained in Module BR (BMA Reporting).

          • AU-3.2 AU-3.2 Review of Financial Disclosures

            • AU-3.2.1

              Conventional bank licensees that are required to publish financial disclosures in accordance with Chapters PD-2 and PD-3 must arrange for their external auditors to review these prior to their publication, unless otherwise exempted in writing by the BMA.

            • AU-3.2.2

              Chapter PD-2 requires overseas conventional bank licensees operating as retail banks to publish on a semi-annual basis summary information on their balance sheet and profit and loss account, in the same format as their annual audited accounts. Chapter PD-3 requires all locally incorporated conventional bank licensees to publish quarterly financial statements, in accordance with International Accounting Standard 34 (Interim Financial Reporting).

          • AU-3.3 AU-3.3 Report on Compliance with Financial Crime Rules

            • AU-3.3.1

              Conventional bank licensees must arrange for their external auditors to report on the licensee's compliance with the requirements contained in Module FC (Financial Crime), at least once a year.

            • AU-3.3.2

              The report specified in Rule AU-3.3.1 must be in the form agreed by the BMA, and must be submitted to the BMA within four months of the licensee's financial year-end.

            • AU-3.3.3

              The context to the above requirement can be found in Section FC-4.3.

          • AU-3.4 AU-3.4 Review and Validation of internal models

            • AU-3.4.1

              Conventional bank licensees seeking BMA approval for their use of internal models for the calculation of regulatory capital requirements, must arrange for their external auditors to validate the soundness of the model concerned. This external review must be undertaken at least once a year, unless otherwise exempted in writing by the BMA.

            • AU-3.4.2

              Before granting its approval for Bahraini conventional bank licensees to use internal models for the measurement of market risk in the context of regulatory capital calculations, the BMA requires such models to be validated by both the internal and external auditors of the bank (see Chapter CA-9). The Agency will review the validation procedures performed by the internal and external auditors, and may independently carry out further validation procedures.

            • AU-3.4.3

              The specific requirements and procedures for external validation of models are contained in Section CA-9.8.

            • AU-3.4.4

              Exemptions from the external validation requirement are normally only given where a track record of satisfactory validations has been developed over several years, and where the BMA has no other material supervisory concerns regarding the licensee concerned.

        • AU-4 AU-4 Accounting Standards

          • AU-4.1 AU-4.1 General Requirements

            • AU-4.1.1

              Conventional bank licensees must comply with International Financial Reporting Standards / International Accounting Standards.

            • AU-4.1.2

              Overseas conventional bank licensees that do not, at the parent company level, apply IFRS/IAS are still required under Paragraph AU-4.1.1 to produce pro-forma accounts for the Bahrain branch in conformity with these standards. Where this requirement is difficult to implement, the Bahraini conventional bank licensee should contact the BMA in order to agree a solution.

            • AU-4.1.3

              Paragraph AU-4.1.1 requires conventional bank licensees that maintain Islamic 'windows' or units to apply relevant AAOIFI Financial Accounting Standards, depending on the type of Islamic finance contracts entered into. In particular, attention is drawn to AAOIFI Financial Accounting Standard 18, "Islamic Financial Services Offered by Conventional Financial Institutions".

      • GR GR General Requirements

        • GR-A GR-A Introduction

          • GR-A.1 GR-A.1 Purpose

            • GR-A.1.1

              The General Requirements Module presents a variety of different requirements that are not extensive enough to warrant their own stand-alone Module, but for the most part are generally applicable. These include general requirements on books and records; on the use of corporate and trade names; and on controllers. Each set of requirements is contained in its own Chapter: a table listing these and their application to licensees is given in Chapter GR-B.

          • GR-A.2 GR-A.2 Module History

            • Evolution of Module

              • GR-A.2.1

                This Module was first issued in July 2006, with immediate effect, as a new Module aimed at aligning the structure and contents of Volume 1 with other Volumes of the BMA Rulebook. It is dated July 2006. All subsequent changes to this Module are annotated with the end-calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

              • GR-A.2.2

                The July 2006 version of Module GR does not introduce new requirements. Rather, it incorporates the record keeping requirements previously contained in Chapter LR-6 of the Licensing and Authorisation Requirement Module (reissued, in July 2006, as the Licensing Module). It also incorporates the requirements relating to controllers, previously contained in Chapter HC-2 of the High-Level Controls Module. Finally, Module GR expands on certain requirements that were previously contained only in the BMA Law 1973, such as the requirement to seek BMA approval for use of a corporate or trading name.

              • GR-A.2.3

                A list of recent changes made to this Module is detailed in the table below:

                Module Ref. Change Date Description of Changes
                     
                     
                     
                     

            • Superseded Requirements

              • GR-A.2.4

                This Module supersedes:

                Circular / other reference Provision Subject
                Module LR (April 2006 version) LR-6: Record Keeping Record keeping requirements were moved to GR-1, and edited down to simplify and avoid duplication of record keeping requirements contained in Module FC.
                Module HC (April 2006 version) HC-2: 'Fit and Proper Requirement' Requirements relating to controllers were moved to GR-5. Remaining 'fit and proper' elements regarding Directors and key employees of licensees were retained in HC-2, in a re-drafted form.
                     

        • GR-B GR-B Scope of Application

          • GR-B.1 GR-B.1 Conventional Bank Licensees

            • License categories

              • GR-B.1.1

                The requirements in Module GR (General Requirements) apply to both retail and wholesale conventional bank licensees.

            • Bahraini and overseas conventional bank licensees

              • GR-B.1.2

                The scope of application of Module GR (General Requirements) is as follows:

                Chapter Bahraini bank licensees Overseas bank licensees
                GR-1 GR-1.1 and GR-1.3 apply to the whole bank; GR-1.2 applies to business booked in Bahrain only. Applies to the Bahrain branch only.
                GR-2 Applies to the whole bank. Applies to the Bahrain branch only.
                GR-3 Applies to the whole bank. Doesn't apply.
                GR-4 Applies to the whole bank. Applies to the Bahrain branch only.
                GR-5 Applies to the whole bank. Applies to the whole bank.
                GR-6 [This chapter has been left blank.] [This chapter has been left blank.]
                GR-7 Applies to the whole bank. Applies to the Bahrain branch only.

              • GR-B.1.3

                In the case of Bahraini bank licensees, certain requirements apply to the whole bank, irrespective of the location of its business; other requirements apply only in respect to business booked in Bahrain. In the case of overseas conventional bank licensees, the requirements of Module GR mostly only apply to business booked in the Bahrain branch.

        • GR-1 GR-1 Books and Records

          • GR-1.1 GR-1.1 General Requirements

            • GR-1.1.1

              The requirements in Section GR-1.1 apply to Bahraini conventional bank licensees, with respect to the business activities of the whole bank (whether booked in Bahrain or in a foreign branch). The requirements in Section GR-1.1 also apply to overseas conventional bank licensees, but only with respect to the business booked in their branch in Bahrain.

            • GR-1.1.2

              All conventional bank licensees must maintain books and records (whether in electronic or hard copy form) sufficient to produce financial statements and show a complete record of the business undertaken by a licensee. These records must be retained for at least the minimum period specified under Bahrain law.

            • GR-1.1.3

              GR-1.1.2 includes accounts, books, files and other records (e.g. trial balance, general ledger, nostro/vostro statements, reconciliations and list of counterparties). It also includes records that substantiate the value of the assets, liabilities and off-balance sheet activities of the licensee (e.g. client activity files and valuation documentation). Finally, it includes email records, including email correspondence with customers and other third parties.

            • GR-1.1.4

              Bahrain law currently requires corporate records to be retained for at least 5 years (see Ministerial Order No. 23 of 2002, made pursuant to the Amiri Decree Law No. 4 of 2001).

            • GR-1.1.5

              Unless otherwise agreed with the BMA in writing, records must be kept in either English or Arabic; or else accompanied by a certified English or Arabic translation. Records must be kept current. The records must be sufficient to allow an audit of the licensee's business or an on-site examination of the licensee by the BMA.

            • GR-1.1.6

              If a licensee wishes to retain certain records in a language other than English or Arabic without translation, the licensee should write to the BMA, explaining which types of records it wishes to keep in a foreign language, and why systematically translating these may be unreasonable. Generally, only loan contracts or similar original transaction documents may be kept without translation. Where exemptions are granted by the BMA, the licensee is nonetheless asked to confirm that it will make available certified translations of such documents, if requested by the BMA for an inspection or other supervisory purpose.

            • GR-1.1.7

              Translations produced in compliance with Rule GR-1.1.5 may be undertaken in-house, by an employee or contractor of the licensee, providing they are certified by an appropriate officer of the licensee.

            • GR-1.1.8

              Records must be accessible at any time from within the Kingdom of Bahrain, or as otherwise agreed with the BMA in writing.

            • GR-1.1.9

              Where older records have been archived, or in the case of records relating to overseas branches of Bahraini conventional bank licensees, the BMA may accept that records be accessible within a reasonably short time frame (e.g. within 5 business days), instead of immediately. The BMA may also agree similar arrangements for overseas conventional bank licensees, as well as Bahraini conventional bank licensees, where elements of record retention and management have been centralised in another group company, whether inside or outside of Bahrain.

            • GR-1.1.10

              All original account opening documentation, due diligence and transaction documentation should normally be kept in Bahrain, if the business is booked in Bahrain. However, where a licensee books a transaction in Bahrain, but the transaction documentation is handled entirely by another (overseas) branch or affiliate of the licensee, the relevant transaction documentation may be held in the foreign office, provided electronic or hard copies are retained in Bahrain; the foreign office is located in a FATF member state; and the foreign office undertakes to provide the original documents should they be required.

            • GR-1.1.11

              Licensees should also note that to perform effective consolidated supervision of a group (or sub-group), the BMA needs to have access to financial information from foreign operations of a licensee, in order to gain a full picture of the financial condition of the group: see Module BR (BMA Reporting), regarding the submission of consolidated financial data. If a licensee is not able to provide to the BMA full financial information on the activities of its branches and subsidiaries, it should notify the BMA of the fact, to agree alternative arrangements: these may include requiring the group to restructure or limit its operations in the jurisdiction concerned.

            • GR-1.1.12

              In the case of Bahraini conventional bank licensees with branch operations overseas, where local record keeping requirements are different, the higher of the local requirements or those contained in this Chapter must be followed.

          • GR-1.2 GR-1.2 Transaction Records

            • GR-1.2.1

              Conventional bank licensees must keep completed transaction records for as long as they are relevant for the purposes for which they were made (with a minimum period in all cases of five years from the date when the transaction was completed). Records of completed transactions must be kept in their original form (whether in hard copy and / or electronic format), for at least five years from the date of the transaction.

            • GR-1.2.2

              For example, if the original documents are paper, they must be kept in their original form. Electronic payments and receipts may be kept electronically without the need for hard copies. The record format selected must be capable of producing complete and accurate financial, management and regulatory reports, and allow monitoring and review of all transactions.

            • GR-1.2.3

              Rule GR-1.2.1 applies to all transactions entered into by a Bahraini conventional bank licensee, whether booked in Bahrain or in an overseas branch. With respect to overseas conventional bank licensees, it applies only to transactions booked in the Bahrain branch.

            • GR-1.2.4

              In the case of overseas conventional bank licensees, Rule GR-1.2.1 therefore only applies to business booked in the Bahrain branch, not in the rest of the company.

          • GR-1.3 GR-1.3 Other Records

            • Corporate Records

              • GR-1.3.1

                Conventional bank licensees must maintain the following records in original form or in hard copy at their premises in Bahrain:

                (a) internal policies, procedures and operating manuals;
                (b) corporate records, including minutes of shareholders', Directors' and management meetings;
                (c) correspondence with the BMA and records relevant to monitoring compliance with BMA requirements;
                (d) reports prepared by the conventional bank licensee's internal and external auditors; and
                (e) employee training manuals and records.

              • GR-1.3.2

                In the case of Bahraini conventional bank licensees, these requirements apply to the licensee as a whole, including any overseas branches. In the case of overseas conventional bank licensees, all the requirements of Chapter GR-1 are limited to the business booked in their branch in Bahrain and the records of that branch (see Rule GR-1.1.1). They are thus not required to hold copies of shareholders' and Directors' meetings, except where relevant to the branch's operations.

            • Customer Records

              • GR-1.3.3

                Record keeping requirements with respect to customer records, including customer identification and due diligence records, are contained in Module FC (Financial Crime). These requirements address specific requirements under the Amiri Decree Law No. 4 of 2001, the standards promulgated by the Financial Action Task Force, as well as to the best practice requirements of the Basel Committee Core Principles methodology, and its paper on "Customer due diligence for banks".

        • GR-2 GR-2 Corporate and Trade Names

          • GR-2.1 GR-2.1 Vetting of Names

            • GR-2.1.1

              Conventional bank licensees must seek prior written approval from the BMA for their corporate name and any trade names, and those of their subsidiaries located in Bahrain.

            • GR-2.1.2

              GR-2.1.1 applies to overseas conventional bank licensees only with respect to their Bahrain branch.

            • GR-2.1.3

              Rules GR-2.1.1 and GR-2.1.2 implement the requirements contained in Article 62 of the BMA Law 1973.

            • GR-2.1.4

              In approving a corporate or trade name, the BMA seeks to ensure that it is sufficiently distinct as to reduce possible confusion with other unconnected businesses, particularly those operating in the financial services sector. The BMA also seeks to ensure that names used by unregulated subsidiaries do not suggest those subsidiaries are in fact regulated.

        • GR-3 GR-3 Dividends

          • GR-3.1 GR-3.1 BMA Non-Objection

            • GR-3.1.1

              Bahraini conventional bank licensees must obtain a letter of no-objection from the BMA to any dividend proposed, before submitting a proposal for a distribution of profits to a shareholder vote.

            • GR-3.1.2

              The BMA will grant a no-objection letter where it is satisfied that the level of dividend proposed is unlikely to leave the licensee vulnerable — for the foreseeable future — to breaching the BMA's capital requirements, taking into account (as appropriate) trends in the licensee's business volumes, expenses, overall performance and the adequacy of provisions against impaired loans or other assets.

            • GR-3.1.3

              To facilitate the prior approval required under Paragraph GR-3.1.1, conventional bank licensees subject to GR-3.1.1 should provide the BMA with a copy of the proposed agenda for the annual general meeting or other special meeting, noting the licensee's intended declared dividends for the coming year.

            • GR-3.1.4

              Conventional bank licensees must also comply with the provisions contained in Articles 72 to 75 of the BMA Law 1973.

        • GR-4 GR-4 Asset / Liability Transfers

          • GR-4.1 GR-4.1 [deleted] [1 July 2011 to 30 September 2012]

            [This Section was deleted in July 2011 as Regulation on Asset/Liability transfers currently under consultation].

            • GR-4.1.1 [deleted]

              Deleted: July 2011

            • GR-4.1.2 [deleted]

              Deleted: July 2011

            • GR-4.1.3 [deleted]

              Deleted: July 2011

            • GR-4.1.4 [deleted]

              Deleted: July 2011

            • GR-4.1.5 [deleted]

              Deleted: July 2011

            • GR-4.1.6 [deleted]

              Deleted: July 2011

          • GR-4.1 GR-4.1 BMA Approval

            • GR-4.1.1

              Conventional bank licensees must seek prior written approval from the BMA before transferring assets or liabilities of a material nature to a third party, except where such transfers are effected within the normal scope of the bank's operations.

            • GR-4.1.2

              Rule GR-4.1.1 is intended to apply to circumstances where a bank wishes to sell part of its business or a portfolio to a third party, or is undertaking winding up proceedings. It implements the provisions contained in Article 65(A)(2) of the BMA Law 1973.

            • GR-4.1.3

              For the purposes of Rule GR-4.1.1, assets or liabilities of a material nature would be assets or liabilities that comprise 5% or more of the total assets or liabilities of the bank concerned, and any deposit liabilities (regardless of amount).

            • GR-4.1.4

              In the case of a Bahraini conventional bank licensee, Chapter GR-4 applies to its assets and liabilities booked in Bahrain and in the bank's overseas branches. In the case of an overseas conventional bank licensee, Chapter GR-4 applies only to assets and liabilities booked in the bank's Bahrain branch.

            • GR-4.1.5

              Banks intending to apply to transfer assets or liabilities are advised to contact the BMA at the earliest possible opportunity, in order that the BMA may determine the nature and level of any documentation to be provided and the need for an auditor or other expert opinion to be provided. The BMA will grant its permission where the transfer will have no negative impact on the financial soundness of the bank, and does not otherwise compromise the interests of the bank's depositors and creditors. In all cases, the BMA will only grant its permission where the institution acquiring the assets or deposit liabilities holds the appropriate regulatory approvals and is in good regulatory standing.

        • GR-5 GR-5 Controllers

          • GR-5.1 GR-5.1 Key Provisions

            • GR-5.1.1

              Condition 3 of the BMA's licensing conditions specifies, amongst other things, that conventional bank licensees must satisfy the BMA that their controllers are suitable and pose no undue risks to the licensee. (See Paragraph LR-2.3.1.)

            • GR-5.1.2

              Applicants for a conventional bank license must provide details of their controllers, by submitting a duly completed Form 2 (Application for authorisation of controller). (See sub-paragraph LR-3.1.5(a)

            • GR-5.1.3

              Conventional bank licensees must obtain prior approval from the BMA for any of the following changes to its controllers (as defined in Section GR-5.2):

              (a) a new controller;
              (b) an existing controller increasing its holding from below 20% to above 20%;
              (c) an existing controller increasing its holding from below 33% to above 33%;
              (d) an existing controller increasing its holding from below 50% to above 50%; and
              (e) an existing controller increasing its holding from below 75% to above 75%.

            • GR-5.1.4

              For approval under Paragraph GR-5.1.3 to be granted, the BMA must be satisfied that the proposed increase in control poses no undue risks to the licensee. A duly completed Form 2 (Controllers) must be submitted as part of the request for a change in controllers.

            • GR-5.1.5

              If, as a result of circumstances outside the conventional bank licensee's knowledge and/or control, one of the changes specified in Paragraph GR-5.1.3 is triggered prior to BMA approval being sought or obtained, the conventional bank licensee must notify the BMA as soon as it becomes aware of the fact and no later than 7 days.

            • GR-5.1.6

              Conventional bank licensees are encouraged to notify the BMA as soon as they become aware of events that are likely to lead to changes in their controllers. The criteria by which the BMA assesses the suitability of controllers are set out in Section GR-5.3. The BMA aims to respond to requests for approval within 30 calendar days. The BMA may contact references and supervisory bodies in connection with any information provided to support an application for controller. The BMA may also ask for further information, in addition to that provided in Form 2, if required to satisfy itself as to the suitability of the applicant.

            • GR-5.1.7

              Conventional bank licensees must submit, within 3 months of their financial year-end, a report on their controllers. This report must identify all controllers of the licensee, as defined in Section GR-5.2.

          • GR-5.2 GR-5.2 Definition of Controller

            • GR-5.2.1

              A controller of a conventional bank licensee is a natural or legal person who:

              (a) holds 10% or more of the shares in the licensee ("L"), or is able to exercise (or control the exercise) of more than 10% of the voting power in L; or
              (b) holds 10% or more of the shares in a parent undertaking ("P") of L, or is able to exercise (or control the exercise) of more than 10% of the voting power in P; or
              (c) is able to exercise significant influence over the management of L or P.

            • GR-5.2.2

              For the purposes of Paragraph GR-5.2.1, "person" means the person ("H") or any of the person's associates, where associate includes:

              (a) the spouse, child or stepchild of H;
              (b) an undertaking of which H is a Director;
              (c) a person who is an employee or partner of H;
              (d) if H is a corporate entity, a Director of H, a subsidiary of H, or a Director of any subsidiary undertaking of H.

            • GR-5.2.3

              Associate also includes any other person or undertaking with which the person H has entered into an agreement or arrangement as to the acquisition, holding or disposal of shares or other interests in the conventional bank licensee, or under which they undertake to act together in exercising their voting power in relation to the conventional bank licensee.

          • GR-5.3 GR-5.3 Suitability of Controllers

            • GR-5.3.1

              A controller of a conventional bank licensee must satisfy the BMA of his suitability.

            • GR-5.3.2

              In assessing the suitability of controllers who are natural persons, the BMA has regard to their professional and personal conduct, including, but not limited to, the following:

              (a) the propriety of a person's conduct, whether or not such conduct resulted in conviction for a criminal offence, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;
              (b) a conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;
              (c) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;
              (d) whether the person has been the subject of any disciplinary proceeding by any government authority, regulatory agency or professional body or association;
              (e) the contravention of any financial services legislation or regulation;
              (f) whether the person has ever been refused a license, authorisation, registration or other authority;
              (g) dismissal or a request to resign from any office or employment;
              (h) disqualification by a court, regulator or other competent body, as a Director or as a manager of a corporation;
              (i) whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;
              (j) the extent to which the person has been truthful and open with regulators; and
              (k) whether the person has ever been adjudged bankrupt, entered into any arrangement with creditors in relation to the inability to pay due debts, or failed to satisfy a judgement debt under a court order.

            • GR-5.3.3

              In addition, the following criteria are also taken into consideration:

              (a) the financial resources of the person and the likely stability of their shareholding;
              (b) existing directorships or ownership of more than 20% of the capital or voting rights of any financial institution in the Kingdom of Bahrain or elsewhere, and the potential for conflicts of interest that such directorships or ownership may imply;
              (c) the interests of depositors, creditors and shareholders of the licensee; and
              (d) the interests of Bahrain's banking and financial sector.

            • GR-5.3.4

              In assessing the suitability of corporate controllers, the BMA has regard to their financial standing, judicial and regulatory record, and standards of business practice and reputation, including, but not limited to, the following:

              (a) the financial strength of the controller, its parent(s) and other members of its group, its implications for the conventional bank licensee and the likely stability of the controller's shareholding;
              (b) whether the controller or members of its group have ever entered into any arrangement with creditors in relation to the inability to pay due debts;
              (c) the controller's jurisdiction of incorporation, location of Head Office, group structure and close links, and the implications for the conventional bank licensee as regards effective supervision of the conventional bank licensee and potential conflicts of interest;
              (d) the controller's (and other group members') propriety and general standards of business conduct, including the contravention of any laws or regulations, or the institution of disciplinary proceedings by a government authority, regulatory agency or professional body;
              (e) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct;
              (f) any criminal actions instigated against the controller or other members of its group, whether or not this resulted in an adverse finding; and
              (g) the extent to which the controller or other members of its group have been truthful and open with regulators and supervisors.

            • GR-5.3.5

              In addition, the following criteria are also taken into consideration:

              (a) the interests of depositors, creditors and shareholders of the licensee; and
              (b) the interests of Bahrain's banking and financial sector.

          • GR-5.4 GR-5.4 Approval Process

            • GR-5.4.1

              Following receipt of an approval request under Paragraph GR-5.1.3, the BMA will issue a written notice of objection if it is not satisfied that the person concerned is suitable to become a controller of the conventional bank licensee. The notice of objection will specify the reasons for the objection and specify the applicant's right of appeal.

            • GR-5.4.2

              Notices of objection have to be approved by an Executive Director of the BMA. The applicant has 30 calendar days from the date of the notice in which to make written representations. The BMA then has 30 calendar days from the date of the representation in which to consider any mitigating evidence submitted and make a final determination. See Module EN (Enforcement).

            • GR-5.4.3

              Where a person has become a controller by virtue of his shareholding in contravention of Paragraph GR-5.1.3, or a notice of objection has been served to him under Paragraph GR-5.4.1 and the period of appeal has expired, the BMA may, by notice in writing served on the person concerned, direct that his shareholding shall, until further notice, be subject to all or any of the following restrictions:

              (a) no voting right shall be exercisable in respect of those shares; and
              (b) except in a liquidation, no payment shall be made of any sum due on the shares from the conventional bank licensee, whether in respect of capital, dividend or otherwise.

        • GR-6 [This Chapter has been left blank.]

          [This Chapter has been left blank.]

        • GR-7 GR-7 Suspension of Business

          • GR-7.1 GR-7.1 BMA Approval

            • GR-7.1.1

              A conventional bank licensee wishing to suspend its operations and liquidate its business must notify the BMA in writing at least six months in advance of its intended suspension, setting out how it proposes to do so and, in particular, how it will treat any deposits that it holds.

            • GR-7.1.2

              The notice period under Rule GR-7.1.1 is a statutory requirement, specified in Article 91 of the BMA Law 1973. Article 91, however, also provides for the notice period to be reduced, by prior agreement with the BMA, if in the BMA's view the rights of depositors are safeguarded.

            • GR-7.1.3

              If the conventional bank licensee wishes to transfer assets or liabilities to a third party, it must comply with the requirements contained in Chapter GR-4.

            • GR-7.1.4

              If the conventional bank licensee wishes to liquidate its business, the BMA will revise its license to restrict the firm from entering into new business. The licensee must continue to comply with all applicable BMA requirements until such time as it is formally notified by the BMA that its obligations have been discharged and that it may surrender its license.

            • GR-7.1.5

              A conventional bank licensee in liquidation must continue to meet its contractual and regulatory obligations to depositors, other clients and creditors.

            • GR-7.1.6

              Once the conventional bank licensee believes that it has discharged all its remaining contractual obligations to depositors, clients and creditors, it must publish a notice in two national newspapers in Bahrain approved by the BMA (one being in English and one in Arabic), stating that is has settled all its dues and wishes to leave the market.

            • GR-7.1.7

              The notice referred to in Paragraph GR-7.1.6 must include a statement that written representations concerning the liquidation may be sent to the BMA before a specified day, which shall not be earlier than sixty days after the day of the first publication of the notice. The BMA will not decide on the application until after considering any representations made to the BMA before the specified day.

            • GR-7.1.8

              If no objections to the liquidation are upheld by the BMA, then the BMA may issue a written notice of approval for the surrender of the license.

        • GR-8 GR-8 BMA Fees

          • GR-8.1 GR-8.1 Annual License Fees

            • GR-8.1.1

              Conventional bank licensees must pay the relevant annual license fee to the BMA, upon the issuance of their license and thereafter on 1 January each year. The annual license fee charged upon issuance of a license is charged on a pro-rata basis, proportionate to the period remaining between the issuance of the license and the end of the calendar year in question (subject to a minimum charge of BD 1,000).

    • Business Standards

      • BC BC Business and Market Conduct

        • BC-A BC-A Introduction

          • BC-A.1 BC-A.1 Purpose

            • BC-A.1.1

              The purpose of this module is to lay down rules and guidelines that lay down the regulations and provide guidance on best practices that banks should adhere to in relation to business and market conduct.

            • BC-A.1.2

              This module provides support for certain other parts of the Rulebook, mainly:

              (a) Principles of Business;
              (b) Audit Firms;
              (c) Public Disclosure; and
              (d) BMA Reporting Requirements.

            • BC-A.1.3

              This module also provides support for certain aspects relating to business and market conduct in the Bahrain Commercial Companies Law of 2001 (as amended).

          • BC-A.2 BC-A.2 Key requirements

            • Promotion of financial products and services

              • BC-A.2.1

                The Agency should be sent copies of documentation relating to promotional schemes at least ten days prior to their launch for information purposes.

              • BC-A.2.2

                All documentation concerning promotional schemes should be in Arabic and English and, if relevant, any other language necessary for customers to fully understand and appreciate their terms and conditions. Such terms and conditions, including any related advertising, need to be clear, concise, truthful, unambiguous and complete so as to enable customers to make a fully informed decision.

            • Code of conduct for bank dealers and foreign exchange and money brokers in the foreign currency and deposit markets

              • BC-A.2.3

                Management of banks and money brokers are responsible for ensuring that their institutions are in full compliance with the Code.

              • BC-A.2.4

                Brokers should pass details verbally, and principals be prepared to receive them, normally within a few minutes after deals have been concluded.

            • Disclosure of information about individual accounts

              • BC-A.2.5

                Banks should not publish or release information to third parties concerning the accounts or activities of their individual customers, unless:

                (a) such information is requested by an authorised official from the BMA or by an order from the Courts; or
                (b) the release of such information is approved by the customer concerned.

            • Minimum balance and charges on savings accounts

              • BC-A.2.6

                Banks may impose no more than a monthly charge of BD 1/– when the monthly weighted average balance for savings accounts for individuals falls below BD 20/– (or equivalent in other currencies).

              • BC-A.2.7

                Orphans, widows, pensioners, individuals receiving social subsidies from the Ministry of Labour & Social Affairs, students and Bahraini nationals with a monthly salary below BD 250/– should be exempted from maintaining the above minimum balance requirement for savings accounts.

            • Dinar Certificates of Deposits — Rules

              • BC-A.2.8

                Certificates of Deposit may be issued for any amount subject only to a minimum denomination of BD 30,000.

              • BC-A.2.9

                Certificates of Deposit may be issued for any maturity between 183 days (6 months) and 5 years.

            • Disclosure of charges

              • BC-A.2.10

                Banks should also ensure that each customer is in receipt of its current list of charges. The list should specify standard charges and commissions that will be applied by the bank to individual services and transactions and to specific areas of business.

            • Accounts held for clubs and societies in Bahrain

              • BC-A.2.11

                The Full Commercial Bank (FCB) is requested to notify General Organisation for Youth and Sport (GOYS) when any club or society registered with GOYS requests the opening of an account with the bank.

            • Current accounts

              • BC-A.2.12

                FCBs levying fees on their low-balance customer current accounts, are required by the Agency to apply such fees to average balances when these fall below a prescribed level during a specified period.

            • Notification to the Agency on introduction of new or expanded customer products and facilities

              • BC-A.2.13

                All full commercial banks are required to notify the Agency before the introduction of any new or expanded customer products and facilities.

            • Penalty system for dishonoured cheques

              • BC-A.2.14

                On the first working day of each calendar month, each FCB will provide to the Agency a list of the names, supported with I.D. numbers (CPR or CR numbers (as applicable) for Bahrain residents, Passport or CR-equivalent numbers (as applicable) for non-Bahrain residents) of those customers to whom one (or more) written warning(s) has been sent in accordance with section BC-5.1 during the immediately preceding calendar month.

              • BC-A.2.15

                Concerned FCB(s) must not provide current account facilities to the abuser of cheques for the twelve calendar month period immediately following the date of issue of the relevant list (as mentioned in section BC-5.1) by the Agency. All other FCBs should, within a maximum period of one month after the issue of the relevant list, also withdraw current account facilities from that abuser of cheques for the same twelve calendar month period.

            • General guidance on administration of dishonoured cheques

              • BC-A.2.16

                FCBs that wish to issue cheque guarantee cards for an amount not exceeding BD 200/= may do so — subject to informing the Director of Banking Services at the Agency of their intention and the arrangements governing the issue of such cards.

            • Penalty charges on dishonoured cheques

              • BC-A.2.17

                The Agency will impose penalty charges of BD 5/= on each returned cheque for the reasons of 'Refer to Drawer', 'Not Arranged For', 'Re-present', and 'Account Closed'.

              • BC-A.2.18

                FCBs will be entitled to charge customers no more than BD 10/= in respect of each dishonoured cheque.

            • Installation of an off-site ATM in Bahrain

              • BC-A.2.19

                FCBs wishing to install an off-site ATM must submit an application (in writing) for the BMA's (Executive Director of Banking Supervision) approval. This application must be accompanied by a copy of a feasibility study for that particular ATM, as well as such other information as the BMA may request. In particular, a copy of the written permission (for installation of that off-site ATM) of the legal owner of the proposed location must be provided to the Agency, as well as a copy of the written permission of any other relevant authorities in this context (e.g. the Traffic & Licensing and Civil Defence & Fire Service Directorates of the Ministry of Interior).

            • GCC ATM network charges

              • BC-A.2.20

                The Agency requires that the charges on such customer withdrawals and other ATM services should not exceed BD 1/= per transaction.

            • Margin Trading System

              • BC-A.2.21

                FCBs may write to the Agency to obtain approval to provide margin trading facilities to their customers. FCBs must follow the rules and guidance in Chapter BC-7.

          • BC-A.3 BC-A.3 Regulation history

            • BC-A.3.1

              This module was first issued in July 2004 as part of the conventional principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter UG-3 of Module UG provides further details on Rulebook maintenance and control.

            • BC-A.3.2

              The most recent changes to this module are detailed in the table below:

              Summary of changes

              Module Ref. Change Date Description of Changes
              BC-4.1 01/01/05 New minimum balance and charges regulations
              BC-4.7 01/10/05 Streamlined notification requirements regarding new products
              BC-7 01/04/06 Margin trading rules and guidance
                   
                   

            • Effective date and evolution of the Module

              • BC-A.3.3

                Prior to the Rulebook, the Agency had issued various circulars representing regulations covering different aspects of Business and Market Conduct. The contents of this module are effective from the date depicted in the original circulars listed below or from the dates indicated in paragraph BC-A.3.2 above:

                Circular Ref. Date of Issue Module Ref. Circular Subject
                EDBC/73/96 1 May 1996 BC-1.1 Explanatory note on the promotion of Banking and Financial Products.
                BS.C7/91/442 10 Sep 1991 BC-1.1 Promotion of Banking Services
                85/25 2 May 1985 BC-2 Code of Conduct for Foreign Exchange Dealers and Brokers
                83/5 10 Apr 1983 BC-3 Disclosure of Information about Individual Accounts
                BS/11/2004 10 Aug 2004 BC-4.1 Min balances and savings accounts
                BS.C7/90/34 31 Jan 1990 BC-4.2 Dinar Certificates of Deposits
                EDBO/51/02 2 Apr 2002 BC-4.3 Charges to Customers
                BC/5/00 8 Mar 2000 BC-4.4 Accounts held for Clubs and Societies
                BSD(111)/94/157 24 Sep 1994 BC-4.5 Fees on Current Accounts
                BC/2/01 3 Mar 2001 BC-4.6 Brokerage Fees in Bahrain
                ODG/145/92 18 Aug 1992 BC-4.7 New products in the Retail Banking Field
                EDBO/46/03 8 Apr 2003 BC-4.8 Inheritance—Financial Procedures
                EDBO/27/96 25 Sep 1996 BC-5.1 Regulation for "Dishonoured Cheques"
                OG/399/94 28 Nov 1994 BC-5.2 Returned Cheques
                EDBO/49/01 6 May 2001 BC-5.3 Penalty Charges on Returned Cheques
                BC/8/98 24 May 1998 BC-6.1 Off-site ATMs
                EDBO/45/02 13 Mar 2002 BC-6.2 GCC ATM Network Charges
                BC/15/99 17 Jul 1999 BC-7.1 Margin Trading

        • BC-1 BC-1 Promotion of financial products and services

          • BC-1.1 BC-1.1 Promotion of financial products and services offered in/from Bahrain by means of incentives etc.

            • Introduction

              • BC-1.1.1

                The purpose of the content of this section is to set out regulations pertaining to the promotion of banking/financial products offered in/from Bahrain by means of incentives etc. (herein referred to as 'promotional schemes').

              • BC-1.1.2

                The Agency has no objection to the use of promotional schemes in general and, unless it otherwise specifically directs in any particular case, the Agency does not expect to be actively consulted/have its approval sought about the idea and/or substance of any promotional schemes. The Agency should, however, be sent copies of documentation relating to promotional schemes at least ten days prior to their launch for information purposes.

              • BC-1.1.3

                The Agency will monitor promotional schemes and, if thought appropriate in the interests of a bank or other financial institution (together herein referred to as 'institutions') and its customers in particular and/or the financial sector in general, may issue specific guidance in certain cases. Institutions should feel free to consult the Agency at any time regarding any matters referred to in the explanatory note set out in this section.

            • General requirements

              • BC-1.1.4

                Institutions should take care to ensure that promotional schemes do not involve a breach of Bahrain law or any other relevant applicable law, regulation or international practice. In addition, promotional schemes should not in any way be detrimental to the public good or public morals.

              • BC-1.1.5

                While there is to be no formal restriction on the types of incentive which may be used by institutions, care should be taken to ensure that promotional schemes do not negatively affect the integrity, reputation, good image and standing of Bahrain and/or its financial sector, and do not detrimentally affect Bahrain's economy.

              • BC-1.1.6

                Bearing in mind the reputation of, and the requirement to develop, the financial sector in Bahrain, as well as the need to act at all times in the best interests of the customer, institutions need to take adequate care to ensure that promotional schemes do not unreasonably divert the attention of the public from other important considerations in choosing an institution or a banking/financial product.

              • BC-1.1.7

                All documentation concerning promotional schemes should be in Arabic and English and, if relevant, any other language necessary for customers to fully understand and appreciate their terms and conditions. Such terms and conditions, including any related advertising, need to be clear, concise, truthful, unambiguous and complete so as to enable customers to make a fully informed decision.

              • BC-1.1.8

                Customers to whom promotional schemes are directed should enjoy equal opportunity in terms of access to, and treatment within, such schemes.

              • BC-1.1.9

                No costs (including funding costs), charges or levies associated with promotional schemes should be concealed from prospective customers.

              • BC-1.1.10

                Full and complete records should be maintained for promotional schemes, particularly where raffles/lotteries etc. are concerned.

              • BC-1.1.11

                Any raffles/lotteries etc. held as part of promotional schemes should be independently monitored (e.g. by the institution's external auditor) and adequate systems put in place to ensure fair play and impartiality.

              • BC-1.1.12

                An appropriate system should also exist for informing participants of the results of a raffle/lottery without delay. Institutions should note that raffles/lotteries etc. may be subject to rules and requirements (including prior authorisation/approval) laid down by the Ministry of Commerce.

              • BC-1.1.13

                Institutions may use small 'gifts' as an inducement to members of the public to use banks' services, provided such gifts are offered on a general basis and have a low monetary value.

              • BC-1.1.14

                Finally, due note should be taken of the overriding provisions of Bahrain (and any other relevant) law in relation to institutions' duties to customers to the extent (if any) that promotional schemes might impact on such duties.

        • BC-2 BC-2 Code of conduct for bank dealers and foreign exchange and money brokers in the foreign currency and deposit markets

          • BC-2.1 BC-2.1 Introduction

            • BC-2.1.1

              The Code of Conduct, which is prepared in cooperation with the Bankers' Society of Bahrain and foreign exchange brokers, provides rules in respect of certain kinds of practice which experience has shown may cause difficulty and may jeopardise the good standing of the Bahrain market. Management of banks and money brokers are responsible for ensuring that their institutions are in full compliance with the Code.

            • BC-2.1.2

              Every broker and dealer shall at all times comply with the criteria in respect to market practice, integrity and conduct. Failure to comply with such criteria will be regarded as a serious offence by the BMA, which reserves the right to investigate any complaints brought to its attention. All participants should adhere to the spirit as well as to the letter of the Code.

          • BC-2.2 BC-2.2 Market terminology and definitions

            • BC-2.2.1

              The use of generally accepted precise terminology should reduce misunderstandings and frustration, and to this end Appendix BC 5 sets out, without claiming to be exhaustive, accepted market terminology and definitions.

            • BC-2.2.2

              For the purpose of this chapter, the following definitions apply:

              (a) 'Broker' means a money and foreign exchange broker who is authorised by the BMA to operate in Bahrain.
              (b) 'Principal' means a party undertaking a transaction through a broker.
              (c) 'Bank' means any institution holding a banking license.

          • BC-2.3 BC-2.3 Confidentiality and market practice

            • BC-2.3.1

              Confidentiality is vital for the preservation of a reputable and efficient market. Accordingly, the exchange of confidential information in respect of third parties is forbidden.

            • BC-2.3.2

              The rules which follow are not intended to define exhaustively the obligations of dealers and brokers but set down specific ways in which confidentiality should be safeguarded and operations should be conducted.

              (a) Use of phrases and terms likely to identify the name of the principal should be avoided at all times.
              (b) In foreign exchange transactions brokers should not disclose the name of the principal until the deal is being closed.

              A broker asking for a specific support price should be prepared to qualify the principal in terms of geographical location, by country or by region when the broker genuinely believes it will enable business to be concluded satisfactorily to the benefit of both broker and principal.

              (c) In deposit transactions, brokers should not disclose the name of the borrower until the broker is satisfied that the potential lender seriously intends to do business. Once a lender has asked for the identity of the borrower ('Who pays?'), the lender is committed to do business at the rate quoted with an acceptable name, until the lending bank takes the broker 'off' or puts himself under reference. In the event of the first disclosed name being unacceptable to the lender, the lender will be prepared to check other acceptable names provided that such names are shown to the lender by the broker within a reasonable amount of time, which should be stipulated if necessary.
              (d) In the deposit market, banks should whenever possible give brokers prior indication of those categories of principals and of any centres and areas with which they would be unwilling to do business, in order that the smooth operation of markets be facilitated and frustration be minimized. Lenders should indicate the amounts they are prepared to place with particular categories of borrower. Brokers should classify bids with an indication of the type and quality of names they are in a position to pass.
              (e) Practices whereby banks reject a succession of names in order to assess the market and brokers offer banks deals which have no chance of being concluded, merely in order to establish their interest, are totally unacceptable.
              (f) A principal is urged whenever possible to specify to a broker the rate, the amount, the currency, and the period of his requirements. The principal shall be willing to deal in a marketable amount with acceptable names and shall remain bound so to deal at the quoted rate unless either:
              (i) the broker is informed otherwise at the time of acceptance, or
              (ii) a time limit was placed (for example, 'Firm for one minute only').

              A broker who quotes a firm rate without qualification shall be prepared to deal at the rate, in a marketable amount. A broker, if quoting only the basis of one or two names, shall qualify his quotation, e.g., 'one small offeror — only two names paying'. The broker should indicate whether prices are firm or simply for guidance and, if requested by the principal, should be willing to indicate the amount involved. Further he should confirm with banks at reasonable intervals that their interest is still firm.

              It is the responsibility of the principal to ensure the broker is made aware of any circumstances which materially affect the validity of the order placed with the broker.

              (g) A principal, by selecting to 'put a broker on', is deemed to have a serious intention of completing business, and should allow the broker sufficient time to quote the principal's interest to a potential counterparty with a view to doing business. In quantifying a 'sufficient time' factors such as the currency, market conditions and communication systems employed, should be taken into account.
              (h) A broker is held responsible for advising a principal on every occasion that his deposit rates are being checked by a potential counterparty. This action should help minimise the occasional difficulties that arise when a principal 'takes a broker off' simultaneously to having his prices checked.

              Whenever possible and subject to market conditions, a bank in the deposit market should, before he 'takes a broker off' either a single order or several orders, check whether the broker is already committed to deal on his behalf.

              (i) 'Under reference' orders placed by banks with brokers without having first being placed as 'firm', are to be discouraged. Firm orders which are later qualified by a request to 'put me under reference' indicate a principal's weakening desire to conclude business with that broker. 'Under reference' orders should not be left with a broker for more than a few minutes. A principal must ensure that the broker has the opportunity frequently to check the validity of an 'under reference' order.
              (j) No person may visit the dealing room of any broker or any bank except with the consent of a Manager or Director of that institution. A broker shall not in any circumstances permit any visitors from a bank to deal for his bank in the dealing room of that broker.
              (k) Management of banks should issue clear directions to staff on the monitoring, control and recording of 'after hours' dealing from premises other than bank dealing rooms. All deals of this kind must be properly authorised and confirmed.
              (l) A bank dealer shall not apply unfair pressure upon a broker to pass information which it would be improper for the broker to pass. Unfair pressure would for example include a statement made in any form that a failure to co-operate would lead to reduction in the business given by the principal or by other principals to the broker.
              (m) A principal should not place an order with a broker solely with the intention of finding out the name of a counterparty, who can be contacted directly with a view to concluding further deals.
              (n) Management of banks and brokers should lay down clear directions to staff on the extent to which dealing in foreign exchange or deposits for personal accounts is permitted. Any such dealing must be strictly controlled.
              (o) Care should be taken over the positioning of 2-way loudspeakers in dealing rooms.
              (p) Brokers and dealers should inform each other if conversations are being recorded. The use of such equipment is encouraged as a sensible means of enabling any subsequent disputes and differences to be settled.

          • BC-2.4 BC-2.4 Passing of details

            • BC-2.4.1

              The passing and recording of details forms an essential part of the transaction and the possibility of errors and misunderstanding is increased by delay and by the passing of details in batches. Brokers should pass details verbally, and principals should be prepared to receive them, normally within a few minutes after deals have been concluded.

            • BC-2.4.2

              When arranging and passing details on forward contracts in foreign exchange, banks and brokers must ensure that the rate applied to the spot end of the transaction bears a close relationship to the spot rate at the time the deal was concluded.

          • BC-2.5 BC-2.5 Confirmations

            • BC-2.5.1

              Written confirmation by a broker is the final check on the details of the transaction. The handling of confirmations must take account of the desire of brokers to have a realistic time-limit placed on their liability for differences. There is an obligation on recipients to check such confirmations. Initial confirmations should be sent out by telex without delay, and at the latest by close of business on the same working day. They should be followed up by written confirmation, normally hand-delivered and receipted before close of business on the following working day.

            • BC-2.5.2

              Banks must check all confirmations carefully upon receipt so that discrepancies shall be quickly revealed and differences minimised. Principals shall also make enquiries of brokers about particular confirmations which have not been received within an appropriate time (as above) or about any changes in contract terms.

            • BC-2.5.3

              In the case of deals where a bank pays against telex confirmation, the broker remains liable for differences until receipt of written confirmation is provided by the bank.

          • BC-2.6 BC-2.6 Differences and disputes

            • BC-2.6.1

              The majority of differences payable by brokers arise from errors occurring in payment or repayment instructions. They also arise from a broker, having in good faith indicated a firm rate, being unable to substantiate his quotation.

            • BC-2.6.2

              Any differences deemed payable by a broker to a bank (or by a bank to a broker) should be settled as soon as possible. The parties should provide each other with documents, setting out the exact details of and circumstances surrounding the deal.

            • BC-2.6.3

              It is acknowledged that differences are sometimes paid by 'points'. The management of broking firms should always ensure that this practice is strictly controlled and monitored.

            • BC-2.6.4

              All differences settled by direct payment should be advised in writing by the broker to the Director of Reserve Management, the BMA, (copied to the Bank) indicating the amount paid and the other party's name. The BMA reserves the right to ask for further information at its discretion.

          • BC-2.7 BC-2.7 Conduct

            • BC-2.7.1

              The BMA will regard any breaches of the rules stated below regarding gifts, favours, betting and entertainment unacceptable.

            • Gifts and favours

              • BC-2.7.2

                No broker, including management, employees and other persons acting on their behalf, shall offer or give inducements to dealing room personnel of a bank. No gifts or favours whatsoever shall be so given unless the broker is satisfied that the person responsible for dealing operations in the bank concerned has been informed of the nature of the gift or favour.

              • BC-2.7.3

                Employees of banks shall not solicit inducements from brokers, nor shall they receive unsolicited gifts or favours from brokers without informing the person responsible for dealing operations in the bank concerned of the nature of such gifts or favours.

            • Bets

              • BC-2.7.4

                The making or arranging of bets between brokers and bank dealers is totally unacceptable.

            • Entertaining

              • BC-2.7.5

                It shall be the responsibility of management in both banks and brokers to ensure that entertainment offered in the course of business does not exceed reasonable limits and does not infringe standards of propriety and decency.

          • BC-2.8 BC-2.8 Responsibility

            • BC-2.8.1

              Brokers shall be responsible for ensuring that:

              (a) their principals understand fully the limitations of the brokers' responsibilities for business and market conducted;
              (b) all their principals understand that they are required to conform, where appropriate, to the Code of Conduct;
              (c) their staff carrying out transactions on behalf of principals are adequately trained both in the practices of the market-place and in the firm's responsibilities to principals; and
              (d) the BMA is notified of any changes in broking staff, in accordance with the BMA requirements.

            • BC-2.8.2

              Bankers shall be responsible for ensuring that:

              (a) their dealing staff are adequately trained and supervised in the practices of the market (the requirement of this Code of Conduct should be fully understood by all staff involved in foreign exchange and currency deposit operations);
              (b) the BMA is notified of any changes in dealing staff, in accordance with BMA requirements;
              (c) their staff understand that the ultimate responsibility for assessing the creditworthiness of a borrower or lender lies with the bank and not the broker;
              (d) brokerage is normally payable at the end of the month in which the money passes, or otherwise by special arrangement; and
              (e) there is no pressure on brokers to reduce charges below the approved minimum rates.

          • BC-2.9 BC-2.9 Market regulations — Foreign exchange

            • Currencies

              • BC-2.9.1

                A broker will, in response to an enquiry from any bank, make known the currencies which it elects to quote and to make a service in.

              • BC-2.9.2

                Each broker shall provide, on request by a bank taking a service, general market information on all currencies handled (whether for the time being active or not) by that broker.

            • Brokerage

              • BC-2.9.3

                Brokers shall comply with the minimum scales of brokerage charges (see section BC-4.6) agreed in consultation with the Bankers' Society Council from time to time, or laid down by the BMA.

                In cases where there is no established minimum scale of brokerage charges, no deals shall be transacted until a rate has been agreed. Rates of brokerage in these cases should be agreed in advance, and only by Directors or senior managers on each side, and in no event by the dealers themselves.

              • BC-2.9.4

                Put-through deals may be net of brokerage.

              • BC-2.9.5

                Brokerage should be expressed in US dollars.

          • BC-2.10 BC-2.10 Market regulations — Currency deposits

            • Brokerage

              • BC-2.10.1

                Brokers shall comply with the minimum scales of brokerage charges (see section BC-4.6) agreed in consultation with the Bankers' Society Council from time to time, or laid down by the BMA. In cases where there is no established minimum scale of brokerage charges, no deals shall be transacted until a rate has been agreed. Rates of brokerage in these cases should be agreed in advance, and only by Directors or senior managers on each side, and in no event by the dealers themselves.

              • BC-2.10.2

                Calculation of brokerage on all currency deposits shall be worked out on a 360-day year, or a 365-day year, according to normally accepted market practice. For example, Sterling and Kuwaiti Dinars are on a 365-day year basis, and US dollars and Saudi Riyals are on a 360-day year basis.

                Brokers' confirmations and statements should express brokerage in US dollars.

              • BC-2.10.3

                In a forward-forward deposit (e.g. one month against six months) the brokerage to be charged shall be on the actual intervening period (i.e. in the above example — five months).

              • BC-2.10.4

                Put-through deals may be net of brokerage.

          • BC-2.11 BC-2.11 Market discipline

            • BC-2.11.1

              As part of its responsibility for supervising the conduct of brokers and dealers in the foreign exchange and currency markets, the Agency may, at its discretion:

              (a) Investigate any complains concerning the conduct of brokers and dealers;
              (b) Investigate possible breaches of this Code by brokers and banks; and/or
              (c) Take such further action as it considers appropriate, in the light of all the relevant facts.

          • BC-2.12 BC-2.12 Adjustment of value dates in case of unexpected banking closing dates

            • BC-2.12.1

              Spot transactions and outrights:

              (a) Original agreed upon value date for identical currency sold and purchased: extension of value date to next possible value date for both currencies.
              (b) Original agreed upon value date for non-identical currency sold and purchased (for instance, Friday for US Dollars and Saturday for Gulf Currencies): as unexpected banking closing days for non-Middle Eastern currencies are unlikely — value of non-Gulf currencies unchanged and value of Gulf currency on the next working day, adjusting spot or outright rate taking into account interest rate difference between the two currencies.

              For pure outrights it would be advisable to adopt the same system as for swaps; however, implied swap difference is not visible or identical for both parties.

              •  It can be assumed that, if the above rule would cause substantial losses for one party, dealers will re-negotiate a new rate, on a case-by case basis; if no agreement can be reached, the BMA — as final arbitrator — will fix the interest rates, prevailing at that time, which will be used to calculate the points difference, with which the outright rate will be adjusted.

              It is possible that payment instructions for counter-currency are already sent out and cannot be cancelled; in that case the paying party should be entitled to the proceeds of the unexpected use of funds by the receiving party.

            • BC-2.12.2

              Deposits:

              (a) Maturing on unexpected closing day(s): Extending deposit to next possible value date; interest to be calculated in the extended period at original agreed upon interest rate.
              (b) Starting on unexpected closing day(s) and maturing after unexpected closing day(s): Starting date will be extended to next possible value date without altering maturing date; interest to be calculated on the shortened period at the originally agreed upon interest rate.
              (c) Starting on unexpected closing day(s) and maturing before or on next possible value date: Cancellation of deal.
              1. If payment instructions are already sent out by lender and can only be executed on next possible value date, and cannot be cancelled, borrower ensures repayment will be done on the same next possible value date. If in that case borrower cannot repay because of deadline of receiving instructions by correspondent on same next possible value day, parties negotiate a new deal starting at value date of payment by lender and maturing according to new deal.
              2. If payment instructions are already sent out by lender for capital and by borrower for capital and interest both payments will be executed at same next possible value date, lender should refund to borrower unearned interest.

            • BC-2.12.3

              Swaps:

              (a) Maturing on unexpected closing day(s): Extending swap to next possible value date for both currencies, adjusting swap difference according to formula — swap difference divided by original number of days and multiplied by new number of days.
              (b) Starting on unexpected closing day(s) and maturing after unexpected closing day(s): Starting date for both currencies would be extended to next possible value date for both currencies without altering maturing date, adjusting swap difference according to Formula under paragraph BC-2.12.3(a).
              (c) Starting on unexpected closing day(s) and maturing before or on next possible value date: Deals are cancelled.

              If starting or maturing date of original swap under paragraph BC-2.12.1 or paragraph BC-2.12.2 are substantially different, per currency swap difference has to be recalculated in mutual agreement between the dealers;

              •  It is possible that payment instructions for counter currency are already sent out and cannot be cancelled — in that case paying party should be entitled to the proceeds of the unexpected use of funds by the receiving party;
              •  It is possible that payment instructions for Gulf currencies are already sent out and cannot be cancelled — in these cases rules according to paragraph BC-2.12.2(c)-1 and paragraph BC-2.12.2(c)-2 should be applied.

        • BC-3 BC-3 Client confidentiality

          • BC-3.1 BC-3.1 Disclosure of information about individual accounts

            • BC-3.1.1

              Banks should not publish or release information to third parties concerning the accounts or activities of their individual customers, unless:

              (a) such information is requested by an authorised official from the BMA or by an order from the Courts; or
              (b) the release of such information is approved by the customer concerned.

        • BC-4 BC-4 Customer account services and charges

          • BC-4.1 BC-4.1 Minimum balance and charges on savings accounts

            • BC-4.1.1

              Banks may impose no more than a monthly charge of BD 1/– when the monthly weighted average balance for savings accounts for individuals falls below BD 20/– (or equivalent in other currencies).

            • BC-4.1.2

              Orphans, widows, pensioners, individuals receiving social subsidies from the Ministry of Labour & Social Affairs, students and Bahraini nationals with a monthly salary below BD 250/– should be exempted from maintaining the above minimum balance requirement for savings accounts. Banks should establish criteria for determining the eligibility of a person for exemption from the above charges and should notify their concerned customers accordingly.

          • BC-4.2 BC-4.2 Dinar Certificates of Deposits — Rules

            • BC-4.2.1

              The purpose of the contents of this section is to set out rules governing the issue of Dinar Certificates of Deposit by commercial banks.

            • BC-4.2.2

              For the purpose of this section, 'Dinar Certificates of Deposit' are financial instruments payable in Bahraini Dinars. They must be negotiable — in accordance with the Law of Commerce (No. 7) of 1987 — and must satisfy the conditions set out in this section.

            • Issue

              • BC-4.2.3

                Dinar Certificates of Deposit may be issued only by full commercial banks and must be payable at their offices in Bahrain.

              • BC-4.2.4

                Commercial banks may issue Certificates of Deposit to both resident and non-resident customers and to other banks inside and outside Bahrain.

              • BC-4.2.5

                Commercial banks may not issue Certificates of Deposit until they receive the necessary funds.

            • Denominations

              • BC-4.2.6

                Certificates of Deposit may be issued for any amount subject only to a minimum denomination of BD 30,000.

            • Maturities

              • BC-4.2.7

                Certificates of Deposit may be issued for any maturity between 183 days (6 months) and 5 years.

            • Interest rates

              • BC-4.2.8

                The interest rates on Certificates of Deposit may be freely agreed between banks and their counterparties at the time of issue.

              • BC-4.2.9

                Interest may be payable by agreement at a fixed or floating rate. In the case of a floating interest rate, the formula for revising the rate must be specified at the time of issue.

              • BC-4.2.10

                Interest may be payable at maturity or on earlier dates specified at the time of issue.

              • BC-4.2.11

                As an alternative to paying interest, Certificates of Deposit may be issued (like Treasury bills) at a discount to their face value (the repayment amount).

              • BC-4.2.12

                Interest and discounted values should be calculated on the basis of a 360 day year.

            • Negotiability

              • BC-4.2.13

                In view of their negotiability, Certificates of Deposit may be freely traded between banks, and between banks and customers. Issuing banks are permitted to re-purchase their own Certificates.

            • Safe custody

              • BC-4.2.14

                Although it is not obligatory, holders of Certificates of Deposit are advised to keep these certificates with a bank for safe custody and to handle them with care at all times.

            • Reserve ratio

              • BC-4.2.15

                Outstanding Certificates of Deposit are subject to reserve requirements in accordance with the provisions set out under section BR-4.2.

            • Other conditions

              • BC-4.2.16

                Banks must not describe deposit receipts, confirmations and other non-negotiable documents relating to ordinary deposits as 'Certificates of Deposit' and must not include such liabilities among Certificates of Deposit in their monthly statistical reports (also see Module BR).

              • BC-4.2.17

                In their statistical reports (also see Module BR), banks should always classify their outstanding Certificates of Deposit according to the type of customer (e.g. resident etc.) to whom they were first issued.

          • BC-4.3 BC-4.3 Disclosure of charges

            • BC-4.3.1

              In order to improve customer awareness and enhance transparency of bank charging structures, full commercial banks should display, by notice in their banking halls (both head offices and branches), a list of current charges.

            • BC-4.3.2

              Banks should also ensure that each customer is in receipt of its current list of charges. The list should specify standard charges and commissions that will be applied by the bank to individual services and transactions and to specific areas of business.

            • BC-4.3.3

              The requirement in this section is in addition to the requirements set out under section CM-8.2 that require all full commercial banks to display, by a conspicuous notice, their current effective rate of interest.

          • BC-4.4 BC-4.4 Accounts held for clubs and societies in Bahrain

            • BC-4.4.1

              All clubs and societies registered with the General Organisation for Youth and Sports (GOYS), are permitted under GOYS rules to only have one account with FCBs in Bahrain.

            • BC-4.4.2

              The FCB is requested to notify GOYS when any club or society registered with GOYS requests the opening of an account with the bank. The purpose of the notification is to obtain clarification whether or not the account in question can be opened in accordance with the rules of GOYS.

            • BC-4.4.3

              For accounts already held with the FCBs for clubs and societies registered with GOYS (i.e. before the application of the regulation in this section), the bank is requested to provide details of such accounts to GOYS (by reference to account name, relevant society, date opened and type of account) as soon as possible. If appropriate, GOYS will contact the relevant club or society in writing (with a copy to the bank) with instructions (e.g. to close the account) regarding such account.

          • BC-4.5 BC-4.5 Current accounts

            • BC-4.5.1

              FCBs levying fees on their low-balance customer current accounts are required by the Agency to apply such fees to average balances when these fall below a prescribed level during a specified period.

            • BC-4.5.2

              In order to prevent incidences of returned cheques due to maintenance of low-balance current accounts, the banks may convert some low-balance and/or inactive current accounts to savings accounts.

          • BC-4.6 BC-4.6 Brokerage fees

            • BC-4.6.1

              The purpose of the contents of this section is to set out the new scale of brokerage fees effective for all banks in Bahrain.

            • BC-4.6.2

              The new scale of fees is the result of discussion and consultation between The Bankers' Society and the Bahrain Money Brokers.

          • BC-4.7 BC-4.7 Notification to the Agency on introduction of new or expanded customer products and facilities

            • BC-4.7.1

              The content of this section is applicable only to full commercial banks licensed by the Agency.

            • BC-4.7.2

              All institutions referred to under paragraph BC-4.7.1 are required to notify the Agency before the introduction of any new or expanded customer products and facilities. The Agency will respond to the concerned bank within one week of receipt of the notification if it has any observations on the new product.

            • BC-4.7.3

              Further, institutions should also advise the Agency, on a six-monthly basis, on the status of new or expanded products and facilities. The advice should cover the following aspects:

              (a) response to,
              (b) success of, and
              (c) difficulties in,

              the introduction of new or expanded products and facilities. The institution should also advise the Agency on any variances which are introduced to the terms and conditions applying to these products and facilities.

          • BC-4.8 BC-4.8 Procedures for inheritance of financial assets

            • BC-4.8.1

              The content of this section is applicable to all full commercial banks licensed by the Agency in the Kingdom of Bahrain.

            • BC-4.8.2

              The Agency requires all commercial banks to follow the undermentioned procedures regarding the distribution of the financial assets of a deceased customer.

              (a) Legal ownership of financial assets should only pass after sight of, and in accordance with, the relevant documentation issued by the Ministry of Justice (known as the "statutory portion").
              (b) Distribution of assets should be made to the order of an individual named in, and in accordance with, a mandate, duly certified by the Ministry of Justice, that reflects the permission of all inheritors that the named individual may act on their collective behalf.
              (c) Where minors are inheritors, the Ministry of Justice documentation must specifically refer to their inheritance and the instruction followed absolutely.

        • BC-5 BC-5 Dishonoured cheques

          • BC-5.1 BC-5.1 Penalty system for dishonoured cheques

            • BC-5.1.1

              The purpose of the contents of this section is to set out regulations relating to the system of penalising any person, whether natural or corporate in form, (referred to as a 'customer' in this chapter) whose cheque is

              (a) presented for payment, but is returned due to insufficient funds being available on his current account, where,
              (b) in the opinion of the FCB on whom the cheque is drawn, such cheque has been issued by the customer in bad faith.

              Cheques falling within this system are referred to as 'dishonoured cheques'. Due regard must be given by FCBs to the general provisions of Bahrain Law regarding joint accounts, partnership accounts and accounts in the name of corporate entities, as well as to the customer mandate in each case, to determine how such accounts may be dealt with for purposes of the Regulation in this chapter.

            • Procedures to be followed

              • BC-5.1.2

                On each occasion that an FCB becomes aware of a dishonoured cheque of one of its customers, that FCB will send a written warning to the relevant customer informing him/her of the existence of the dishonoured cheque, requesting him/her to immediately make good the insufficiency in his current account in order to clear the cheque. This written warning will also inform the customer of the provisions of this system with regard to dishonoured cheques and abusers of cheques.

              • BC-5.1.3

                On the first working day of each calendar month, each FCB should provide to the Agency a list of the names, supported with I.D. numbers (CPR or CR numbers (as applicable) for Bahrain residents, Passport or CR-equivalent numbers (as applicable) for non-Bahrain residents) of those customers to whom one (or more) written warning(s) has been sent in accordance with paragraph BC-5.1.2 above during the immediately preceding calendar month. This list should specify the number of written warnings relating to dishonoured cheques for each customer of the relevant FCB for the month in question and shall be in the form set out in Appendix BC 1. FCBs will be responsible for ensuring the accuracy of all details on their respective lists.

              • BC-5.1.4

                Using the lists referred to in paragraph BC-5.1.3 above, the Agency will prepare a further list (the 'Control List') of those customers to whom two or more written warnings were sent by any one or more FCB at any time within a maximum period of three consecutive calendar months. The Control List, which will be in the form set out in Appendix BC 2, will specify the name and I.D. numbers of each such customer, the total number of dishonoured cheques for that customer included in the lists referred to in paragraph BC-5.1.3 above, the name of the relevant FCB(s) on whose list(s) the customer's name has been included, and other relevant details for FCBs' information and checking in accordance with paragraph BC-5.1.5 below. Any customer to whom more than two written warnings relating to dishonoured cheques were sent by any one or more FCB at any time within a maximum period of three consecutive calendar months will be automatically deemed an abuser of cheques for the purposes of paragraph BC-5.1.7 below.

              • BC-5.1.5

                On the second working day of each calendar month, the Agency will circulate a draft copy of the Control List to FCBs. FCBs will be requested to check the accuracy of the Control List by reference to the information they have sent to the Agency in accordance with paragraph BC-5.1.3 above, and to notify the Agency within a maximum period of one week of receiving the list of any inaccuracies on the Control List. The Control List, as amended if appropriate, will be circulated to FCBs by the Agency on the second working day after it receives all responses from FCBs. FCBs will be required to monitor the customers on this Control List to establish whether any one or more of them issued another dishonoured cheque in the instant calendar month. Any FCB becoming aware of a dishonoured cheque of one or more of its customers on the Control List during this month should notify the Agency of this fact, using the relevant section in Appendix BC 1, on the first working day of each calendar month.

              • BC-5.1.6

                If the Agency does not receive any notification as contemplated in paragraph BC-5.1.5 above for a particular customer on the Control List, that customer's name shall be withdrawn from the next issue of the Control List. However, the Agency will monitor the names of customers appearing on the Control List during the three consecutive calendar months falling immediately after the calendar month in which a customer's name is taken off the Control List. If any such customer's name is again reported to the Agency pursuant to paragraph BC-5.1.3 above at any time during this three month period,

                (a) his name will be returned to the Control List on the date of its next issue if there is only one dishonoured cheque reported in this context, or
                (b) he will be automatically deemed an abuser of cheques for the purposes of paragraph BC-5.1.7 below if there is more than one dishonoured cheque reported in this context.

                If, however, his name is not reported to the Agency in this regard, the Agency will cease its monitoring thereof.

              • BC-5.1.7

                If the Agency does receive notification as contemplated in paragraph BC-5.1.5 above for a particular customer on the Control List, or if a customer is deemed to be an abuser of cheques within paragraph BC-5.1.4 or paragraph BC-5.1.6 above, such customer (herein referred to as an 'abuser of cheques') will be penalised as follows. Using Appendix BC 3, on the second working day of the calendar month following the receipt of the information referred to above, the Agency will circulate a draft list to FCBs. FCBs will be requested to check the accuracy of this list by reference to the information they have sent to the Agency in accordance with paragraph BC-5.1.5 above, and to notify the Agency within a maximum period of one week of receiving the list of any inaccuracies on that list. The list, as amended if appropriate, will be circulated to FCBs by the Agency on the second working day after it receives all responses from FCBs, and will direct the FCB(s) which has/have reported an abuser of cheques to withdraw all cheque books held by that abuser of cheques, and to close such person's current account(s) by transferring any balances therein to savings and/or any other accounts held with that/those FCB(s). Furthermore, that FCB(s) must not provide current account facilities to that abuser of cheques for the twelve calendar month period immediately following the date of issue of the relevant list. All other FCBs should, within a maximum period of one month after the issue of the relevant list, also withdraw current account facilities from that abuser of cheques for the same twelve calendar month period. FCBs will be entitled to recover any amounts due to them from abusers of cheques as a result of compliance with this system by availing of their set-off rights under Bahrain Law.

              • BC-5.1.8

                On Appendix BC 4, the Agency will notify FCBs of those abusers of cheques in respect of whom the twelve calendar month period referred to in paragraph BC-5.1.7 above has ended, and to whom FCBs may reinstate/offer current account facilities at their discretion.

              • BC-5.1.9

                Nothing in this Regulation shall prejudice the rights of banks against customers otherwise existing under Bahrain Law and/or under any particular bank/customer agreement. Furthermore, FCBs will be entitled to the same immunity from prosecution as the Agency for any harm suffered, or alleged to be suffered, by customers as a result of FCBs complying with the Regulation in this chapter.

              • BC-5.1.10

                The Regulation in this chapter may be amended, in whole or in part, from time to time by the Agency. In addition, the Agency may, at its discretion and as it so deems appropriate, issue specific directions to all or any FCBs regarding abusers of cheques or any particular abuser of cheques.

          • BC-5.2 BC-5.2 General guidance on administration of dishonoured cheques

            • BC-5.2.1

              FCBs that wish to issue cheque guarantee cards for an amount not exceeding BD 200 may do so — subject to informing the Director of Banking Services at the Agency of their intention and the arrangements governing the issue of such cards.

            • BC-5.2.2

              FCBs, generally, should take steps to extend their administrative supervision and control over current account customers (in particular those who are in repeated breach of normally-accepted behaviour), and to stress to account holders the need for an appropriate level of discipline in the usage of cheques.

            • BC-5.2.3

              FCBs should exercise greater vigilance over borrowers, especially in the area of consumer finance, where such borrowers maintain their current accounts at a bank or banks other than at the lending bank.

            • BC-5.2.4

              The Agency will monitor the incidence of returned cheques on a monthly basis (as stipulated in section BC-5.1) in order to determine the extent to which such incidence is being reduced or otherwise.

          • BC-5.3 BC-5.3 Penalty charges on dishonoured cheques

            • BC-5.3.1

              The Agency will impose penalty charges of BD 5/= (five Bahraini Dinars) on each returned cheque for the reasons of 'Refer to Drawer', 'Not Arranged For', 'Re-present', and 'Account Closed'. Individual banks will continue to be informed daily of any charges accruing to their accounts. The respective accounts will be debited on the same day.

            • BC-5.3.2

              FCBs will be entitled to charge customers no more than BD 10/= (ten Bahraini Dinars) in respect of each dishonoured cheque.

        • BC-6 BC-6 Automated Teller Machine (ATMs)

          • BC-6.1 BC-6.1 Installation of an off-site ATM in Bahrain

            • BC-6.1.1

              The purpose of the content of this section is to set out the criteria to be followed by banks for the installation and usage of off-site ATMs in the Kingdom of Bahrain.

            • BC-6.1.2

              Applications for the installation of off-site ATMs should be sent in writing, and in accordance with the requirements set out in paragraphs BC-6.1.3 to paragraphs BC-6.1.10, to the Executive Director of Banking Supervision at the Agency.

            • General criteria

              • BC-6.1.3

                Subject to the prior written approval of the Agency, off-site ATMs may be owned individually or jointly by licensed FCBs which are members of the BENEFIT Switch. Each relevant owning FCB must already have linked its bank's ATM capability to the BENEFIT Switch prior to requesting the BMA's permission to install an off-site ATM and, furthermore, must conform to the general standards set by the Benefit company.

              • BC-6.1.4

                Subject to the prior written approval of the Agency, off-site ATMs may, at each relevant owning FCB's discretion, be fully functioning or operate as cash dispensers only. In addition, off-site ATMs may, at each relevant owning FCB's discretion (and subject to the prior written approval of the Agency), be 'walk-up' or 'drive-in' machines.

              • BC-6.1.5

                Owning FCBs will bear full legal responsibility for their respective off-site ATMs, as well as all costs associated with such ATMs (including, but not limited to, cash replenishment, installation, security etc.).

              • BC-6.1.6

                FCBs wishing to install an off-site ATM must submit an application (in writing) for the BMA's approval. This application must be accompanied by a copy of a feasibility study for that particular ATM, as well as such other information as the BMA may request. In particular, a copy of the written permission (for installation of that off-site ATM) of the legal owner of the proposed location must be provided to the Agency, as well as a copy of the written permission of any other relevant authorities in this context (e.g. the Traffic & Licensing and Civil Defence & Fire Service Directorates of the Ministry of Interior).

              • BC-6.1.7

                Applications will generally be considered on a 'first come, first served' basis for a particular location. If more than one application is received to install an off-site ATM in the same location, the number of such applications which are approved will depend upon whether the location appears to the Agency to be capable of sustaining multiple off-site ATMs (subject, in addition, to the exact details of each individual application regarding security etc. being acceptable to the Agency).

              • BC-6.1.8

                Each application will be assessed on its individual merits, and at the Agency's discretion, taking into account factors which the Agency considers relevant including, but not limited to:

                (a) the suitability of the location in question,
                (b) the level of overall activities of the applicant in the market as well as the size and make-up of its customer base, and
                (c) the type and range of facilities which the applicant proposes offering through the off-site ATM at the location in question.

              • BC-6.1.9

                In addition to the information required by the Agency under paragraph BC-6.1.6, the Agency may require further information/clarification to be provided to it before it takes a decision regarding the application. The Agency's decision in this regard will be notified to each relevant applicant FCB in writing and will be final.

              • BC-6.1.10

                The Agency may, at its discretion, require an off-site ATM to be closed at any time. In addition, an owning FCB may request the Agency in writing for permission to close any of its off-site ATMs.

          • BC-6.2 BC-6.2 GCC ATM network charges

            • BC-6.2.1

              The purpose of this section is to set a limit on ATM charges imposed by full commercial banks in the Kingdom of Bahrain for customer withdrawals and other ATM services transactions relating to other banks in the GCC (i.e. linking to GCC ATM networks).

            • BC-6.2.2

              The limits in this section do not apply to ATM service charges on local ATM networks.

            • BC-6.2.3

              The Agency requires that the charges on such customer withdrawals and other ATM services should not exceed BD 1/= (one Bahraini Dinar) per transaction.

        • BC-7 BC-7 Margin Trading System

          • BC-7.1 BC-7.1 Introduction

            • BC-7.1.1

              This Chapter applies to all full commercial banks in Bahrain.

            • BC-7.1.2

              Investors purchasing securities (as defined from time to time by the Bahrain Stock Exchange ("BSE")) listed on the BSE may pay for them under the Margin Trading System ("The System") by borrowing a portion of the purchase price from a participating bank. The System is subject to relevant provisions of the BMA Law, the BSE Law, any rules and regulations issued pursuant to such Laws and this Module. The System applies to equities in companies listed on the BSE. Unless restrictions apply under Bahrain law in this regard, the System shall be available to Bahraini or non-Bahraini investors, whether resident or non-resident in Bahrain.

            • BC-7.1.3

              The main objective of introducing the System is to enhance the overall activity on the BSE, allowing investors to leverage their investments, in a controlled manner.

            • General criteria

              • BC-7.1.4

                Only Full Commercial Banks licensed by the Agency will be permitted to act as participating banks for the System. Participating banks must each receive the prior general written approval of the BMA in order to take part in the System. The BMA will notify the BSE of the identity of participating banks for the System. The BMA's approval may be withdrawn at its discretion.

              • BC-7.1.5

                Stock Exchange Brokers will not be permitted to act as lenders or financiers for the System.

          • BC-7.2 BC-7.2 Limits and Trading Rules

            • BC-7.2.1

              An investor may, through his relationship with any one individual participating bank under the System, invest a maximum of BD 200,000 in securities (i.e. BD 200,000 per investor/per individual participating bank, made up of BD 100,000 by way of the investor's own initial margin and BD 100,000 by way of financing from the relevant participating bank to that investor).

            • BC-7.2.2

              An investor may, through approaching more than one bank under the System, invest a maximum of BD 500,000 in securities (i.e. BD 500,000 per investor/from all participating banks, made up of BD 250,000 by way of the investor's own initial margin with all participating banks and BD 250,000 by way of total financing from all participating banks to that investor.

            • BC-7.2.3

              The amount of the margin facility made to an investor under the System shall be included as an exposure to that customer, and contribute towards the large exposures limit and the consumer finance limit for that person.

            • BC-7.2.4

              The total amount of financing granted by an individual participating bank to all investors under the System shall not, at any time exceed 15% of that participating bank's capital base, such percentage to be reviewed by the BMA at its discretion from time to time.

            • BC-7.2.5

              In relation to the aggregate limit under paragraph BC-7.2.2 above, the Agency will require participating banks to inform the Credit Risk Bureau of all facility limits approved to investors under the System from time to time. Participating banks must check with the CRB on the amount of facility limits outstanding under the System at any time to a particular investor.

            • Brokers

              • BC-7.2.6

                Only those brokers approved by the BSE will be permitted to act as brokers for the System. Generally, brokers will only be approved if they (a) hold a "Class A" license from the BSE, and (b) meet the requirements set for the System from time to time by the BSE and the BMA.

            • Documentation

              • BC-7.2.7

                Only standard-form documents (application forms and agreements) will be used for the System. Standard-form agreements, drafted and approved in advance by the BSE, will be entered into between the participating bank and the investor (in respect of financing), and between the participating bank and the investor and the broker (in respect of trading) and, as relevant, these agreements shall (amongst other things) confirm that:

                a. The investor is borrowing or financing a stated amount from the participating bank for the purpose of taking part in the System;
                b. The investor will repay such stated amount, together with any interest or charges thereon, when due and in accordance with the agreement;
                c. The investor understands the risks involved in margin trading as well as the implications of the undertakings given by him;
                d. The participating bank can sell the securities bought through the System if the relevant margin is called and not met, without further formalities being required;
                e. The broker is liable for marking the securities to market on a daily (or more frequent) basis and for keeping the participating bank updated as to the participating bank's exposure to the investor;
                f. The investor can place orders with the broker for the purchase of securities up to the limit permitted by the agreement;
                g. Each party to the agreement in question shall abide by the duty of confidentiality imposed on him in relation to the matters set out in the agreement; and
                h. There is an overriding obligation on the parties thereto to comply with Bahrain law in general and, in particular, with the share-ownership restrictions applying to certain types of securities.

            • Owner of the Securities bought using the System

              • BC-7.2.8

                For ease of transfer and sale of the securities in the event that a margin is called by the participating bank but not met by the investor, the securities will be registered in the participating bank's name (for the account of the investor) and held by a custodian.

              • BC-7.2.9

                Under paragraph BC-7.2.8 above: (a) the securities should not be considered as part of the bank's own assets for the purposes of determining ownership/control under Bahrain law, and (b) if the investor has discharged his obligations to the participating bank under the System and the securities have not been sold, the securities shall be transferred into the legal ownership of the investor.

            • Margin Percentage

              • BC-7.2.10

                For equities listed on the BSE, an investor shall have the right to borrow a loan the value of which shall not exceed 50% of the total value of the funds being invested (i.e. 1:1). The BMA and the BSE shall coordinate in making any change to the margin percentages set for the System.

            • Margin Call Top-up

              • BC-7.2.11

                The margin call top-up shall be 30% of the total value of the funds invested by an investor through a margin account with a participating bank. An investor shall settle a margin call on the settlement date (as determined by the BSE) by making a cash payment of such amount to the participating bank. Such cash payment may, at the investor's discretion and in whole or part, come from the sale of the securities bought through the System, or otherwise. Failure to meet such margin call will, however, give the participating bank the right to sell the securities bought through the System.

            • Margin Interest

              • BC-7.2.12

                The participating bank shall charge a rate of interest or impose charges on the financing amount granted to the investor at a rate or on a basis to be determined by the participating bank. In the event that investor's margin account is in credit in excess of the margin applicable thereto, interest or profit shall be paid on the excess at a rate to be determined by the participating bank.

      • CA CA Capital Adequacy

        • CA-A CA-A Introduction

          • CA-A.1 CA-A.1 Application

            • CA-A.1.1

              Regulations in this module are applicable to locally incorporated banks on both a stand-alone, including foreign branches, and consolidated group basis.

            • CA-A.1.2

              In addition to licensees mentioned in paragraph CA-A.1.1, certain of these regulations (in particular market risk requirements) are also applicable to full commercial branches of foreign banks.

          • CA-A.2 CA-A.2 Purpose

            • CA-A.2.1

              The purpose of this module is to set out the Agency's capital adequacy regulations and provide guidance on the risk measurement for the calculation of capital requirements by locally incorporated banks.

            • CA-A.2.2

              The module also sets out the minimum gearing requirements which relevant banks (referred to in section CA-A.1) must meet as a condition of their licensing.

            • CA-A.2.3

              The Agency requires in particular that the relevant banks maintain adequate capital, in accordance with the Regulation in this module, against their risks as capital provides banks with a cushion to absorb losses without endangering customer deposits. Due to this, the Agency also requires the relevant banks to maintain adequate liquidity and identify and control their large credit exposures that might otherwise be a source of loss to a licensee on a scale that might threaten its solvency.

            • CA-A.2.4

              This module provides support for certain other parts of the Rulebook, mainly:

              (a) Licensing and Authorisation Requirements;
              (b) BMA Reporting Requirements;
              (c) Credit Risk Management;
              (d) Market Risk Management;
              (e) Operational Risk Management;
              (f) Liquidity Risk Management;
              (g) High Level Controls:
              (h) Relationship with Audit Firms; and
              (i) Penalties and Fines.

          • CA-A.3 CA-A.3 Key requirements

            • CA-A.3.1

              All locally incorporated banks are required to measure and apply capital charges in respect of their credit and market risk capital requirements.

            • The capital requirement

              • CA-A.3.2

                Banks are allowed three classes of capital instruments (see section CA-2.2) to meet their capital requirements for credit risk and market risk, as set out below:

                Tier 1: Core capital — May be used to support credit risk and market risk;
                Tier 2: Supplementary capital — May be used to support credit risk and market risk; and
                Tier 3: Ancillary capital — May be used solely to support market risk.

            • Measuring credit risks

              • CA-A.3.3

                In measuring credit risk for the purpose of capital adequacy, banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative riskiness.

            • Measuring market risks

              • CA-A.3.4

                For the measurement of their market risks, banks will have a choice, subject to the written approval of the Agency, between two broad methodologies. One alternative is to measure the risks in a standardised approach, using the measurement frameworks described in chapters CA-4 to CA-8 of these regulations. The second alternative methodology (i.e. the internal models approach) is set out in detail in chapter CA-9 including the procedure for obtaining the Agency's approval. This methodology is subject to the fulfilment of certain conditions. The use of this methodology is, therefore, conditional upon the explicit approval of the Agency.

            • Minimum capital ratio requirement

              • CA-A.3.5

                On a consolidated basis, the Agency has set a minimum Risk Asset Ratio ("RAR") of 12.0% for all locally incorporated banks. Furthermore, on a solo basis, the parent bank is required to maintain a minimum RAR of 8.0% (i.e. unconsolidated).

              • CA-A.3.6

                For banks that are required to complete only the PIR form, the Agency has set a minimum Risk Asset Ratio ("RAR") of 12.0%.

            • Maintaining minimum RAR

              • CA-A.3.7

                The Agency considers it a matter of basic prudential practice that, in order to ensure that these RARs are constantly met, banks set up internal "targets" of 12.5% (on a consolidated basis) and 8.5% (on a solo basis) to warn them of a potential fall by the bank below the Agency's required minimum RARs. Where a bank's capital ratio falls below its target ratio, the General Manager should notify the Agency immediately, however, no formal action plan will be necessary. The General Manager should explain what measures are being implemented to ensure that the bank will remain above its minimum RAR(s).

              • CA-A.3.8

                The bank will be required to submit form PIR (and PIRC where applicable) to the Agency on a monthly basis, until the RAR(s) exceeds its target ratio(s).

            • Gearing requirements

              • CA-A.3.9

                For Full Commercial Bank and Offshore Banking Unit licensees, deposit liabilities should not exceed 20 times the respective bank's capital and reserves.

              • CA-A.3.10

                For Investment Bank licensees, deposit liabilities should not exceed 10 times the respective bank's capital and reserves.

          • CA-A.4 CA-A.4 Regulation history

            • CA-A.4.1

              This module was first issued in July 2004 as part of the conventional principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter UG-3 of Module UG provides further details on Rulebook maintenance and control. The most recent changes made to this module are detailed in the table below:

              Summary of changes

              Module Ref. Change Date Description of Changes
                   
                   
                   
                   
                   

            • Evolution of the Module

              • CA-A.4.2

                Prior to the development of the Rulebook, the Agency had issued various circulars representing regulations relating to capital adequacy requirements. These circulars have now been consolidated into this module covering the capital adequacy regulation. These circulars and their evolution into this module are listed below:

                Circular Ref. Date of Issue Module Ref. Circular Subject
                ODG/50/98 11 Sep 1998 CA-1CA-9 Market Risk Capital Regulations
                BC/07/02 26 Jun 2002 CA-1.4 Review of PIR by External Auditors
                OG/78/01 20 Feb 2001 CA-2.5 Monitoring of Capital Adequacy
                BC/01/98 10 Jan 1998 CA-2.5 Risk Asset Ratio

            • Effective date

              • CA-A.4.3

                The contents in this module are effective from the date depicted in the original circulars (see Paragraph CA-A.4.2) from which the requirements are compiled.

        • CA-B CA-B General guidance and best practice

          • CA-B.1 CA-B.1 Introduction

            • CA-B.1.1

              This chapter provides general guidance on Capital adequacy requirements, unless otherwise stated.

            • CA-B.1.2

              It sets best practice standards and should generally be applied by all licensees to their activities.

          • CA-B.2 CA-B.2 Guidance provided by other international bodies

            • Basel Committee: Use of 'Backtesting' in Conjunction with the Internal Models Approach to Market Risk Capital Requirements

              • CA-B.2.1

                In January 1996, the Basel Committee on Banking Supervision issued technical guidance on the "use of 'Backtesting' in Conjunction with the Internal Models Approach to Market Risk Capital Requirements" (see http://www.bis.org/publ/bcbs22.htm).

              • CA-B.2.2

                This technical guidance presents a methodology for testing the accuracy of the internal models used by banks to measure market risks.

              • CA-B.2.3

                Backtesting offers the best opportunity for incorporating suitable incentives into the internal models in a consistent manner.

              • CA-B.2.4

                The Agency will rely upon technical guidance for its assessment and review of bank's market risk capital requirements including, but not limited to, the determination of the add-on factor.

            • Basel Committee: The management of banks' off-balance-sheet exposures — a supervisory perspective

              • CA-B.2.5

                In March 1986, the Basel Committee on Banking Supervision issued a paper titled "The management of banks' off-balance-sheet exposures — a supervisory perspective" (see www.bis.org/publ/bcbsc134.pdf).

              • CA-B.2.6

                This paper examines off-balance-sheet risks from three angles: market/position risk, credit risk and operational/control risk. Part III of this paper examines credit risk (including control of large exposures, settlement risk and country risk), with particular emphasis given to the assessment of the relative risks of the different types of off-balance-sheet activity.

          • CA-B.3 CA-B.3 Enforceability

            • CA-B.3.1

              This guidance should not be taken as legally binding requirements, unless otherwise embodied in Bahrain law or by regulation.

            • CA-B.3.2

              It should be noted that the provisions in this chapter are to be taken as guidance, unless otherwise stated, supplementing the Regulations set out in this module.

        • CA-1 CA-1 Scope and coverage of capital charges

          • CA-1.1 CA-1.1 Introduction

            • CA-1.1.1

              All locally incorporated banks are required to measure and apply capital charges in respect of their credit and market risk capital requirements.

            • CA-1.1.2

              Credit risk is defined as the potential that a bank's borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk exists throughout the activities of a bank in the banking book and in the trading book including both on- and off-balance-sheet exposures.

            • CA-1.1.3

              Market risk is defined as the risk of losses in on- or off-balance-sheet positions arising from movements in market prices. The risks subject to the capital requirement of this module are:

              (a) the risks pertaining to interest rate related instruments and equities in the trading book: and
              (b) foreign exchange and commodities risks throughout the bank.

          • CA-1.2 CA-1.2 Measuring credit risks

            • CA-1.2.1

              In measuring credit risk for the purpose of capital adequacy, banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative riskiness.

            • CA-1.2.2

              The framework of weights consists of four weights — 0%, 20%, 50% and 100% for on- and off-balance-sheet items, which based on a broad-brush judgment, are applied to the different types of assets and off-balance-sheet exposures (with the exception of derivative transactions) within the banking book.

            • CA-1.2.3

              The resultant different weighted assets and off-balance-sheet exposures are then added together to calculate the total credit-risk-weighted assets of the bank.

          • CA-1.3 CA-1.3 Measuring market risks

            • Trading book

              • CA-1.3.1

                The trading book means the bank's proprietary positions in financial instruments (including positions in derivative products and off-balance-sheet instruments) which are intentionally held for short-term resale and/or which are taken on by the bank with the intention of benefiting in the short-term from actual and/or expected differences between their buying and selling prices, or from other price or interest rate variations, and positions in financial instruments arising from matched principal brokering and market making, or positions taken in order to hedge other elements of the trading book.

              • CA-1.3.2

                Each bank should agree a written policy statement with the Agency on which activities are normally considered trading and which, therefore, constitute the trading book.

              • CA-1.3.3

                It is expected that the trading activities will be managed and monitored by a separate unit and that such activities should be identifiable because of their intent, as defined in paragraph CA-1.3.1 above.

            • Interest rate and equity risk

              • CA-1.3.4

                The capital charges for interest rate related instruments and equities will apply based on the current market values of items in a bank's trading book.

            • Foreign exchange and commodities risk

              • CA-1.3.5

                The capital charges for foreign exchange risk and for commodities risk will apply to a bank's total currency and commodity positions, with the exception of structural foreign exchange positions in accordance with section CA-6.3 of this module.

            • Exemptions

              • CA-1.3.6

                Banks will be allowed certain de minimis exemptions from the capital requirements for foreign exchange risk, as described in section CA-6.2. For the time being, there shall be no exemptions from the trading book capital requirements, or from the capital requirements for commodities risk.

            • Hedging instruments

              • CA-1.3.7

                A trading book exposure may be hedged, completely or partially, by an instrument that, in its own right, is not normally considered eligible to be a part of the trading book. Subject to the policy statement agreed by the bank with the Agency as explained in paragraph CA-1.3.2 above, and with the prior written approval of the Agency, banks will be allowed to include within their market risk measure non-trading instruments (on- or off-balance-sheet) which are deliberately used to hedge the trading activities. The positions in these instruments will attract counterparty risk capital requirements and general market risk, but not specific risk requirements.

              • CA-1.3.8

                Where a financial instrument which would normally qualify as part of the trading book is used to hedge an exposure in the banking book, it should be carved out of the trading book for the period of the hedge, and included in the banking book with the exposure it is hedging. Such instruments will be subject to the credit risk capital requirements.

              • CA-1.3.9

                It is possible that general market risk arising from the trading book may hedge positions in the banking book without reference to individual financial instruments. In such circumstances, there must nevertheless be underlying positions in the trading book. The positions in the banking book which are being hedged must remain in the banking book, although the general market risk exposure associated with them should be incorporated within the calculation of general market risk capital requirements for the trading book (i.e. the general market risk element on the banking book side of the hedge should be added to the trading book calculation, rather than that on the trading book side of the hedge being deducted from it). As no individual financial instruments are designated, there is no resultant specific risk requirement in the trading book and the risk-weighted assets in the banking book will not be reduced. Any such arrangement for the transfer of risk must be subject to the policy statement agreed with the Agency as explained in paragraph CA-1.3.2 above, and should have the specific prior written approval of the Agency.

            • Allocation of financial and hedging instruments

              • CA-1.3.10

                The allocation of a financial instrument between the trading book and the banking book, or the allocation of hedging instruments described in paragraph CA-1.3.7 above, or the transfer of general market risk as explained in paragraph CA-1.3.9 above, should be subject to appropriate and adequate documentation to ensure that it can be established through audit verification that the item is treated correctly for the purposes of capital requirements, in compliance with the bank's established criteria for allocating items to the trading or banking book, and subject to the policy statement agreed with the Agency.

              • CA-1.3.11

                The Agency intends to carefully monitor the way in which banks allocate financial instruments and will seek, in particular, to ensure that no abusive switching designed to minimise capital charges occurs and to prevent "gains trading" in respect of securities which are not marked to market.

            • Review of compliance by internal and external auditors

              • CA-1.3.12

                The bank's compliance with the established criteria for allocating items to the trading and banking books, and with the policy statement agreed with the Agency, should be reviewed by the bank's internal auditors at least on a quarterly basis, and by the external auditors at least once a year.

              • CA-1.3.13

                Any cases of non-compliance identified by the internal auditor should be immediately brought to the attention of the Agency, in writing, by the senior management of the bank. Any non-compliance identified by the external auditors, requires them to submit a written report directly to the Agency (in accordance with the requirements in section CA-9.8), in addition to a report to be submitted by the management.

            • Valuation requirements

              • CA-1.3.14

                To establish a relevant base for measuring the market risk in the trading book, all positions should be marked to market daily, including the recognition of accruing interest, dividends or other benefits as appropriate. Banks are required to have, and discuss with the Agency, a written policy statement on the subject of valuing trading book positions, which in particular should address the valuation process for those items where market prices are not readily available. This policy statement should have been developed in conjunction with the bank's internal and external auditors. Having arrived at a valuation mechanism for a single position or a group of similar positions, the valuation approach should be applied consistently. In addition to the considerations of prudence and consistency, the bank's valuation policy should reflect the points set out below:

                (a) A bank may mark to market positions using either a close-out valuation based on two-way prices (i.e., a long position shall be valued at its current bid price and a short position at its current offer price) or, alternatively, using a mid-market price but making a provision for the spread between bid and offer prices for different instruments. The bank must have due regard to the liquidity of the position concerned and any special factors which may adversely affect the closure of the position.
                (b) Where a bank has obtained the Agency's approval for the use of a risk assessment model in the calculation of the capital requirements for options (in accordance with chapter CA-9 of these regulations), it may value its options using the values derived from that model.
                (c) Where a bank does not use a model and the prices are not published for its options positions, it must determine the market value as follows:
                (i) For purchased options, the marked-to-market value is the product of the "in the money" amount and the quantity underlying the option; and
                (ii) For written options, the marked-to-market value is the initial premium received for the option plus the product of the amount by which the current "in the money" amount exceeds either the "in the money" amount at the time the contract was written, or zero if the contract was "out of the money" at the time that it was written; and the quantity underlying the option.
                (d) A bank must calculate the value of a swap contract or an FRA having regard to the net present value of the future cash flows of the contract, using current interest rates relevant to the periods in which the cash flows will arise.
                (e) Where a bank is a market maker in an instrument(s), the valuation should be the bank's own bid or offer price which should reflect the bank's exposure to the market as a whole and its views on future prices. Where the bank is the sole market maker in a particular instrument, it should take proper care to ensure that the valuation used is prudent in all circumstances.
                (f) In the event that a bank is only able to access indicative prices, having regard to the fact that they are only a guide, such prices may have to be adjusted to some degree in order to arrive at a prudent valuation.
                (g) In the event that the bank is only able to access mid-market or single values, it should have regard to the fact that these prices will have to be adjusted to some degree in order to arrive at a prudent valuation.

            • Consolidation

              • CA-1.3.15

                Both credit risk and market risk capital requirements will apply on a worldwide consolidated basis. Only a bank which is running a global consolidated book may apply the offsetting rules contained in the remainder of these regulations, on a consolidated basis with the prior written agreement of the Agency. However, where it would not be prudent to offset or net positions within the group as, for example, where there are obstacles to the quick repatriation of profits from a foreign subsidiary or where there are legal and procedural difficulties in carrying out the timely management of risks on a consolidated basis, the Agency will require the bank to take individual positions into account without any offsetting.

              • CA-1.3.16

                Notwithstanding that the market risk capital requirements will apply on a worldwide consolidated basis, the Agency retains the right to monitor the market risks of banks on a non-consolidated basis to ensure that significant imbalances within a group do not escape supervision. The Agency will be particularly vigilant to ensure that banks do not pass positions on reporting dates in such a way as to escape measurement.

            • Approach to measurement

              • CA-1.3.17

                For the measurement of their market risks, banks will have a choice, subject to the written approval of the Agency, between two broad methodologies. One alternative is to measure the risks in a standardised approach, using the measurement frameworks described in chapters CA-4 to CA-8 of these regulations. Chapters CA-4 to CA-7 deal with the four risks addressed by these regulations; namely interest rate risk, equity position risk, foreign exchange risk and commodities risk. Chapter CA-8 sets out a number of possible methods for measuring the price risk in options of all kinds. The capital charge under the standardised approach is the arithmetical sum of the risk measures obtained from the measurement frameworks in chapters CA-4 to CA-8.

              • CA-1.3.18

                The standardised approach uses a "building-block" approach in which the specific risk and the general market risk arising from interest rate and equity positions are calculated separately.

              • CA-1.3.19

                The second alternative methodology, which is subject to the fulfilment of certain conditions and the use of which is, therefore, conditional upon the explicit approval of the Agency, is set out in detail in chapter CA-9 including the procedure for obtaining the Agency's approval. This method allows banks to use risk measures derived from their own internal risk measurement models (Internal Models Approach), subject to seven sets of conditions which are described in detail in chapter CA-9.

              • CA-1.3.20

                The focus of most internal models currently used by banks is the general market risk exposure, typically leaving specific risk (i.e., exposures to specific issuers of debt securities or equities1) to be measured largely through separate credit risk measurement systems. Banks using internal models for the measurement of their market risk capital requirements will be subject to a separate capital charge for specific risk, to the extent that the model does not capture specific risk. The capital charge for banks which are modelling specific risk is set out in chapter CA-9.


                1 Specific risk includes the risk that an individual debt or equity security moves by more or less than the general market in day-to-day trading (including periods when the whole market is volatile) and event risk (where the price of an individual debt or equity security moves precipitously relative to the general market, e.g., on a take-over bid or some other shock event; such events would also include the risk of "default").

              • CA-1.3.21

                In measuring the price risk in options under the standardised approach, a number of alternatives with varying degrees of sophistication are allowed (see chapter CA-8). The more a bank is engaged in writing options, the more sophisticated its measurement method needs to be. In the longer term, banks with significant options business will be expected to move to comprehensive value-at-risk models and become subject to the full range of quantitative and qualitative standards set out in chapter CA-9.

              • CA-1.3.22

                All transactions, including forward sales and purchases, shall be included in the calculation of capital requirements as from the date on which they were entered into.

            • Monitoring

              • CA-1.3.23

                Banks are expected to manage their market risk in such a way that the capital requirements for market risk are being met on a continuous basis, i.e. at the close of each business day and not merely at the end of each calendar quarter, both in the case of banks that use the standardised approach and those that use internal models. Banks are also expected to maintain strict risk management systems to ensure that their intra-day exposures are not excessive.

              • CA-1.3.24

                Banks' daily compliance with the capital requirements for market risk shall be verified by the independent risk management department and the internal auditor. It is expected that the external auditors will perform appropriate tests of the banks' daily compliance with the capital requirements for market risk. Where a bank fails to meet the minimum capital requirements for market risk on any business day, the Agency should be informed in writing. The Agency will then seek to ensure that the bank takes immediate measures to rectify the situation.

              • CA-1.3.25

                Besides what is stated in paragraphs CA-1.3.2, CA-1.3.3, CA-1.3.10, CA-1.3.11, CA-1.3.19 and section CA-1.6, the Agency will consider a number of other appropriate and effective measures to ensure that banks do not "window-dress" by showing significantly lower market risk positions on reporting dates.

          • CA-1.4 CA-1.4 Reporting

            • CA-1.4.1

              Formal reporting, to the Agency, of capital adequacy shall be made in accordance with the requirements set out under section BR-3.1.

            • Review of Prudential Information Returns by External Auditors

              • CA-1.4.2

                The Agency requires all relevant banks to request their external auditors to conduct a review of the prudential returns on a quarterly basis in accordance with the requirements set out under section BR-3.1.

          • CA-1.5 CA-1.5 Summary of overall capital adequacy requirement

            • CA-1.5.1

              Each bank is expected to monitor and report the level of risk against which a capital requirement is to be applied, in accordance with section CA-1.3 above. The bank's overall minimum capital requirement will be:

              The credit risk requirements laid down by the Agency, excluding debt and equity securities in the trading book and all positions in commodities, but including the credit counterparty risk on all over-the-counter derivatives whether in the trading or the banking books: PLUS one of the following:

              (a) The capital charges for market risks calculated according to the measurement frameworks described in chapters CA-4 to CA-8, summed arithmetically: OR
              (b) The measure of market risk derived from the models approach set out in chapter CA-9 (with the prior written approval of the Agency for adopting this approach — see chapter CA-9); OR
              (c) A mixture of (a) and (b) above, summed arithmetically (with the prior written approval of the Agency for adopting a combination of the standardised approach and the internal models approach — see chapter CA-9).

          • CA-1.6 CA-1.6 Transitional provisions

            • CA-1.6.1

              Banks which start to use internal models for one or more risk categories should, over a reasonable period of time, extend the models to all of their operations, subject to the exceptions mentioned in paragraph CA-1.6.4 below, and to move towards a comprehensive model (i.e., one which captures all market risk categories).

            • CA-1.6.2

              On a transitional basis, banks will be allowed to use a combination of the standardised approach and the internal models approach to measure their market risks provided they should cover a complete risk category (e.g., interest rate risk or foreign exchange risk), i.e., a combination of the two methods will not be allowed within the same risk category1. However, for banks that are, at present, still implementing or further improving their internal models, they will be allowed some flexibility, even within risk categories, in including all their operations on a worldwide basis. This flexibility shall be subject to the specific prior written approval of the Agency, and such approval will be given on a case-by-case basis and reviewed by the Agency from time to time.


              1 This does not, however, apply to pre-processing techniques which are used to simplify the calculation and whose results become subject to the standardised methodology.

            • CA-1.6.3

              The Agency will closely monitor banks to ensure that there will be no "cherry-picking" between the standardised approach and the models approach within a risk category. Banks which adopt a model will not be permitted, save in exceptional circumstances, to revert to the standardised approach.

            • CA-1.6.4

              The Agency recognises that even a bank which uses a comprehensive model may still incur risks in positions which are not captured by their internal models2, for example, in remote locations, in minor currencies or in negligible business areas3. Any such risks that are not included in a model should be separately measured and reported using the standardised approach described in chapters CA-4 to CA-8.


              2 Banks may also incur interest rate and equity risks outside of their trading activities. However, there are no explicit capital charges for the price risk in such positions.

              3 For example, if a bank is hardly engaged in commodities it will not necessarily be expected to model its commodities risk.

            • CA-1.6.5

              Transitioning banks are required to move towards a comprehensive internal model approach.

            • CA-1.6.6

              The Agency will closely monitor the risk management practices of banks moving towards the models approach, to ensure that they will be in a position to meet all the standards once they are applying a fully-fledged model for any risk category.

        • CA-2 CA-2 The capital requirement

          • CA-2.1 CA-2.1 Introduction

            • CA-2.1.1

              Banks are allowed three types of capital instruments to meet their capital requirements for credit risk and market risk, as set out below:

              Tiers 1 and 2: May be used to support credit risk and market risk; and
              Tier 3: May be used solely to support market risk.

            • CA-2.1.2

              For a branch of a foreign bank operating as a full commercial branch, a designated capital is required, as agreed between the BMA and the licensee, taking into consideration the gearing requirement stated in section CA-10.1.

          • CA-2.2 CA-2.2 Definition of capital

            • Tier 1: Core capital

              • CA-2.2.1

                Tier 1 capital shall consist of the sum of items (a) to (c) below, less the sum of items (d) to (e) below:

                (a) Permanent shareholders' equity (including issued and fully paid ordinary shares / common stock and perpetual non-cumulative preference shares, but excluding cumulative preference shares);
                (b) Disclosed reserves, which are audited and approved by the shareholders, in the form of legal, general and other reserves created by appropriations of retained earnings, share premiums, capital redemption reserves and other surplus but excluding revaluation reserves; and
                (c) Minority interests, arising on consolidation, in the equity of subsidiaries which are less than wholly owned.

                LESS:
                (d) Goodwill; and
                (e) Current year's cumulative net losses which have been reviewed or audited as per the International Standards on Auditing (ISA) by the external auditors.

            • Tier 2: Supplementary capital

              • CA-2.2.2

                Tier 2 capital shall consist of the following items:

                (a) Interim retained profits which have been reviewed as per the ISA by the external auditors;
                (b) Asset revaluation reserves, which arise in two ways. Firstly, these reserves can arise from the revaluation of fixed assets from time to time in line with the change in market values, and are reflected on the face of the balance sheet as a revaluation reserve. Secondly, hidden values or "latent' revaluation reserves may be present as a result of long-term holdings of equity securities valued in the balance sheet at the historical cost of acquisition. Both types of revaluation reserve may be included in tier 2 capital, with the concurrence of the external auditors, provided that the assets are prudently valued, fully reflecting the possibility of price fluctuation and forced sale. In the case of "latent" revaluation reserves, a discount of 55% will be applied to the difference between the historical cost book value and the market value to reflect the potential volatility of this form of unrealised capital.
                (c) General provisions held against future, presently unidentified losses which are freely available to meet losses which subsequently materialise and, therefore, qualify for inclusion within supplementary elements of capital, subject to a maximum of 1.25% of total risk-weighted assets (both credit and market risk-weighted assets). Provisions ascribed to impairment of particular assets or known liabilities should be excluded.
                (d) Hybrid instruments, which include a range of instruments which combine characteristics of equity capital and of debt, and which meet the following requirements:
                •  They are unsecured, subordinated and fully paid-up;
                •  They are not redeemable at the initiative of the holder or without the prior consent of the Agency;
                •  They are available to participate in losses without the bank being obliged to cease trading (unlike conventional subordinated debt); and
                •  Although the capital instrument may carry an obligation to pay interest that cannot permanently be reduced or waived (unlike dividends on ordinary shareholders' equity), it should allow service obligations to be deferred (as with cumulative preference shares) where the profitability of the bank would not support payment.
                Cumulative preference shares, having the above characteristics, would be eligible for inclusion in tier 2 capital. Debt capital instruments which do not meet the above criteria may be eligible for inclusion in item (e) below.
                (e) Subordinated term debt, which comprises all conventional unsecured borrowing subordinated (in respect of both interest and principal) to all other liabilities of the bank except the share capital and limited life redeemable preference shares. To be eligible for inclusion in tier 2 capital, subordinated debt capital instruments should have a minimum original fixed term to maturity of over five years. During the last five years to maturity, a cumulative discount (or amortisation) factor of 20% per year will be applied to reflect the diminishing value of these instruments as a continuing source of strength. Unlike instruments included in item (d) above, these instruments are not normally available to participate in the losses of a bank which continues trading. For this reason, these instruments will be limited to a maximum of 50% of tier 1 capital.
                (f) 45% of unrealised gains on equity securities held as available-for-sale (on an aggregate net-basis).

            • Deduction from tiers 1 and 2 capital

              • CA-2.2.3

                The following item shall be deducted from tiers 1 and 2 capital on a pro-rata basis:

                —Investments in and lending of a capital nature to unconsolidated subsidiaries engaged in banking and financial activities. The assets representing the investments in subsidiary companies whose capital is deducted from that of the parent would not be included in total assets for the purpose of computing the capital ratio.

            • Tier 3: Trading book ancillary capital

              • CA-2.2.4

                Tier 3 capital will consist of short-term subordinated debt which, if circumstances demand, needs to be capable of becoming part of the bank's permanent capital and thus be available to absorb losses in the event of insolvency. It must, therefore, at a minimum meet the following conditions:

                (a) Be unsecured, subordinated and fully paid up;
                (b) Have an original maturity of at least two years;
                (c) Not be repayable before the agreed repayment date; and
                (d) Be subject to a lock-in clause which stipulates that neither interest nor principal may be paid (even at maturity) if such payment means that the bank falls below or remains below its minimum capital requirement.

          • CA-2.3 CA-2.3 Limits on the use of different forms of capital

            • Tier 1: Core capital

              • CA-2.3.1

                Tier 1 capital should represent at least half of the total eligible capital, i.e., the sum total of tier 2 plus tier 3 eligible capital should not exceed total tier 1 eligible capital.

            • Tier 2: Supplementary capital

              • CA-2.3.2

                Tier 2 elements may be substituted for tier 3 up to the tier 3 limit of 250% of tier 1 capital (as below) in so far as eligible tier 2 capital does not exceed total tier 1 capital, and long-term subordinated debt does not exceed 50% of tier 1 capital.

            • Tier 3: Ancillary capital

              • CA-2.3.3

                Tier 3 capital is limited to 250% of a bank's tier 1 capital that is required to support market risks. This means that a minimum of about 28.57% of market risks needs to be supported by tier 1 capital that is not required to support risks in the remainder of the book.

          • CA-2.4 CA-2.4 Calculation of the capital ratio

            • CA-2.4.1

              A bank should start the calculation of the capital ratio with the measure of market risk (i.e., specific risk plus general market risk) in accordance with the regulations in this module, including interest rate risk, equity risk, foreign exchange and commodities risks.

            • CA-2.4.2

              The bank should next calculate its credit risk-weighted assets in accordance with the regulations in this module.

            • CA-2.4.3

              The next step is to create an explicit numerical link between the capital requirements for credit and market risks. This is accomplished by multiplying the measure of market risk (calculated as stated in paragraphs CA-2.4.1 and CA-2.4.2 above) by 12.5 and adding the resulting figure to the sum of the credit risk-weighted assets. The capital ratio will then be calculated in relation to the sum of the two, using as the numerator only the eligible capital.

            • CA-2.4.4

              In calculating the eligible capital, it will be necessary first to calculate the bank's minimum capital requirement for credit risk, and only afterwards its market risk requirement, to establish how much tier 1 and tier 2 capital is available to support market risk. Eligible capital will be the sum of the whole of the bank's tier 1 capital, plus tier 2 capital under the limits set out in section CA-2.3 above. Tier 3 capital will be regarded as eligible only if it can be used to support market risks under the conditions set out in section CA-2.2 and CA-2.3 above. The quoted capital ratio will thus represent capital that is available to meet both credit risk and market risk. Where a bank has tier 3 capital, which meets the conditions set out in section CA-2.2 above and which is not at present supporting market risks, it may report that excess as unused but eligible tier 3 capital alongside its capital ratio. A worked example of the calculation of the capital ratio is set out in Appendix CA 1.

          • CA-2.5 CA-2.5 Minimum capital ratio requirement

            • Banking group

              • CA-2.5.1

                On a consolidated basis, the Agency has set a minimum Risk Asset Ratio ("RAR") of 12.0% for all locally incorporated banks. Furthermore, on a solo basis, the parent bank of a group is required to maintain a minimum RAR of 8.0% (i.e. unconsolidated).

              • CA-2.5.2

                This means where a bank is required to complete both form PIR (Appendix BR 5) and form PIRC (Appendix BR 6), 8.0% is the minimum RAR necessary for the solo bank (PIR), and 12.0% for the consolidated bank (PIRC).

            • Individual bank

              • CA-2.5.3

                For banks that are required to complete only the PIR form, the Agency has set a minimum Risk Asset Ratio ("RAR") of 12.0%.

            • Maintaining minimum RAR

              • CA-2.5.4

                To clarify the effect of these minimum ratios (as identified in paragraphs CA-2.5.1 to CA-2.5.3) on differing banking groups and individual banks, four examples (see Appendix CA 1) are given. In the examples, the parent and the subsidiary are Bahrain incorporated banks, but the cases could apply to overseas incorporated subsidiaries (with adjustment to the minimum RAR where appropriate in individual cases).

                (a) Case One: Compliant solo bank—No subsidiaries (PIR only).
                (b) Case Two: Compliant parent bank, compliant group (PIR and PIRC).
                (c) Case Three: Compliant parent bank, compliant subsidiary bank, but non-compliant group.
                (d) Case Four: Non-compliant parent bank, compliant subsidiary bank and compliant group.

                For detailed workings of the above cases, refer to Appendix CA 1.

              • CA-2.5.5

                All locally incorporated banks must give the Agency, immediate written notification of any actual breach by such banks of either or both of the above RARs. Where such notification is given, the bank must also:

                (a) provide the Agency no later than one calendar week after the notification, with a written action plan setting out how the bank proposes to restore the relevant RAR(s) to the required minimum level(s) set out above and, further, describing how the bank will ensure that a breach of such RAR(s) will not occur again in the future; and
                (b) report on a weekly basis thereafter on the bank's relevant RAR(s) until such RAR(s) have reached the required target level(s) set out below.

              • CA-2.5.6

                In addition, the Agency considers it a matter of basic prudential practice that, in order to ensure that these RARs are constantly met, banks set up internal "targets" of 12.5% (on a consolidated basis) and 8.5% (on a solo basis) to warn them of a potential fall by the bank below the Agency's required minimum RARs as set out above.

              • CA-2.5.7

                Where a bank's capital ratio falls below its target ratio, the General Manager should notify the Director of Banking Supervision at the Agency immediately. No formal action plan will be necessary, however the General Manager should explain what measures are being implemented to ensure that the bank will remain above its minimum RAR(s).

              • CA-2.5.8

                The bank will be required to submit form PIR (and PIRC where applicable) to the Agency on a monthly basis, until the RAR(s) exceeds its target ratio(s).

              • CA-2.5.9

                The Agency will notify banks in writing of any action required of them with regard to the corrective and preventive action (as appropriate) proposed by the bank pursuant to the above, as well as of any other requirement of the Agency in any particular case.

              • CA-2.5.10

                Banks should note that the Agency considers the breach of RARs to be a very serious matter. Consequently, the Agency may (at its discretion) subject a bank which breaches its RAR(s) to a formal licensing reappraisal. Such reappraisal may be effected either through the Agency's own inspection function or through the use of Reporting Accountants, as appropriate. Following such appraisal, the Agency will notify the bank concerned in writing of its conclusions with regard to the continued licensing of the bank.

              • CA-2.5.11

                The Agency recommends that the bank's compliance officer supports and cooperates with the Agency in the monitoring and reporting of the capital ratios and other regulatory reporting matters. Compliance officers should ensure that their banks have adequate internal systems and controls to comply with these regulations.

        • CA-3 CA-3 Credit risk

          • CA-3.1 CA-3.1 Introduction

            • CA-3.1.1

              This chapter describes the standardised approach for the measurement of the credit risk exposure in the bank's banking book.

            • CA-3.1.2

              As illustrated in sections CA-3.2, CA-3.3 and CA-3.4, banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative risk.

          • CA-3.2 CA-3.2 Risk weighting — On-balance-sheet asset category

            • CA-3.2.1

              Risk weights by category of on-balance-sheet asset are illustrated in the table below:

              Risk weights Category of on-balance-sheet assets/claims
              0%
              (a) Cash and balances with Central Banks
              (b) Holdings of Gold bullion and other commodities
              (c) Claims on & guaranteed by:

              (i) The Government of Bahrain & Bahrain public sector entities
              (ii) Government-owned GCC companies incorporated in Bahrain
              (d) Claims on & guaranteed by or collateralised by cash or securities issued by central governments and central banks of Group A countries; and
              (e) Claims on the central governments and central banks of Group B countries, where denominated in national currency and funded in that currency.
              20%
              (a) Claims on and guaranteed by or collateralised by securities issued by multilateral development banks
              (b) Claims on and guaranteed by banks and securities firms incorporated in Group A countries
              (c) Claims on and guaranteed by banks incorporated in Group B countries with a residual maturity of 1 year or less
              (d) Claims on and guaranteed by public sector entities in Group A countries
              (e) Claims on and guaranteed by government-owned GCC companies incorporated outside Bahrain; and
              (f) Cash items in process of collection
              50% Claims secured by mortgage on residential property
              100%
              (a) Claims on related parties
              (b) Holdings of other (non-subsidiary) banks' and securities firms' capital instruments
              (c) Claims on and guaranteed by banks incorporated in Group B countries with a residual maturity over one year
              (d) Claims on central governments and central banks of Group B countries (not included above)
              (e) Claims on and guaranteed by public sector entities of Group B countries
              (f) Claims on and guaranteed by government-owned companies in non-GCC countries
              (g) Claims on and guaranteed by private sector persons and entities in and outside Bahrain
              (h) Premises and equipment, real estate investments and assets not reported elsewhere

          • CA-3.3 CA-3.3 Risk weighting — Off-balance-sheet items

            • CA-3.3.1

              The framework takes account of the credit risk on off-balance-sheet exposures by applying credit conversion factors to the different types of off-balance-sheet instruments or transactions (with the exception of derivatives).

            • CA-3.3.2

              The conversion factors are derived from the estimated size and likely occurrence of the credit exposure, as well as the relative degree of credit risk as identified in the Basel Committee's paper on "The management of banks' off-balance-sheet exposures: a supervisory perspective" (see www.bis.org/publ/bcbsc134.pdf) issued in March 1986.

            • CA-3.3.3

              The credit conversion factors applicable to the off-balance-sheet items are set out in the table below:

              Credit Conversion factors Off-balance-sheet items
              100% Direct credit substitutes, including general guarantees of indebtedness and acceptances
              50% Transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions)
              20% Short-term self-liquidating trade-related contingencies (such as documentary credits collateralised by the underlying shipments)
              100% Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank
              100% Forward asset purchases, forward forward deposits and the unpaid part of partly-paid shares and securities, which represent commitments with certain draw-down
              50% Underwriting commitments under note issuance and revolving underwriting facilities (minus own holdings of notes underwritten)
              50% Other commitments (e.g. formal standby facilities and credit lines) with an original maturity of 1 year and over
              0% Similar commitments with an original maturity of up to 1 year, or which can be unconditionally cancelled at any time

            • CA-3.3.4

              The applicable credit conversion factors should be multiplied by the weights applicable to the category of the counterparty as set out below:

              Risk weights Counterparty
              0% Type (a)
              — The Government of Bahrain.
              — Bahrain public sector entities.
              — Government-owned (non-banking) GCC companies incorporated in Bahrain.
              — Central government and central banks of Group A countries.
              20% Type (b)
              — Banks incorporated in Bahrain or Group A countries and securities firms.
              — Banks incorporated in Group B countries (if the commitment has a residual life of 1 year or less).
              — Public sector entities in Group A countries.
              — Government-owned (non-banking) GCC companies incorporated outside Bahrain.
              100% Type (c)
              — Banks incorporated in Group B countries (if the commitment has a residual life of more than 1 year).
              — Central governments, central banks and public sector entities in Group B countries.
              — Government-owned companies incorporated in non-GCC countries.
              — Private sector persons and entities in Bahrain and abroad.

          • CA-3.4 CA-3.4 Treatment of derivatives contracts in the banking book

            • CA-3.4.1

              The treatment of forwards, swaps, purchased options and similar derivative contracts needs special attention because banks are not exposed to credit risk for the full face value of their contracts, but only to the potential cost of replacing the cash flow (on contracts showing positive value) if the counterparty defaults. The credit equivalent amounts (as referred to under paragraph CA-3.4.13) will depend inter alia on the maturity of the contract and on the volatility of the rates and prices underlying that type of instrument.

            • CA-3.4.2

              Instruments traded on exchanges may be excluded where they are subject to daily receipt and payment of cash variation margins.

            • CA-3.4.3

              Options purchased over-the-counter are included with the same conversion factors as other instruments.

            • Interest rate contracts

              • CA-3.4.4

                Interest rate contracts are defined to include single-currency interest rate swaps, basis swaps, forward rate agreements, interest rate futures, interest rate options purchased and similar instruments.

            • Exchange rate contracts

              • CA-3.4.5

                Exchange rate contracts include cross-currency interest rate swaps, forward foreign exchange contracts, currency futures, currency options purchased and similar instruments.

              • CA-3.4.6

                Exchange rate contracts with an original maturity of 14 calendar days or less may be excluded.

            • Equity contracts

              • CA-3.4.7

                Equity contracts include forwards, swaps, purchased options and similar derivative contracts based on individual equities or on equity indices.

            • Gold contracts

              • CA-3.4.8

                Gold contracts are treated the same as foreign exchange contracts for the purpose of calculating credit risk except that contracts with original maturity of 14 calendar days or less are included.

              • CA-3.4.9

                Precious metals other than gold receive a separate treatment (see section BR-4.1) and include forwards, swaps, purchased options and similar derivative contracts that are based on precious metals (e.g. silver, platinum, and palladium).

            • Other commodities

              • CA-3.4.10

                Other commodities are also treated separately (see section BR-4.1) and include forwards, swaps, purchased options and similar derivative contracts based on energy contracts, agricultural contracts, base metals (e.g. aluminium, copper, and zinc), and any other non-precious metal commodity contracts.

            • General guidance on treatment of derivatives contracts

              • CA-3.4.11

                The following points should be noted for the treatment of certain derivatives contracts:

                (a) For contracts with multiple exchange of principal, the add-on factors are to be multiplied by the number of remaining payments in the contracts.
                (i) For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be set equal to the time until the next reset date.
                (ii) Forwards, swaps, purchased options and similar derivative contracts not covered in any of the above mentioned categories should be treated as "other commodities".
                (iii) No potential future credit exposure (as referred to under paragraph CA-3.4.12) would be calculated for single currency floating/floating interest rate swaps.

            • Calculation of weighted derivative exposures

              • CA-3.4.12

                Banks should calculate their weighted exposure under the above mentioned contracts according to the Current Exposure Method, which involves calculating the current replacement cost by marking contracts to market, thus capturing the current exposure without any need for estimation, and then adding a factor (the "add-on") to reflect the potential future exposure over the remaining life of the contract.

                The 'add-on' factor table:

                  Residual maturity of contracts
                1 year or less Over 1 year to 5 years Over 5 years
                Interest rate related contracts 0.000 0.005 0.015
                Foreign exchange & gold contracts 0.010 0.050 0.075
                Equity contracts 0.060 0.080 0.100
                Precious metals (except gold) 0.070 0.070 0.070
                Other commodities 0.120 0.120 0.150

              • CA-3.4.13

                In order to reflect counterparty risk, the total credit equivalent amount, which results from the calculation in paragraph CA-3.4.12 has to be broken down again according to type of counterparty, using the same classification into types (a), (b) and (c) given in section CA-3.3. Finally, the exposure to each type of counterparty has to be weighted as 0%, 20% or 50% respectively, and the total weighted exposure calculated.

        • CA-4 CA-4 Interest rate risk — Standardised approach

          • CA-4.1 CA-4.1 Introduction

            • CA-4.1.1

              This chapter describes the standardised approach for the measurement of the interest rate risk in the bank's trading book, in order to determine the capital requirement for this risk. The interest rate exposure captured includes exposure arising from interest-bearing and discounted financial instruments, derivatives which are based on the movement of interest rates, foreign exchange forwards, and interest rate exposure embedded in derivatives which are based on non-interest rate related instruments.

            • CA-4.1.2

              For the guidance of the banks, and without being exhaustive, the following list includes financial instruments in the trading book to which interest rate risk capital requirements will apply, irrespective of whether or not the instruments carry coupons:

              (a) bonds/loan stocks, debentures etc.;
              (b) non-convertible preference shares;
              (c) convertible securities such as preference shares and bonds, which are treated as debt instruments4;
              (d) mortgage backed securities and other securitised assets5;
              (e) Certificates of Deposit;
              (f) treasury bills, local authority bills, banker's acceptances;
              (g) commercial paper;
              (h) euronotes, medium term notes, etc.;
              (i) floating rate notes, FRCDs etc.;
              (j) foreign exchange forward positions;
              (k) derivatives based on the above instruments and interest rates; and
              (l) interest rate exposure embedded in other financial instruments.

              4 See section CA-5.1 for an explanation of the circumstances in which convertible securities should be treated as equity instruments. In other circumstances, they should be treated as debt instruments.

              5 Traded mortgage securities and mortgage derivative products possess unique characteristics because of the risk of pre-payment. It is possible that including such products within the standardised methodology as if they were similar to other securitised assets may not capture all the risks of holding positions in them. Banks which have traded mortgage securities and mortgage derivative products should discuss their proposed treatment with the Agency and obtain the Agency's prior written approval for it.

            • CA-4.1.3

              For instruments that deviate from the above structures, or could be considered complex, each bank should agree a written policy statement with the Agency about the intended treatment, on a case-by-case basis. In some circumstances, the treatment of an instrument may be uncertain, for example bonds whose coupon payments are linked to equity indices. The position risk of such instruments should be broken down into its components and allocated appropriately between the equity, interest rate and foreign exchange risk categories. Advice must be sought from the Agency in cases of doubt, particularly when a bank is trading an instrument for the first time.

            • CA-4.1.4

              A security which is the subject of a repurchase or securities lending agreement will be treated as if it were still owned by the lender of the security, i.e., it will be treated in the same manner as other securities positions.

            • CA-4.1.5

              The minimum capital requirement is expressed in terms of two separately calculated charges, one applying to the 'specific risk" of each position, and the other to the interest rate risk in the portfolio, termed "general market risk". The aggregate capital requirement for interest rate risk is the sum of the general market interest rate risk capital requirements across currencies, and the specific risk capital requirements.

            • CA-4.1.6

              The specific risk capital requirement recognises that individual instruments may change in value for reasons other than shifts in the yield curve of a given currency. The general risk capital requirement reflects the price change of these products caused by parallel and non-parallel shifts in the yield curve, as well as the difficulty of constructing perfect hedges.

            • CA-4.1.7

              There is general market risk inherent in all interest rate risk positions. This may be accompanied by one or more out of specific interest rate risk, counterparty risk, equity risk and foreign exchange risk, depending on the nature of the position. Banks should consider carefully which risks are generated by each individual position. It should be recognised that the identification of the risks will require the application of the appropriate level of technical skills and professional judgment.

            • CA-4.1.8

              Banks which have the intention and capability to use internal models for the measurement of general and specific interest rate risks and, hence, for the calculation of the capital requirement, should seek the prior written approval of the Agency for those models. The Agency's detailed rules for the recognition and use of internal models are included in chapter CA-9. Banks which do not use internal models should adopt the standardised approach to calculate the interest rate risk capital requirement, as set out in detail in this chapter.

          • CA-4.2 CA-4.2 Specific risk calculation

            • CA-4.2.1

              The capital charge for specific risk is designed to protect against a movement in the price of an individual instrument, owing to factors related to the individual issuer.

            • CA-4.2.2

              In measuring the specific risk for interest rate related instruments, a bank may net, by value, long and short positions (including positions in derivatives) in the same debt instrument to generate the individual net position in that instrument. Instruments will be considered to be the same where the issuer is the same, they have an equivalent ranking in a liquidation, and the currency, the coupon and the maturity are the same.

            • CA-4.2.3

              The specific risk capital requirement is determined by weighting the current market value of each individual net position, whether long or short, according to its allocation among the following five broad categories:

              (a) Eligible central government debt instrument 0.00%
              (b) Qualifying items with residual maturity up to 6 months 0.25%
              (c) Qualifying items with residual maturity between 6 and 24 months 1.00%
              (d) Qualifying items with residual maturity exceeding 24 months 1.60%
              (e) Non-qualifying items 8.00%

            • CA-4.2.4

              Eligible central "government" debt instruments will include all forms of government paper, including bonds, treasury bills and other short-term instruments, but the Agency reserves the right to apply a specific risk weight to securities issued by certain foreign governments, especially to securities denominated in a currency other than that of the issuing government.

            • CA-4.2.5

              Governments eligible are those which are members of either the Gulf Co-operation Council (GCC) or the Organisation for Economic Co-operation and Development (OECD).

            • CA-4.2.6

              The "qualifying" category includes securities issued by or fully guaranteed by public sector entities and multilateral development banks (refer to Appendix CA 2), plus other securities that are:

              (a) rated investment grade by at least two internationally recognised credit rating agencies (to be agreed with the Agency); or
              (b) deemed to be of comparable investment quality by the reporting bank, provided that the issuer is rated investment grade by at least two internationally recognised credit rating agencies (to be agreed with the Agency); or
              (c) rated investment grade by one credit rating agency and not less than investment grade by any internationally recognised credit rating agencies (to be agreed with the Agency); or
              (d) unrated (subject to the approval of the Agency), but deemed to be of comparable investment quality by the reporting bank and where the issuer has securities listed on a recognised stock exchange, may also be included.

          • CA-4.3 CA-4.3 General market risk calculation

            • CA-4.3.1

              The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest rates, i.e. the risk of parallel and non-parallel shifts in the yield curve. A choice between two principal methods of measuring the general market risk is permitted, a "maturity" method and a "duration" method. In each method, the capital charge is the sum of the following four components:

              (a) the net short or long position in the whole trading book;
              (b) a small proportion of the matched positions in each time-band (the "vertical disallowance");
              (c) a larger proportion of the matched positions across different time-bands (the "horizontal disallowance"); and
              (d) a net charge for positions in options, where appropriate (see chapter CA-8).

            • CA-4.3.2

              Separate maturity ladders should be used for each currency and capital charges should be calculated for each currency separately and then summed, by applying the prevailing foreign exchange spot rates, with no off-setting between positions of opposite sign.

            • CA-4.3.3

              In the case of those currencies in which the value and volume of business is insignificant, separate maturity ladders for each currency are not required. Instead, the bank may construct a single maturity ladder and slot, within each appropriate time-band, the net long or short position for each currency. However, these individual net positions are to be summed within each time-band, irrespective of whether they are long or short positions, to arrive at the gross position figure for the time-band.

            • CA-4.3.4

              A combination of the two methods (referred to under paragraph CA-4.3.1) is not permitted. Any exceptions to this rule will require the prior written approval of the Agency. It is expected that such approval will only be given in cases where a bank clearly demonstrates to the Agency, the difficulty in applying, to a definite category of trading instruments, the method otherwise chosen by the bank as the normal method. It is further expected that the Agency may, in future years, consider recognising the duration method as the approved method, and the use of the maturity method may be discontinued.

          • CA-4.4 CA-4.4 Maturity method

            • CA-4.4.1

              A worked example of the maturity method is included in Appendix CA 3. The various time-bands and their risk weights, relevant to the maturity method, are illustrated in paragraph CA-4.4.2(a) below.

            • CA-4.4.2

              The steps in the calculation of the general market risk for interest rate positions, under this method, are set out below:

              (a) Individual long or short positions in interest-rate related instruments, including derivatives, are slotted into a maturity ladder comprising thirteen time-bands (or fifteen time-bands in the case of zero-coupon and deep-discount instruments, defined as those with a coupon of less than 3%), on the following basis:
              (i) fixed rate instruments are allocated according to their residual term to maturity (irrespective of embedded puts and calls), and whether their coupon is below 3%;
              (ii) floating rate instruments are allocated according to the residual term to the next repricing date;
              (iii) positions in derivatives, and all positions in repos, reverse repos and similar products are decomposed into their components within each time band. Derivative instruments are covered in greater detail in sections CA-4.6 to CA-4.9;
              (iv) opposite positions of the same amount in the same issues (but not different issues by the same issuer), whether actual or notional, can be omitted from the interest rate maturity framework, as well as closely matched swaps, forwards, futures and FRAs which meet the conditions set out in section CA-4.8. In other words, these positions are netted within their relevant time-bands; and
              (v) the Agency's advice must be sought on the treatment of instruments that deviate from the above structures, or which may be considered sufficiently complex to warrant the Agency's attention.

              Maturity method: time-bands and risk weights

                Coupon > 3% Coupon < 3% Risk weight
              Zone 1 1 month or less 1 month or less 0.00%
                1 to 3 months 1 to 3 months 0.20%
                3 to 6 months 3 to 6 months 0.40%
                6 to 12 months 6 to 12 months 0.70%
              Zone 2 1 to 2 years 1 to 1.9 years 1.25%
                2 to 3 years 1.9 to 2.8 years 1.75%
                3 to 4 years 2.8 to 3.6 years 2.25%
              Zone 3 4 to 5 years 3.6 to 4.3 years 2.75%
                5 to 7 years 4.3 to 5.7 years 3.25%
                7 to 10 years 5.7 to 7.3 years 3.75%
                10 to 15 years 7.3 to 9.3 years 4.50%
                15 to 20 years 9.3 to 10.6 years 5.25%
                > 20 years 10.6 to 12 years 6.00%
                  12 to 20 years 8.00%
                  > 20 years 12.50%
              (b) The market values of the individual long and short net positions in each maturity band are multiplied by the respective risk weighting factors given in paragraph CA-4.4.2(a) above.
              (c) Matching of positions within each maturity band (i.e. vertical matching) is done as follows:
              •  Where a maturity band has both weighted long and short positions, the extent to which the one offsets the other is called the matched weighted position. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a band) is called the unmatched weighted position for that band.
              (d) Matching of positions, across maturity bands, within each zone (i.e. horizontal matching—level 1), is done as follows:
              •  Where a zone has both unmatched weighted long and short positions for various bands, the extent to which the one offsets the other is called the matched weighted position for that zone. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a zone) is called the unmatched weighted position for that zone.
              (e) Matching of positions, across zones (i.e. horizontal matching—level 2), is done as follows:
              (i) The unmatched weighted long or short position in zone 1 may be offset against the unmatched weighted short or long position in zone 2. The extent to which the unmatched weighted positions in zones 1 and 2 are offsetting is described as the matched weighted position between zones 1 and 2.
              (ii) After step (i) above, any residual unmatched weighted long or short position in zone 2 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 2 and 3 are offsetting is described as the matched weighted position between zones 2 and 3.
              The calculations in steps (i) and (ii) above may be carried out in reverse order (i.e. zones 2 and 3, followed by zones 1 and 2).

              (i) After steps (i) and (iii) above, any residual unmatched weighted long or short position in zone 1 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 1 and 3 are offsetting is described as the matched weighted position between zones 1 and 3.
              (f) Any residual unmatched weighted positions, following the matching within and between maturity bands and zones as described above, will be summed.
              (g) The general interest rate risk capital requirement is the sum of:

              (i) Matched weighted positions in all maturity bands x 10%
              (ii) Matched weighted positions in zone 1 x 40%
              (iii) Matched weighted positions in zone 2 x 30%
              (iv) Matched weighted positions in zone 3 x 30%
              (v) Matched weighted positions between zones 1 & 2 x 40%
              (vi) Matched weighted positions between zones 2 & 3 x 40%
              (vii) Matched weighted positions between zones 1 & 3 x 100%
              (viii) Residual unmatched weighted positions x 100%

              Item (i) is referred to as the vertical disallowance, items (ii) through (iv) as the first set of horizontal disallowances, and items (v) through (vii) as the second set of horizontal disallowances.

          • CA-4.5 CA-4.5 Duration method

            • CA-4.5.1

              The duration method is an alternative approach to measuring the exposure to parallel and non-parallel shifts in the yield curve, and recognises the use of duration as an indicator of the sensitivity of individual positions to changes in market yields. Under this method, banks may use a duration-based system for determining their general interest rate risk capital requirements for traded debt instruments and other sources of interest rate exposures including derivatives. A worked example of the duration method is included in Appendix CA 4. The various time-bands and assumed changes in yield, relevant to the duration method, are illustrated below.

              Duration method: time-bands and assumed changes in yield

                Time-band Assumed change in yield
              Zone 1 1 month or less 1.00
                1 to 3 months 1.00
                3 to 6 months 1.00
                6 to 12 months 1.00
              Zone 2 1 to 1.9 years 0.90
                1.9 to 2.8 years 0.80
                2.8 to 3.6 years 0.75
              Zone 3 3.6 to 4.3 years 0.75
                4.3 to 5.7 years 0.70
                5.7 to 7.3 years 0.65
                7.3 to 9.3 years 0.60
                9.3 to 10.6 years 0.60
                10.6 to 12 years 0.60
                12 to 20 years 0.60
                > 20 years 0.60

            • CA-4.5.2

              Banks should notify the Agency of the circumstances in which they elect to use this method. Once chosen, the duration method must be consistently applied, in accordance with the requirements of section CA-4.3.

            • CA-4.5.3

              Where a bank has chosen to use the duration method, it is possible that it will not be suitable for certain instruments. In such cases, the bank should seek the advice of the Agency or obtain approval for application of the maturity method to the specific category(ies) of instruments, in accordance with the provisions of section CA-4.3.

            • CA-4.5.4

              The steps in the calculation of the general market risk for interest rate positions, under this method, are set out below:

              (a) The bank will determine the Yield-to-Maturity (YTM) for each individual net position in fixed rate and floating rate instruments, based on the current market value. The basis of arriving at individual net positions is explained in section CA-4.4 above. The YTM for fixed rate instruments is determined without any regard to whether the instrument is coupon bearing, or whether the instrument has any embedded options. In all cases, YTM for fixed rate instruments is calculated with reference to the final maturity date and, for floating rate instruments, with reference to the next repricing date.
              (b) The bank will calculate, for each debt instrument, the modified duration (M) on the basis of the following formula:

              M = D
                (1+r)
              where,  
              D (duration) =
              Σ m   t × C
              t=1   (1+r)t

              Σ m   C
              t=1   (1+r)t

              r = YTM % per annum expressed as a decimal

              C = Cash flow at time t

              t = time at which cash flows occur, in years

              m = time to maturity, in years
              (c) Individual net positions, at current market value, are allocated to the time-bands illustrated in paragraph CA-4.5.1, based on their modified duration.
              (d) The bank will then calculate the modified duration-weighted position for each individual net position by multiplying its current market value by the modified duration and the assumed change in yield.
              (e) Matching of positions within each time band (i.e. vertical matching) is done as follows:
              •  Where a time band has both weighted long and short positions, the extent to which the one offsets the other is called the matched weighted position. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a band) is called the unmatched weighted position for that band.
              (f) Matching of positions, across time bands, within each zone (i.e. horizontal matching—level 1), is done as follows:
              •  Where a zone has both unmatched weighted long and short positions for various bands, the extent to which the one offsets the other is called the matched weighted position for that zone. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a zone) is called the unmatched weighted position for that zone.
              (g) Matching of positions, across zones (i.e. horizontal matching—level 2), is done as follows:
              (i) The unmatched weighted long or short position in zone 1 may be offset against the unmatched weighted short or long position in zone 2. The extent to which the unmatched weighted positions in zones 1 and 2 are offsetting is described as the matched weighted position between zones 1 and 2.
              (ii) After step (i) above, any residual unmatched weighted long or short position in zone 2 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 2 and 3 are offsetting is described as the matched weighted position between zones 2 and 3.
              The calculations in steps (i) and (ii) above may be carried out in reverse order (i.e. zones 2 and 3, followed by zones 1 and 2).

              (iii) After steps (a) and (b) above, any residual unmatched weighted long or short position in zone 1 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 1 and 3 are offsetting is described as the matched weighted position between zones 1 and 3.
              (h) Any residual unmatched weighted positions, following the matching within and between maturity bands and zones as described above, will be summed.
              (i) The general interest rate risk capital requirement is the sum of:

              (i) Matched weighted positions in all maturity bands x 5%
              (ii) Matched weighted positions in zone 1 x 40%
              (iii) Matched weighted positions in zone 2 x 30%
              (iv) Matched weighted positions in zone 3 x 30%
              (v) Matched weighted positions between zones 1 & 2 x 40%
              (vi) Matched weighted positions between zones 2 & 3 x 40%
              (vii) Matched weighted positions between zones 1 & 3 x 100%
              (viii) Residual unmatched weighted positions x 100%

              Item (i) is referred to as the vertical disallowance, items (ii) through (iv) as the first set of horizontal disallowances, and items (v) through (vii) as the second set of horizontal disallowances.

          • CA-4.6 CA-4.6 Derivatives

            • CA-4.6.1

              Banks which propose to use internal models to measure the interest rate risk inherent in derivatives will seek the prior written approval of the Agency for using those models. The use of internal models to measure market risk, and the Agency's rules applicable to them, are discussed in detail in chapter CA-9.

            • CA-4.6.2

              Where a bank, with the prior written approval of the Agency, uses an interest rate sensitivity model, the output of that model is used, by the duration method, to calculate the general market risk as described in section CA-4.5.

            • CA-4.6.3

              Where a bank does not propose to use models, it must use the techniques described in the following paragraphs, for measuring the market risk on interest rate derivatives. The measurement system should include all interest rate derivatives and off-balance-sheet instruments in the trading book which react to changes in interest rates (e.g. forward rate agreements, other forward contracts, bond futures, interest rate and cross-currency swaps, options and forward foreign exchange contracts). Where a bank has obtained the approval of the Agency for the use of non-interest rate derivatives models, the embedded interest rate exposures should be incorporated in the standardised measurement framework described in sections CA-4.7 to CA-4.9.

            • CA-4.6.4

              Derivative positions will attract specific risk only when they are based on an underlying instrument or security. For instance, where the underlying exposure is an interest rate exposure, as in a swap based upon interbank rates, there will be no specific risk, but only counterparty risk. A similar treatment applies to FRAs, forward foreign exchange contracts and interest rate futures. However, for a swap based on a bond yield, or a futures contract based on a debt security or an index representing a basket of debt securities, the credit risk of the issuer of the underlying bond will generate a specific risk capital requirement. Future cash flows derived from positions in derivatives will generate counterparty risk requirements related to the counterparty in the trade, in addition to position risk requirements (specific and general market risk) related to the underlying security.

            • CA-4.6.5

              A summary of the rules for dealing with interest rate derivatives (other than options) is set out in section CA-4.9. The treatment of options, being a complex issue, is dealt with in detail in chapter CA-8.

          • CA-4.7 CA-4.7 Calculation of derivative positions

            • CA-4.7.1

              The derivatives should be converted to positions in the relevant underlying and become subject to specific and general market risk charges as described in sections CA-4.2 and CA-4.3, respectively. For the purpose of calculation by the standard formulae, the amounts reported are the market values of the principal amounts of the underlying or of the notional underlying. For instruments where the apparent notional amount differs from the effective notional amount, banks should use the latter.

            • CA-4.7.2

              The remaining paragraphs in this section include the guidelines for the calculation of positions in different categories of interest rate derivatives. Banks which need further assistance in the calculation, particularly in relation to complex instruments, should contact the Agency in writing.

            • Forward foreign exchange contracts

              • CA-4.7.3

                A forward foreign exchange position is decomposed into legs representing the paying and receiving currencies. Each of the legs is treated as if it were a zero coupon bond, with zero specific risk, in the relevant currency and included in the measurement framework as follows:

                (a) If the maturity method is used, each leg is included at the notional amount.
                (b) If the duration method is used, each leg is included at the present value of the notional zero coupon bond.

            • Deposit futures and FRAs

              • CA-4.7.4

                Deposit futures, forward rate agreements and other instruments where the underlying is a money market exposure will be split into two legs as follows:

                (a) The first leg will represent the time to expiry of the futures contract, or settlement date of the FRA as the case may be.
                (b) The second leg will represent the time to expiry of the underlying instrument.
                (c) Each leg will be treated as a zero coupon bond with zero specific risk.
                (d) For deposit futures, the size of each leg is the notional amount of the underlying money market exposure. For FRAs, the size of each leg is the notional amount of the underlying money market exposure discounted to present value, although in the maturity method, the notional amount may be used without discounting.

                For example, under the maturity method, a single 3-month Euro$ 1,000,000 deposit futures contract expiring in 3 months' time will have one leg of $ 1,000,000 representing the 8 months to contract expiry, and another leg of $ 1,000,000 in the 11 months' time-band representing the time to expiry of the deposit underlying the futures contract.

            • Bonds futures and forwards bond transactions

              • CA-4.7.5

                Bond futures, forward bond transactions and the forward leg of repos, reverse repos and other similar transactions will use the two-legged approach. A forward bond transaction is one where the settlement is for a period other than the prevailing norm for the market.

                (a) The first leg is a zero coupon bond with zero specific risk. Its maturity is the time to expiry of the futures or forward contract. Its size is the cash flow on maturity discounted to present value, although in the maturity method, the cash flow on maturity may be used without discounting.
                (b) The second leg is the underlying bond. Its maturity is that of the underlying bond for fixed rate bonds, or the time to the next reset for floating rate bonds. Its size is as set out in (c) and (d) below.
                (c) For forward bond transactions, the underlying bond and amount is used at the present spot price.
                (d) For bond futures, the principal amounts for each of the two legs is reckoned as the futures price times the notional underlying bond amount.
                (e) Where a range of deliverable instruments may be delivered to fulfil a futures contract (at the option of the "short"), then the following rules are used to determine the principal amount, taking account of any conversion factors defined by the exchange:
                (i) The "long" may use one of the deliverable bonds, or the notional bond on which the contract is based, as the underlying instrument, but this notional long leg may not be offset against a short cash position in the same bond.
                (ii) The "short" may treat the notional underlying bond as if it were one of the deliverable bonds, and it may be offset against a short cash position in the same bond.
                (f) For futures contracts based on a corporate bond index, the positions will be included at the market value of the notional underlying portfolio of securities.
                (g) A repo (or sell-buy or stock lending) involving exchange of a security for cash should be represented as a cash borrowing — i.e. a short position in a government bond with maturity equal to the repo and coupon equal to the repo rate. A reverse repo (or buy-sell or stock borrowing) should be represented as a cash loan — i.e. a long position in a government bond with maturity equal to the reverse repo and coupon equal to the repo rate. These positions are referred to as "cash legs".
                (h) It should be noted that, where a security owned by the bank (and included in its calculation of market risk) is repo'd, it continues to contribute to the bank's interest rate or equity position risk calculation.

            • Swaps

              • CA-4.7.6

                Swaps are treated as two notional positions in government securities with the relevant maturities.

                (a) Interest rate swaps will be decomposed into two legs, and each leg will be allocated to the maturity band equating to the time remaining to repricing or maturity. For example, an interest rate swap in which a bank is receiving floating rate interest and paying fixed is treated as a long position in a floating rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed rate instrument of maturity equivalent to the residual life of the swap.
                (b) For swaps that pay or receive a fixed or floating interest rate against some other reference price, e.g. a stock index, the interest rate component should be slotted into the appropriate repricing or maturity category, with the equity component being included in the equity risk measurement framework as described in chapter CA-5.
                (c) For cross currency swaps, the separate legs are included in the interest rate risk measurement for the currencies concerned, as having a fixed/floating leg in each currency. Alternatively, the two parts of a currency swap transaction are split into forward foreign exchange contracts and treated accordingly.
                (d) Where a swap has a deferred start, and one or both legs have been fixed, then the fixed leg(s) will be sub-divided into the time to the commencement of the leg and the actual swap leg with fixed or floating rate. A swap is deemed to have a deferred start when the commencement of the interest rate calculation periods is more than two business days from the transaction date, and one or both legs have been fixed at the time of the commitment. However, when a swap has a deferred start and neither leg has been fixed, there is no interest rate exposure, albeit there will be counterparty exposure.
                (e) Where a swap has a different structure from those discussed above, it may be necessary to adjust the underlying notional principal amount, or the notional maturity of one or both legs of the transaction.

              • CA-4.7.7

                Banks with large swap books may use alternative formulae for these swaps to calculate the positions to be included in the maturity or duration ladder. One method would be to first convert the cash flows required by the swap into their present values. For this purpose, each cash flow should be discounted using the zero coupon yields, and a single net figure for the present value of the cash flows entered into the appropriate time-band using procedures that apply to zero or low coupon (less than 3%) instruments. An alternative method would be to calculate the sensitivity of the net present value implied by the change in yield used in the duration method (as set out in section CA-4.5), and allocate these sensitivities into the appropriate time-bands.

              • CA-4.7.8

                Banks which propose to use the approaches described in paragraph CA-4.7.7, or any other similar alternative formulae, should obtain the prior written approval of the Agency. The Agency will consider the following factors before approving any alternative methods for calculating the swap positions:

                (a) Whether the systems proposed to be used are accurate;
                (b) Whether the positions calculated fully reflect the sensitivity of the cash flows to interest rate changes and are entered into the appropriate time-bands; and
                (c) Whether the positions are denominated in the same currency.

          • CA-4.8 CA-4.8 Netting of derivative positions

            • Permissible offsetting of fully matched positions for both specific and general market risk

              • CA-4.8.1

                Banks may exclude from the interest rate risk calculation, altogether, the long and short positions (both actual and notional) in identical instruments with exactly the same issuer, coupon, currency and maturity. A matched position in a future or a forward and its corresponding underlying may also be fully offset, albeit the leg representing the time to expiry of the future is included in the calculation.

              • CA-4.8.2

                When the future or the forward comprises a range of deliverable instruments, offsetting of positions in the futures or forward contract and its underlying is only permitted in cases where there is a readily identifiable underlying security which is most profitable for the trader with a short position to deliver. The price of this security, sometimes called the "cheapest-to-deliver", and the price of the future or forward contract should, in such cases, move in close alignment. No offsetting will be allowed between positions in different currencies. The separate legs of cross-currency swaps or forward foreign exchange contracts are treated as notional positions in the relevant instruments and included in the appropriate calculation for each currency.

            • Permissible offsetting of closely matched positions for general market risk only

              • CA-4.8.3

                For the purpose of calculation of the general market risk, in addition to the permissible offsetting of fully matched positions as described in paragraph CA-4.8.1 above, opposite positions giving rise to interest rate exposure can be offset if they relate to the same underlying instruments, are of the same nominal value and are denominated in the same currency and, in addition, fulfil the following conditions:

                (a) For futures:

                Offsetting positions in the notional or underlying instruments to which the futures contract relates should be for identical products and mature within seven days of each other.
                (b) For swaps and FRAs:

                The reference rate (for floating rate positions) must be identical and the coupons must be within 15 basis points of each other.
                (c) For swaps, FRAs and forwards:

                The next interest fixing date or, for fixed coupon positions or forwards, the residual maturity must correspond within the following limits:

                less than one month: same day;
                between one month and one year: within 7 days;
                over one year: within 30 days.

          • CA-4.9 CA-4.9 Calculation of capital charge for derivatives

            • CA-4.9.1

              After calculating the derivatives positions, taking account of the permissible offsetting of matched positions, as explained in section CA-4.8, the capital charges for specific and general market risk for interest rate derivatives are calculated in the same manner as for cash positions, as described earlier in this chapter.

              Summary of treatment of interest rate derivatives

              Instrument Specific risk charge* General market risk charge
              Exchange-traded futures
              — Government** debt security No Yes, as two positions
              — Corporate debt security Yes Yes, as two positions
              — Index on interest rates (e.g. LIBOR) No Yes, as two positions
              — Index on basket of debt securities Yes Yes, as two positions
              OTC forwards
              — Government** debt security No Yes, as two positions
              — Corporate debt security Yes Yes, as two positions
              — Index on interest rates No Yes, as two positions
              FRAs No Yes, as two positions
              Swaps
              — Based on interbank rates No Yes, as two positions
              — Based on Government** bond yields No Yes, as two positions
              — Based on corporate bond yields Yes Yes, as two positions
              Forward foreign exchange No Yes, as one position in each currency
              Options
              — Government** debt security No Either (a) or (b) as below (see chapter CA-8 for a detailed description):
              (a) Carve out together with the associated hedging positions, and use:
              — simplified approach; or
              — scenario analysis; or
              — internal models (see chapter CA-9).
              (b) General market risk charge according to the delta-plus method (gamma and vega should receive separate capital charges).
              — Corporate debt security Yes
              — Index on interest rates No
              — FRAs, swaps No
              * This is the specific risk charge relating to the issuer of the instrument. Under the credit risk rules, there remains a separate capital charge for the counterparty risk.

              ** As defined in section CA-4.2.

        • CA-5 CA-5 Equity position risk — Standardised approach

          • CA-5.1 CA-5.1 Introduction

            • CA-5.1.1

              This chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in equities in the bank's trading book.

            • CA-5.1.2

              For the guidance of the banks, and without being exhaustive, the following list includes financial instruments in the trading book, including forward positions, to which equity position risk capital requirements will apply:

              (a) common stocks, whether voting or non-voting;
              (b) depository receipts (which should be included in the measurement framework in terms of the underlying shares);
              (c) convertible preference securities (non-convertible preference securities are treated as bonds);
              (d) convertible debt securities which convert into equity instruments and are, therefore, treated as equities (see paragraph CA-5.1.3 below);
              (e) commitments to buy or sell equity securities;
              (f) derivatives based on the above instruments.

            • CA-5.1.3

              Convertible debt securities must be treated as equities where:

              (a) the first date at which the conversion may take place is less than three months ahead, or the next such date (where the first date has passed) is less than a year ahead; and
              (b) the convertible is trading at a premium of less than 10%, where the premium is defined as the current marked-to-market value of the convertible less the marked-to-market value of the underlying equity, expressed as a percentage of the latter.

              In other instances, convertibles should be treated as either equity or debt securities, based reasonably on their market behaviour.

            • CA-5.1.4

              For instruments that deviate from the structures described in paragraphs CA-5.1.2 and CA-5.1.3 above, or which could be considered complex, each bank should agree a written policy statement with the Agency about the intended treatment, on a case-by-case basis. In some circumstances, the treatment of an instrument may be uncertain, for example bonds whose coupon payments are linked to equity indices. The position risk of such instruments should be broken down into its components and allocated appropriately between the equity, interest rate and foreign exchange risk categories. Advice must be sought from the Agency in cases of doubt, particularly when a bank is trading an instrument for the first time.

            • CA-5.1.5

              Where equities are part of a forward contract, a future or an option (i.e. a quantity of equities to be received or delivered), any interest rate or foreign currency exposure from the other leg of the contract should be included in the measurement framework as described in chapters CA-4 and CA-6, respectively.

            • CA-5.1.6

              As with interest rate related instruments, the minimum capital requirement for equities is expressed in terms of two separately calculated charges, one applying to the "specific risk" of holding a long or short position in an individual equity, and the other to the "general market risk" of holding a long or short position in the market as a whole.

            • CA-5.1.7

              Banks which have the intention and capability to use internal models for the measurement of general and specific equity risk and, hence, for the calculation of the capital requirement, should seek the prior written approval of the Agency for those models. The Agency's detailed rules for the recognition and use of internal models are included in chapter CA-9. Banks which do not use internal models should adopt the standardised approach to calculate the equity position risk capital requirement, as set out in detail in this chapter.

          • CA-5.2 CA-5.2 Calculation of equity positions

            • CA-5.2.1

              A bank may net long and short positions in the same equity instrument, arising either directly or through derivatives, to generate the individual net position in that instrument. For example, a future in a given equity may be offset against an opposite cash position in the same equity, albeit the interest rate risk arising out of the future should be calculated separately in accordance with the rules set out in chapter CA-4.

            • CA-5.2.2

              A bank may net long and short positions in one tranche of an equity instrument against another tranche only where the relevant tranches:

              (a) rank pari passu in all respects; and
              (b) become fungible within 180 days, and thereafter the equity instruments of one tranche can be delivered in settlement of the other tranche.

            • CA-5.2.3

              Positions in depository receipts may only be netted against positions in the underlying stock if the stock is freely deliverable against the depository receipt. If a bank takes a position in depository receipts against an opposite position in the underlying equity in different markets (i.e. arbitrage), it may offset the position provided that any costs on conversion are fully taken into account. Furthermore, the foreign exchange risk arising out of these positions should be included in the measurement framework as set out in chapter CA-6.

            • CA-5.2.4

              More detailed guidance on the treatment of equity derivatives is set out in section CA-5.5.

            • CA-5.2.5

              Equity positions, arising either directly or through derivatives, should be allocated to the country in which each equity is listed. Where an equity is listed in more than one country, the bank should discuss the appropriate country allocation with the Agency.

          • CA-5.3 CA-5.3 Specific risk calculation

            • CA-5.3.1

              Specific risk is defined as the bank's gross equity positions (i.e. the sum of all long equity positions and of all short equity positions), and is calculated for each country or equity market. For each national market in which the bank holds equities, it should sum the market values of its individual net positions as determined in accordance with section CA-5.2, irrespective of whether they are long or short positions, to produce the overall gross equity position for that market.

            • CA-5.3.2

              The capital charge for specific risk is 8%, unless the portfolio is both liquid and well-diversified, in which case the capital charge will be 4%. To qualify for the reduced 4% capital charge, the following requirements need to be met:

              (a) The portfolio should be listed on a recognised stock exchange;
              (b) No individual equity position shall comprise more than 10% of the gross value of the country portfolio; and
              (c) The total value of the equity positions which individually comprise between 5% and 10% of the gross value of the country portfolio, shall not exceed 50% of the gross value of the country portfolio.

          • CA-5.4 CA-5.4 General risk calculation

            • CA-5.4.1

              The general market risk is the difference between the sum of the long positions and the sum of the short positions (i.e. the overall net position) in each national equity market. In other words, to calculate the general market risk, the bank should sum the market value of its individual net positions for each national market, as determined in accordance with section CA-5.2, taking into account whether the positions are long or short.

            • CA-5.4.2

              The general market equity risk measure is 8% of the overall net position in each national market.

          • CA-5.5 CA-5.5 Equity derivatives

            • CA-5.5.1

              For the purpose of calculating the specific and general market risk by the standardised approach, equity derivative positions should be converted into notional underlying equity positions, whether long or short. All equity derivatives and off-balance-sheet positions which are affected by changes in equity prices should be included in the measurement framework. This includes futures and swaps on both individual equities and on stock indices.

            • CA-5.5.2

              The following guidelines will apply to the calculation of positions in different categories of equity derivatives. Banks which need further assistance in the calculation, particularly in relation to complex instruments, should contact the Agency.

              (a) Futures and forward contracts relating to individual equities should, in principle, be included in the calculation at current market prices.
              (b) Futures relating to stock indices should be included in the calculation, at the marked-to-market value of the notional underlying equity portfolio, i.e. as a single position based on the sum of the current market values of the underlying instruments.
              (c) Equity swaps are treated as two notional positions. For example, an equity swap in which a bank is receiving an amount based on the change in value of one particular equity or stock index, and paying a different index is treated as a long position in the former and a short position in the latter. Where one of the swap legs involves receiving/paying a fixed or floating interest rate, that exposure should be slotted into the appropriate time-band for interest rate related instruments as set out in chapter CA-4. The stock index leg should be covered by the equity treatment as set out in this chapter.
              (d) Equity options and stock index options are either "carved out" together with the associated underlying instruments, or are incorporated in the general market risk measurement framework, described in this chapter, based on the delta-plus method. The treatment of options, being a complex issue, is dealt with in detail in chapter CA-8.

            • CA-5.5.3

              A summary of the treatment of equity derivatives is set out in paragraph CA-5.5.8.

            • Specific risk on positions in equity indices

              • CA-5.5.4

                Positions in highly liquid equity indices whether they arise directly or through derivatives, attract a 2% capital charge in addition to the general market risk, to cover factors such as execution risk.

              • CA-5.5.5

                For positions in equity indices not regarded as highly liquid, the specific risk capital charge is the highest specific risk charge that would apply to any of its components, as set out in section CA-5.3.

              • CA-5.5.6

                In the case of the futures-related arbitrage strategies set out below, the specific risk capital charge described above may be applied to only one index with the opposite position exempt from a specific risk capital charge. The strategies are as follows:

                (a) where a bank takes an opposite position in exactly the same index, at different dates or in different market centres;
                (b) where a bank takes opposite positions in contracts at the same date in different but similar indices, provided the two indices contain at least 90% common components.

              • CA-5.5.7

                Where a bank engages in a deliberate arbitrage strategy, in which a futures contract on a broad-based index matches a basket of stocks, it will be allowed to carve out both positions from the standardised methodology on the following conditions:

                (a) the trade has been deliberately entered into, and separately controlled; and
                (b) the composition of the basket of stocks represents at least 90% of the index when broken down into its notional components.

                In such a case, the minimum capital requirement is limited to 4% (i.e. 2% of the gross value of the positions on each side) to reflect divergence and execution risks. This applies even if all of the stocks comprising the index are held in identical proportions. Any excess value of the stocks comprising the basket over the value of the futures contract or vice versa is treated as an open long or short position.

            • Counterparty risk

              • CA-5.5.8

                Derivative positions may also generate counterparty risk exposure related to the counterparty in the trade, in addition to position risk requirements (specific and general) related to the underlying instrument, e.g. counterparty risk related to OTC trades through margin payments, fees payable or settlement exposures. The credit risk capital requirements will apply to such counterparty risk exposure.

                Summary of treatment of equity derivatives

                Instrument Specific risk charge* General market risk charge
                Exchange-traded or OTC futures
                — Individual equity Yes Yes, as underlying
                — Index Yes
                (see section CA-5.5)
                Yes, as underlying
                Options
                — Individual equity Yes Either (a) or (b) as below (chapter CA-8 for a detailed description):
                (a) Carve out together with the associated hedging positions, and use:
                — simplified approach; or
                — scenario analysis; or
                — internal models (chapter CA-9).
                (b) General market risk charge according to the delta-plus method (gamma and vega should receive separate capital charges).
                — Index Yes
                * This is the specific risk charge relating to the issuer of the instrument. Under the credit risk rules, there remains a separate capital charge for the counterparty risk.

        • CA-6 CA-6 Foreign exchange risk — Standardised approach

          • CA-6.1 CA-6.1 Introduction

            • CA-6.1.1

              A bank which holds net open positions (whether long or short) in foreign currencies is exposed to the risk that exchange rates may move against it. The open positions may be either trading positions or, simply, exposures caused by the bank's overall assets and liabilities.

            • CA-6.1.2

              This chapter describes the standardised method for calculation of the bank's foreign exchange risk, and the capital required against that risk. The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold6 and, as a second step, the measurement of the risks inherent in the bank's mix of long and short positions in different currencies.


              6 Positions in gold should be treated as if they were foreign currency positions, rather than as commodity positions, because the volatility of gold is more in line with that of foreign currencies and most banks manage it in a similar manner to foreign currencies.

            • CA-6.1.3

              The open positions and the capital requirements are calculated with reference to the entire business, i.e. the banking and trading books combined.

            • CA-6.1.4

              The open positions are calculated with reference to the bank's base currency, which will be either Bahraini Dinars or United States dollars.

            • CA-6.1.5

              Banks which have the intention and capability to use internal models for the measurement of their foreign exchange risk and, hence, for the calculation of the capital requirement, should seek the prior written approval of the Agency for those models. The Agency's detailed rules for the recognition and use of internal models are included in chapter CA-9. Banks which do not use internal models should adopt the standardised approach, as set out in detail in this chapter.

            • CA-6.1.6

              In addition to foreign exchange risk, positions in foreign currencies may be subject to interest rate risk and credit risk which should be treated separately.

          • CA-6.2 CA-6.2 De minimis exemptions

            • CA-6.2.1

              A bank doing negligible business in foreign currencies and which does not take foreign exchange positions for its own account may, at the discretion of the Agency evidenced by the Agency's prior written approval, be exempted from calculating the capital requirements on these positions. The Agency is likely to be guided by the following criteria in deciding to grant exemption to any bank:

              (a) the bank's holdings or taking of positions in foreign currencies, including gold, defined as the greater of the sum of the gross long positions and the sum of the gross short positions in all foreign currencies and gold, does not exceed 100% of its eligible capital; and
              (b) the bank's overall net open position, as defined in paragraph CA-6.3.1, does not exceed 2% of its eligible capital as defined in chapter CA-2.

            • CA-6.2.2

              The criteria listed in paragraph CA-6.2.1 above are only intended to be guidelines, and a bank will not automatically qualify for exemptions upon meeting them. The Agency may also, in its discretion, fix a minimum capital requirement for a bank which is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.

            • CA-6.2.3

              The Agency may, at a future date, revoke an exemption previously granted to a bank, if the Agency is convinced that the conditions on which the exemption was granted no longer exist.

          • CA-6.3 CA-6.3 Calculation of net open positions

            • CA-6.3.1

              A bank's exposure to foreign exchange risk in any currency is its net open position in that currency, which is calculated by summing the following items:

              (a) the net spot position in the currency (i.e. all asset items less all liability items, including accrued interest, other income and expenses, denominated in the currency in question, assets are included gross of provisions for bad and doubtful debts, except in cases where the provisions are maintained in the same currency as the underlying assets);
              (b) the net forward position in the currency (i.e. all amounts to be received less all amounts to be paid under forward foreign exchange contracts, in the concerned currency, including currency futures and the principal on currency swaps not included in the spot position);
              (c) guarantees and similar off-balance-sheet contingent items that are certain to be called and are likely to be irrecoverable where the provisions, if any, are not maintained in the same currency;
              (d) net future income/expenses not yet accrued but already fully hedged by forward foreign exchange contracts may be included provided that such anticipatory hedging is part of the bank's formal written policy and the items are included on a consistent basis;
              (e) profits (i.e. the net value of income and expense accounts) held in the currency in question;
              (f) specific provisions held in the currency in question where the underlying asset is in a different currency, net of assets held in the currency in question where a specific provision is held in a different currency; and
              (g) the net delta-based equivalent of the total book of foreign currency options (subject to a separately calculated capital charge for gamma and vega as described in chapter CA-8, alternatively, options and their associated underlying positions are dealt with by one of the other methods described in chapter CA-8).

              All assets and liabilities, as described above, should be included at closing mid-market spot exchange rates. Marked-to-market items should be included on the basis of the current market value of the positions. However, banks which base their normal management accounting on net present values are expected to use the net present values of each position, discounted using current interest rates and valued at current spot rates, for measuring their forward currency and gold positions.

            • CA-6.3.2

              Net positions in composite currencies, such as the SDR, may either be broken down into the component currencies according to the quotas in force and included in the net open position calculations for the individual currencies, or treated as a separate currency. In any case, the mechanism for treating composite currencies should be consistently applied.

            • CA-6.3.3

              For calculating the net open position in gold, the bank will first express the net position (spot plus forward) in terms of the standard unit of measurement (i.e. ounces or grams) and then convert it at the current spot rate into the base currency.

            • CA-6.3.4

              Forward currency and gold positions should be valued at current spot market exchange rates. Using forward exchange rates is inappropriate as it will result in the measured positions reflecting current interest rate differentials, to some extent.

            • CA-6.3.5

              Where gold is part of a forward contract (i.e. quantity of gold to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract should be reported as set out in chapter CA-4 or section CA-6.1 above, respectively.

            • Structural positions

              • CA-6.3.6

                Positions of a structural, i.e. non-dealing, nature as set out below, may be excluded from the calculation of the net open currency positions:

                (a) positions are taken deliberately in order to hedge, partially or totally, against the adverse effects of exchange rate movements on the bank's capital adequacy ratio;
                (b) positions related to items that are deducted from the bank's capital when calculating its capital base in accordance with the rules and guidelines in this module, such as investments in non-consolidated subsidiaries; and
                (c) Retained profits held for payout to parent.

                The Agency will consider approving the exclusion of the above positions for the purpose of calculating the capital requirement, only if the following conditions are met:

                (i) the concerned bank provides adequate documentary evidence to the Agency which establishes the fact that the positions proposed to be excluded are, indeed, of a structural, i.e. non-dealing, nature and are merely intended to protect the bank's capital adequacy ratio. For this purpose, the Agency may ask for written representations from the bank's management or Directors; and
                (ii) any exclusion of a position is consistently applied, with the treatment of the hedge remaining the same for the life of the associated assets or other items.

            • Derivatives

              • CA-6.3.7

                A currency swap is treated as a combination of a long position in one currency and a short position in the second currency.

              • CA-6.3.8

                There are a number of alternative approaches to the calculation of the foreign exchange risk in options. As stated in section CA-6.1, with the Agency's prior written approval, a bank may choose to use internal models to measure the options risk. Extra capital charges will apply to those option risks that the bank's internal model does not capture. The standardised framework for the calculation of options risks and the resultant capital charges is described, in detail, in chapter CA-8. Where, as explained in paragraph CA-6.3.1, the option delta value is incorporated in the net open position, the capital charges for the other option risks are calculated separately.

          • CA-6.4 CA-6.4 Calculation of the overall net open positions

            • CA-6.4.1

              The net long or short position in each currency is converted, at the spot rate, into the reporting currency. The overall net open position is measured by aggregating the following:

              (a) The sum of the net short positions or the sum of the net long positions, whichever is greater; plus
              (b) The net position (short or long) in gold, regardless of sign.

            • CA-6.4.2

              Where the bank is assessing its foreign exchange risk on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the bank. In such cases, the internal limit for that branch/subsidiary, in each currency, may be used as a proxy for the positions. The branch/subsidiary limits should be added, without regard to sign, to the net open position in each currency involved. When this simplified approach to the treatment of currencies with marginal operations is adopted, the bank should adequately monitor the actual positions of the branch/subsidiary against the limits, and revise the limits, if necessary, based on the results of the ex-post monitoring.

          • CA-6.5 CA-6.5 Calculation of the capital charge

            • CA-6.5.1

              The capital charge is 8% of the overall net open position.

            • CA-6.5.2

              The table below illustrates the calculation of the overall net open position and the capital charge:

              Example of the calculation of the foreign exchange overall net open position and the capital charge
              GBP EURO SAR US$ JPY Gold
              +100 +150 +50 –180 –20 –20
              +300 –200 20
              The capital charge is 8% of the higher of either the sum of the net long currency positions or the sum of the net short positions (i.e. 300) and of the net position in gold (i.e. 20) = 320 x 8% = 25.6

        • CA-7 CA-7 Commodities risk — Standardised approach

          • CA-7.1 CA-7.1 Introduction

            • CA-7.1.1

              This chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in commodities, including precious metals, but excluding gold (which is treated as a foreign currency according to the methodology explained in chapter CA-6).

            • CA-7.1.2

              The commodities position risk and the capital charges are calculated with reference to the entire business of a bank, i.e., the banking and trading books combined.

            • CA-7.1.3

              The price risk in commodities is often more complex and volatile than that associated with currencies and interest rates. Commodity markets may also be less liquid than those for interest rates and currencies and, as a result, changes in supply and demand can have a more dramatic effect on price and volatility. Banks need also to guard against the risk that arises when a short position falls due before the long position. Owing to a shortage of liquidity in some markets, it might be difficult to close the short position and the bank might be "squeezed by the market". All these market characteristics of commodities can make price transparency and the effective hedging of risks more difficult.

            • CA-7.1.4

              For spot or physical trading, the directional risk arising from a change in the spot price is the most important risk. However, banks using portfolio strategies involving forward and derivative contracts are exposed to a variety of additional risks, which may well be larger than the risk of a change in spot prices (directional risk). These include:

              (a) 'basis risk', i.e., the risk that the relationship between the prices of similar commodities alters through time;
              (b) 'interest rate risk', i.e., the risk of a change in the cost of carry for forward positions and options; and
              (c) 'forward gap risk', i.e., the risk that the forward price may change for reasons other than a change in interest rates.

            • CA-7.1.5

              The capital charges for commodities risk envisaged by the rules within this chapter are intended to cover the risks identified in paragraph CA-7.1.4. In addition, however, banks face credit counterparty risk on over-the-counter derivatives, which must be incorporated into their credit risk capital requirements. Furthermore, the funding of commodities positions may well open a bank to interest rate or foreign exchange risk which should be captured within the measurement framework set out in chapters CA-4 and CA-6, respectively.7


              7 Where a commodity is part of a forward contract (i.e.. a quantity of commodity to be received or to be delivered), any interest rate or foreign exchange risk from the other leg of the contract should be captured, within the measurement framework set out in chapters 4 and 6, respectively. However, positions which are purely of a stock financing nature (i.e., a physical stock has been sold forward and the cost of funding has been locked in until the date of the forward sale) may be omitted from the commodities risk-calculation although they will be subject to the interest rate and counterparty risk capital requirements.

            • CA-7.1.6

              Banks which have the intention and capability to use internal models for the measurement of their commodities risks and, hence, for the calculation of the capital requirement, should seek the prior written approval of the Agency for those models. The Agency's detailed rules for the recognition and use of internal models are included in chapter CA-9. It is essential that the internal models methodology captures the directional risk, forward gap and interest rate risks, and the basis risk which are defined in paragraph CA-7.1.4. It is also particularly important that models take proper account of market characteristics, notably the delivery dates and the scope provided to traders to close out positions.

            • CA-7.1.7

              Banks which do not propose to use internal models should adopt either the maturity ladder approach or the simplified approach to calculate their commodities risk and the resultant capital charges. Both these approaches are described in sections CA-7.3 and CA-7.4, respectively.

          • CA-7.2 CA-7.2 Calculation of commodities positions

            • Netting

              • CA-7.2.1

                Banks should first express each commodity position (spot plus forward) in terms of the standard unit of measurement (i.e., barrels, kilograms, grams etc.). Long and short positions in a commodity are reported on a net basis for the purpose of calculating the net open position in that commodity. For markets which have daily delivery dates, any contracts maturing within ten days of one another may be offset. The net position in each commodity is then converted, at spot rates, into the bank's reporting currency.

              • CA-7.2.2

                Positions in different commodities cannot be offset for the purpose of calculating the open positions as described in paragraph CA-7.2.1 above. However, where two or more sub-categories8 of the same category are, in effect, deliverable against each other, netting between those sub-categories is permitted. Furthermore, if two or more sub-categories of the same category are considered as close substitutes for each other, and minimum correlation of 0.9 between their price movements is clearly established over a minimum period of one year, the bank may, with the prior written approval of the Agency, net positions in those sub-categories. Banks which wish to net positions based on correlations, in the manner discussed above, will need to satisfy the Agency of the accuracy of the method which it proposes to adopt.


                8 Commodities can be grouped into clans, families, sub-groups and individual commodities. For example, a clan might be Energy Commodities, within which Hydro-Carbons is a family with Crude Oil being a sub-group and West Texas Intermediate, Arabian Light and Brent being individual commodities.

            • Derivatives

              • CA-7.2.3

                All commodity derivatives and off-balance-sheet positions which are affected by changes in commodity prices should be included in the measurement framework for commodities risks. This includes commodity futures, commodity swaps, and options where the "delta plus" method is used9. In order to calculate the risks, commodity derivatives are converted into notional commodities positions and assigned to maturities as follows

                (a) futures and forward contracts relating to individual commodities should be incorporated in the measurement framework as notional amounts of barrels, kilograms etc., and should be assigned a maturity with reference to their expiry date;
                (b) commodity swaps where one leg is a fixed price and the other one is the current market price, should be incorporated as a series of positions equal to the notional amount of the contract, with one position corresponding to each payment on the swap and slotted into the maturity time-bands accordingly. The positions would be long positions if the bank is paying fixed and receiving floating, and short positions if vice versa. (If one of the legs involves receiving/paying a fixed or floating interest rate, that exposure should be slotted into the appropriate repricing maturity band for the calculation of the interest rate risk, as described in chapter CA-4);
                (c) commodity swaps where the legs are in different commodities should be incorporated in the measurement framework of the respective commodities separately, without any offsetting. Offsetting will only be permitted if the conditions set out in paragraphs CA-7.2.1 and CA-7.2.2 are met.

                9 For banks using other approaches to measure options risks, all Options and the associated underlying instruments should be excluded from both the maturity ladder approach and the simplified approach. The treatment of options is described, in detail, in chapter 8.

            • CA-7.3 CA-7.3 Maturity ladder approach

              • CA-7.3.1

                A worked example of the maturity ladder approach is set out in Appendix CA 5 and the table in paragraph CA-7.3.2 illustrates the maturity time-bands of the maturity ladder for each commodity.

              • CA-7.3.2

                The steps in the calculation of the commodities risk by the maturity ladder approach are:

                (a) The net positions in individual commodities, expressed in terms of the standard unit of measurement, are first slotted into the maturity ladder. Physical stocks are allocated to the first time-band. A separate maturity ladder is used for each commodity as defined in section CA-7.2 earlier in this chapter. The net positions in commodities are calculated as explained in section CA-7.2.
                (b) Long and short positions in each time-band are matched. The sum of the matched long and short positions is multiplied first by the spot price of the commodity, and then by a spread rate of 1.5% for each time-band as set out in the table below. This represents the capital charge in order to capture forward gap and interest rate risk within a time-band (which, together, are sometimes referred to as curvature/spread risk).

                Time-bands10
                0–1 months
                1–3 months
                3–6 months
                6–12 months
                1–2 years
                2–3 years
                over 3 years
                (c) The residual (unmatched) net positions from nearer time-bands are then carried forward to offset opposite positions (i.e. long against short, and vice versa) in time-bands that are further out. However, a surcharge of 0.6% of the net position carried forward is added in respect of each time-band that the net position is carried forward, to recognise that such hedging of positions between different time-bands is imprecise. The surcharge is in addition to the capital charge for each matched amount created by carrying net positions forward, and is calculated as explained in step (b) above.
                (d) At the end of step (c) above, there will be either only long or only short positions, to which a capital charge of 15% will apply. The Agency recognises that there are differences in volatility between different commodities, but has, nevertheless, decided that one uniform capital charge for open positions in all commodities shall apply in the interest of simplicity of the measurement, and given the fact that banks normally run rather small open positions in commodities. Banks will be required to submit, in writing, details of their commodities business, to enable the Agency to evaluate whether the models approach should be adopted by the bank, to capture the market risk on this business.

                10 For instruments, the maturity of which is on the boundary of two maturity time-bands, the instrument should be placed into the earlier maturity band. For example, instruments with a maturity of exactly one year are placed into the 6 to 12 months time-band.

            • CA-7.4 CA-7.4 Simplified approach

              • CA-7.4.1

                By the simplified approach, the capital charge of 15% of the net position, long or short, in each commodity is applied to capture directional risk. Net positions in commodities are calculated as explained in section CA-7.2.

              • CA-7.4.2

                An additional capital charge equivalent to 3% of the bank's gross positions, long plus short, in each commodity is applied to protect the bank against basis risk, interest rate risk and forward gap risk. In valuing the gross positions in commodity derivatives for this purpose, banks should use the current spot price.

        • CA-8 CA-8 Options risk — Standardised approach

          • CA-8.1 CA-8.1 Introduction

            • CA-8.1.1

              It is recognised that the measurement of the price risk of options is inherently a difficult task, which is further complicated by the wide diversity of banks' activities in options. The Agency has decided that the following approaches should be adopted to the measurement of options risks:

              (a) Banks which solely use purchased options are permitted to use the simplified (carve-out) approach described later in this chapter.
              (b) Banks which also write options should use either the delta-plus (buffer) approach or the scenario approach, or alternatively use a comprehensive risk management model. The Agency's detailed rules for the recognition and use of internal models are included in chapter CA-9.

            • CA-8.1.2

              The scenario approach and the internal models approach are generally regarded as more satisfactory for managing and measuring options risk, as they assess risk over a range of outcomes rather than focusing on the point estimate of the 'Greek' risk parameters as in the delta-plus approach. The more significant the level and/or complexity of the bank's options trading activities, the more the bank will be expected to use a sophisticated approach to the measurement of options risks. The Agency will monitor the banks' options trading activities, and the adequacy of the risk measurement framework adopted.

            • CA-8.1.3

              Where written option positions are hedged by perfectly matched long positions in exactly the same options, no capital charge for market risk is required in respect of those matched positions.

          • CA-8.2 CA-8.2 Simplified approach (carve-out)

            • CA-8.2.1

              In the simplified approach, positions for the options and the associated underlying (hedges), cash or forward, are entirely omitted from the calculation of capital charges by the standardised methodology and are, instead, "carved out" and subject to separately calculated capital charges that incorporate both general market risk and specific risk. The capital charges thus generated are then added to the capital charges for the relevant risk category, i.e., interest rate related instruments, equities, foreign exchange and commodities as described in chapters CA-4, CA-5, CA-6 and CA-7 respectively.

            • CA-8.2.2

              The capital charges for the carved out positions are as set out in the table below. As an example of how the calculation would work, if a bank holds 100 shares currently valued at $ 10 each, and also holds an equivalent put option with a strike price of $ 11, the capital charge would be as follows:

              [$ 1,000 x 16%11 ] minus [($ 11–$ 10)12 x 100] = $ 60

              A similar methodology applies to options whose underlying is a foreign currency, an interest rate related instrument or a commodity.

              Simplified approach: Capital charges
              Position Treatment
              Long cash and long put

              or

              Short cash and long call (i.e., hedged positions)
              The capital charge is:

              [Market value of underlying instrument13 x Sum of specific and general market risk charges14 for the underlying] minus [Amount, if any, the option is in the money15]

              The capital charge calculated as above is bounded at zero, i.e., it cannot be a negative number.
              Long call

              or

              Long put
              (i.e., naked option positions)
              The capital charge is the lesser of:

              i) Market value of the underlying instrument x Sum of specific and general market risk charges for the underlying; and

              ii) Market value of the option16.


              11 8% specific risk plus 8% general market risk.

              12 The amount the option is "in the money".

              13 In some cases such as foreign exchange, it may be unclear which side is the "underlying instrument"; this should be taken to be the asset which would be received if the option were exercised. In addition, the nominal value should be used for items where the market value of the underlying instrument could be zero, e.g., caps and floors, swaptions etc.

              14 Some options (e.g., where the underlying is an interest rate, a currency or a commodity) bear no specific risk, but specific risk is present in the case of options on certain interest rate related instruments (e.g., options on a corporate debt security or a corporate bond index — see chapter CA-4 for the relevant capital charges), and in the case of options on equities and stock indices (see chapter CA-5 for the relevant capital charges). The capital charge for currency options is 8% and for options on commodities is 15%.

              15 For options with a residual maturity of more than six months, the strike price should be compared with the forward, not the current, price. A bank unable to do this should take the "in the money" amount to be zero.

              16 Where the position does not fall within the trading book options on certain foreign exchange and commodities positions (not belonging to the trading book), it is acceptable to use the book value instead of the market value.

          • CA-8.3 CA-8.3 Delta-plus method (buffer approach)

            • CA-8.3.1

              Banks which write options are allowed to include delta-weighted option positions within the standardised methodology set out in chapters CA-4 through CA-7. Each option should be reported as a position equal to the market value of the underlying multiplied by the delta. The delta should be calculated by an adequate model with appropriate documentation of the process and controls, to enable the Agency to review such models, if considered necessary. A worked example of the delta-plus method is set out in Appendix CA 6.

            • CA-8.3.2

              Since delta does not sufficiently cover the risks associated with options positions, there will be additional capital buffers to cover gamma (which measures the rate of change of delta) and vega (which measures the sensitivity of the value of an option with respect to a change in volatility), in order to calculate the total capital charge. The gamma and vega buffers should be calculated by an adequate exchange model or the bank's proprietary options pricing model, with appropriate documentation of the process and controls, to enable the Agency to review such models, if considered necessary.

            • Treatment of delta

              • CA-8.3.3

                The treatment of the delta-weighted positions, for the calculation of the capital charges arising from delta risk, is summarised in paragraphs CA-8.3.4 to CA-8.3.9.

            • Where the underlying is a debt security or an interest rate

              • CA-8.3.4

                The delta-weighted option positions are slotted into the interest rate time-bands as set out in chapter CA-4. A two-legged approach should be used as for other derivatives, as explained in chapter CA-4, requiring one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures. A few examples to elucidate the two-legged treatment are set out below:

                (a) A bought call option on a June three-month interest rate future will, in April, be considered, on the basis of its delta-equivalent value, to be a long position with a maturity of five months and a short position with a maturity of two months.
                (b) A written option with the same underlying as in (a) above, will be included in the measurement framework as a long position with a maturity of two months and a short position with a maturity of five months.
                (c) A two months call option on a bond future where delivery of the bond takes place in September will be considered in April, as being long the bond and short a five months deposit, both positions being delta-weighted.

              • CA-8.3.5

                Floating rate instruments with caps or floors are treated as a combination of floating rate securities and a series of European-style options. For example, the holder of a three-year floating rate bond indexed to six month LIBOR with a cap of 10% will treat it as:

                (a) a debt security that reprices in six months; and
                (b) a series of five written call options on an FRA with a reference rate of 10%, each with a negative sign at the time the underlying FRA takes effect and a positive sign at the time the underlying FRA matures.

              • CA-8.3.6

                The rules applying to closely matched positions, set out in paragraph CA-4.8.2, will also apply in this respect.

            • Where the underlying is an equity instrument

              • CA-8.3.7

                The delta-weighted positions are incorporated in the measure of market risk described in chapter CA-5. For purposes of this calculation, each national market is treated as a separate underlying.

            • Options on foreign exchange and gold positions

              • CA-8.3.8

                The net delta-based equivalent of the foreign currency and gold options are incorporated in the measurement of the exposure for the respective currency or gold position, as described in chapter CA-6.

            • Options on commodities

              • CA-8.3.9

                The delta-weighted positions are incorporated in the measurement of the commodities risk by the simplified approach or the maturity ladder approach, as described in chapter CA-7.

            • Calculation of the gamma and vega buffers

              • CA-8.3.10

                As explained in paragraph CA-8.3.2, in addition to the above capital charges to cover delta risk, banks are required to calculate additional capital charges to cover the gamma and vega risks. The additional capital charges are calculated as follows:

                Gamma

                (a) For each individual option position (including hedge positions), a gamma impact is calculated according to the following formula derived from the Taylor series expansion:

                Gamma impact = 0.5 x Gamma x VU
                where VU = variation of the underlying of the option, calculated as in (b) below
                (b) VU is calculated as follows:
                (i) For interest rate options17, where the underlying is a bond, the market value of the underlying is multiplied by the risk weights set out in section CA-4.4. An equivalent calculation is carried out where the underlying is an interest rate, based on the assumed changes in yield as set out in the table in section CA-4.5;
                (ii) For options on equities and equity indices17, the market value of the underlying is multiplied by 8%;
                (iii) For foreign exchange and gold options, the market value of the underlying is multiplied by 8%;
                (iv) For commodities options, the market value of the underlying is multiplied by 15%.
                (c) For the purpose of the calculation of the gamma buffer, the following positions are treated as the same underlying:
                (i) For interest rates, each time-band as set out in the table in section CA-4.4. Positions should be slotted into separate maturity ladders by currency. Banks using the duration method should use the time-bands as set out in the table in section CA-4.5;
                (ii) For equities and stock indices, each individual national market;
                (iii) For foreign currencies and gold, each currency pair and gold; and
                (iv) For commodities, each individual commodity as defined in section CA-7.2.
                (d) Each option on the same underlying will have a gamma impact that is either positive or negative. These individual gamma impacts are summed, resulting in a net gamma impact for each underlying that is either positive or negative. Only those net gamma impacts that are negative are included in the capital calculation.
                (e) The total gamma capital charge is the sum of the absolute value of the net negative gamma impacts calculated for each underlying as explained in (d) above.

                Vega

                (f) For volatility risk (vega), banks are required to calculate the capital charges by multiplying the sum of the vegas for all options on the same underlying, as defined above, by a proportional shift in volatility of ±25%.
                (g) The total vega capital charge is the sum of the absolute value of the individual vega capital charges calculated for each underlying.

                17 For interest rate and equity options, the present set of rules do not attempt to capture specific risk when calculating gamma capital charges. See section CA-8.4 for an explanation of the Agency's views on this subject.

              • CA-8.3.11

                The capital charges for delta, gamma and vega risks described in paragraphs CA-8.3.1 through CA-8.3.10 are in addition to the specific risk capital charges which are determined separately by multiplying the delta-equivalent of each option position by the specific risk weights set out in chapters CA-4 through CA-7.

              • CA-8.3.12

                To summarise, capital requirements for, say OTC options, using the delta-plus method are as follows:

                (a) Counterparty risk capital charges (on purchased options only), calculated in accordance with the credit risk regulations; PLUS
                (b) Specific risk capital charges (calculated as explained in paragraph CA-8.3.11); PLUS
                (c) Delta risk capital charges (calculated as explained in paragraphs CA-8.3.3 through CA-8.3.9) PLUS
                (d) Gamma and vega capital buffers (calculated as explained in paragraph CA-8.3.10).

          • CA-8.4 CA-8.4 Scenario approach

            • CA-8.4.1

              As stated in section CA-8.1, banks which have a significant level of options trading activities, or have complex options trading strategies, are expected to use more sophisticated methods for measuring and monitoring the options risks. Banks with the appropriate capability will be permitted, with the prior approval of the Agency, to base the market risk capital charge for options portfolios and associated hedging positions on scenario matrix analysis. Before giving its approval, the Agency will closely review the accuracy of the analysis that is constructed. Furthermore, like in the case of internal models, the banks' use of scenario analysis as part of the standardised methodology will also be subject to external validation, and to those of the qualitative standards listed in chapter CA-9 which are appropriate given the nature of the business.

            • CA-8.4.2

              The scenario matrix analysis involves specifying a fixed range of changes in the option portfolio's risk factors and calculating changes in the value of the option portfolio at various points along this "grid" or "matrix". For the purpose of calculating the capital charge, the bank will revalue the option portfolio using matrices for simultaneous changes in the option's underlying rate or price and in the volatility of that rate or price. A different matrix is set up for each individual underlying as defined in section CA-8.3 above. As an alternative, in respect of interest rate options, banks which are significant traders in such options are permitted to base the calculation on a minimum of six sets of time-bands. When using this alternative method, not more than three of the time-bands as defined in chapter CA-4 should be combined into any one set.

            • CA-8.4.3

              The first dimension of the matrix involves a specified range of changes in the option's underlying rate or price. The Agency has set the range for each risk category as follows:

              (a) Interest rate related instruments — The range for interest rates is consistent with the assumed changes in yield set out in section CA-4.5. Those banks using the alternative method of grouping time-bands into sets, as explained in paragraph CA-8.4.2, should use, for each set of time-bands, the highest of the assumed changes in yield applicable to the individual time-bands in that group. If, for example, the time-bands 3 to 4 years, 4 to 5 years and 5 to 7 years are combined, the highest assumed change in yield of these three bands would be 0.75 which would be applicable to that set.
              (b) For equity instruments, the range is ±8%.
              (c) For foreign exchange and gold, the range is ±8%.
              (d) For commodities, the range is ±15%,

              For all risk categories, at least seven observations (including the current observation) should be used to divide the range into equally spaced intervals.

            • CA-8.4.4

              The second dimension of the matrix entails a change in the volatility of the underlying rate or price. A single change in the volatility of the underlying rate or price equal to a shift in volatility of ±25% is applied.

            • CA-8.4.5

              The Agency will closely monitor the need to reset the parameters for the amounts by which the price of the underlying instrument and volatility must be shifted to form the rows and columns of the scenario matrix. For the time being, the parameters set, as above, only reflect general market risk (see paragraphs CA-8.4.10 to CA-8.4.12).

            • CA-8.4.6

              After calculating the matrix, each cell contains the net profit or loss of the option and the underlying hedge instrument. The general market risk capital charge for each underlying is then calculated as the largest loss contained in the matrix.

            • CA-8.4.7

              In addition to the capital charge calculated as above, the specific risk capital charge is determined separately by multiplying the delta-equivalent of each option position by the specific risk weights set out in chapters CA-4 through CA-7.

            • CA-8.4.8

              To summarise, capital requirements for, say OTC options, using the scenario approach are as follows:

              (a) Counterparty risk capital charges (on purchased options only), calculated in accordance with the credit risk regulations; PLUS
              (b) Specific risk capital charges (calculated as explained in paragraph CA-8.4.7); PLUS
              (c) Directional and volatility risk capital charges (i.e., the worst case loss from a given scenario matrix analysis).

            • CA-8.4.9

              Banks doing business in certain classes of complex exotic options (e.g. barrier options involving discontinuities in deltas etc.), or in options at the money that are close to expiry, are required to use either the scenario approach or the internal models approach, both of which can accommodate more detailed revaluation approaches. The Agency expects the concerned banks to work with it closely to produce an agreed method, within the framework of these rules. If a bank uses scenario matrix analysis, it must be able to demonstrate that no substantially larger loss could fall between the nodes.

            • CA-8.4.10

              In drawing up the delta-plus and the scenario approaches, the Agency's present set of rules do not attempt to capture specific risk other than the delta-related elements (which are captured as explained in paragraphs CA-8.4.7 and CA-8.4.11). The Agency recognises that introduction of those other specific risk elements will make the measurement framework much more complex. On the other hand, the simplifying assumptions used in these rules will result in a relatively conservative treatment of certain options positions.

            • CA-8.4.11

              In addition to the options risks described earlier in this chapter, the Agency is conscious of the other risks also associated with options, e.g., rho or interest rate risk (the rate of change of the value of the option with respect to the interest rate) and theta (the rate of change of the value of the option with respect to time). While not proposing a measurement system for those risks at present, the Agency expects banks undertaking significant options business, at the very least, to monitor such risks closely. Additionally, banks will be permitted to incorporate rho into their capital calculations for interest rate risk, if they wish to do so.

            • CA-8.4.12

              The Agency will closely review the treatment of options for the calculation of market risk capital charges, particularly in the light of the aspects described in paragraphs CA-8.4.10 and CA-8.4.11.

        • CA-9 CA-9 Use of internal models

          • CA-9.1 CA-9.1 Introduction

            • CA-9.1.1

              As stated in chapter CA-1, as an alternative to the standardised approach to the measurement of market risks (which is described in chapters CA-4 through CA-8), and subject to the explicit prior approval of the Agency, banks will be allowed to use risk measures derived from their own internal models.

            • CA-9.1.2

              This chapter describes the seven sets of conditions that should be met before a bank is allowed to use the internal models approach, namely:

              (a) general criteria regarding the adequacy of the risk management system;
              (b) qualitative standards for internal oversight of the use of models, notably by senior management;
              (c) guidelines for specifying an appropriate set of market risk factors (i.e., the market rates and prices that affect the value of a bank's positions);
              (d) quantitative standards setting out the use of common minimum statistical parameters for measuring risk;
              (e) guidelines for stress testing;
              (f) validation procedures for external oversight of the use of models; and
              (g) rules for banks which use a mixture of the internal models approach and the standardised approach.

            • CA-9.1.3

              The standardised methodology, described in chapters CA-4 through CA-8, uses a "building-block" approach in which the specific risk and the general market risk arising from debt and equity positions are calculated separately. The focus of most internal models is a bank's general market risk exposure, typically leaving specific risk (i.e., exposures to specific issuers of debt securities and equities) to be measured largely through separate credit risk measurement systems. Banks using models are subject to separate capital charges for the specific risk not captured by their models, which shall be calculated by the standardised methodology. The capital charge for banks which are modelling specific risk is set out in section CA-9.10.

            • CA-9.1.4

              While the models recognition criteria described in this chapter are primarily intended for comprehensive Value-at-Risk (VaR) models, nevertheless, the same set of criteria will be applied, to the extent that it is appropriate, to other pre-processing or valuation models the output of which is fed into the standardised measurement system, e.g., interest rate sensitivity models (from which the residual positions are fed into the duration ladders) and option pricing models (for the calculation of the delta, gamma and vega sensitivities).

            • CA-9.1.5

              As a number of strict conditions are required to be met before internal models can be recognised by the Agency, including external validation, banks which are contemplating using internal models should submit their detailed written proposals for the Agency's approval, immediately upon receipt of these regulations.

            • CA-9.1.6

              As the model approval process will encompass a review of both the model and its operating environment, it is not the case that a commercially produced model which is recognised for one bank will automatically be recognised for another bank.

          • CA-9.2 CA-9.2 General criteria

            • CA-9.2.1

              The Agency will give its approval for the use of internal models to measure market risks only if, in addition to the detailed requirements described later in this chapter, it is satisfied that the following general criteria are met:

              (a) that the bank's risk management system is conceptually sound and is implemented with integrity;
              (b) that the bank has, in the Agency's view, sufficient numbers of staff skilled in the use of sophisticated models not only in the trading area but also in the risk control, audit and the back office areas;
              (c) that the bank's models have, in the Agency's judgement, a proven track record of reasonable accuracy in measuring risk. The Agency recognises that the use of internal models is, for most banks in Bahrain, a relatively new development and, therefore, it is difficult to establish a track record of reasonable accuracy. The Agency, therefore, will require a period of initial monitoring and live testing of a bank's internal model before it is used for supervisory capital purposes; and
              (d) that the bank regularly conducts stress tests as outlined in section CA-9.7 and conducts backtesting as described in section CA-9.6.

          • CA-9.3 CA-9.3 Qualitative standards

            • CA-9.3.1

              In order to ensure that banks using models have market risk management systems that are conceptually sound and implemented with integrity, the Agency has set the following qualitative criteria that banks are required to meet before they are permitted to use the models-based approach. Apart from influencing the Agency's decision to permit a bank to use internal models, where such permission is granted, the extent to which the bank meets the qualitative criteria will further influence the level at which the Agency will set the multiplication factor for that bank, referred to in section CA-9.5. Only those banks whose models, in the Agency's judgement, are in full compliance with the qualitative criteria will be eligible for application of the minimum multiplication factor of 3. The qualitative criteria include the following:

              (a) The bank should have an independent risk management unit that is responsible for the design and implementation of the bank's risk management system. The unit should produce and analyse daily reports on the output of the bank's risk measurement model, including an evaluation of the relationship between the measures of risk exposure and the trading limits. This unit must be independent from the business trading units and should report directly to the senior management of the bank.
              (b) The independent risk management unit should conduct a regular backtesting programme, i.e. an ex-post comparison of the risk measure generated by the model against the actual daily changes in portfolio value over longer periods of time, as well as hypothetical changes based on static positions. The document issued by the Basel Committee on Banking Supervision in January 1996, titled "Supervisory framework for the use of 'backtesting' in conjunction with the internal models approach to market risk capital requirements" (see http://www.bis.org/publ/bcbs22.pdf), presents in detail the approach to be applied by banks for backtesting.
              (c) The Board of Directors and senior management of the bank should be actively involved in the risk management process and must regard such process as an essential aspect of the business to which significant resources need to be devoted18. In this regard, the daily reports prepared by the independent risk management unit must be reviewed by a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual traders and reductions in the bank's overall risk exposure.
              (d) The bank's internal model must be closely integrated into the day-to-day risk management process of the bank. Its output should, accordingly, be an integral part of the process of planning, monitoring and controlling the bank's market risk profile.
              (e) The risk measurement system should be used in conjunction with the internal trading and exposure limits. In this regard, the trading limits should be related to the bank's risk measurement model in a manner that is consistent over time and that is well-understood by both traders and senior management.
              (f) A routine and rigorous programme of stress testing, along the general lines set out in section CA-9.6, should be in place as a supplement to the risk analysis based on the day-to-day output of the bank's risk measurement model. The results of stress testing should be reviewed periodically by senior management and should be reflected in the policies and limits set by management and the Board of Directors. Where stress tests reveal particular vulnerability to a given set of circumstances, prompt steps should be taken to manage those risks appropriately (e.g., by hedging against that outcome or reducing the size of the bank's exposures).
              (g) The bank should have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operation of the risk measurement system. The bank's risk measurement system must be well documented, for example, through a risk management manual that describes the basic principles of the risk management system and that provides an explanation of the empirical techniques used to measure market risk.
              (h) An independent review of the risk measurement system should be carried out regularly in the bank's own internal auditing process. This review should include both the activities of the business trading units and of the independent risk management unit. A review, by the internal auditor, of the overall risk management process should take place at regular intervals (ideally not less than once every six months) and should specifically address, at a minimum:
              (i) the adequacy of the documentation of the risk management system and process;
              (ii) the organisation of the risk management unit;
              (iii) the integration of market risk measures into daily risk management;
              (iv) the approval process for risk pricing models and valuation systems used by front- and back-office personnel;
              (v) the validation of any significant changes in the risk measurement process;
              (vi) the scope of market risks captured by the risk measurement model;
              (vii) the integrity of the management information system;
              (viii) the accuracy and completeness of position data;
              (ix) the verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;
              (x) the accuracy and appropriateness of volatility and correlation assumptions;
              (xi) the accuracy of valuation and risk transformation calculations;
              (xii) the verification of the model's accuracy through frequent backtesting as described in (b) above and in the Basel Committee's document referred to therein.

              18 The report, "Risk management guidelines for derivatives", issued by the Basel Committee in July 1994, further discusses the responsibilities of the Board of Directors and senior management.

          • CA-9.4 CA-9.4 Specification of market risk factors

            • CA-9.4.1

              An important part of a bank's internal market risk measurement system is the specification of an appropriate set of market risk factors, i.e. the market rates and prices that affect the value of the bank's trading positions. The risk factors contained in a market risk measurement system should be sufficient to capture the risks inherent in the bank's portfolio of on- and off-balance-sheet trading positions. Banks should follow the Agency's guidelines, set out below, for specifying the risk factors for their internal models. Where a bank has difficulty in specifying the risk factors for any currency or market within a risk category, in accordance with the following guidelines, the bank should immediately contact the Agency. The Agency will review and discuss the specific circumstances of each such case with the concerned bank, and will decide alternative methods of calculating the risks which are not captured by the bank's model.

              (a) For interest rates:
              There should be a set of risk factors corresponding to interest rates in each currency in which the bank has interest-rate-sensitive on- or off-balance-sheet positions.
              The risk measurement system should model the yield curve using one of a number of generally accepted approaches, for example, by estimating forward rates of zero coupon yields. The yield curve should be divided into various maturity segments in order to capture variation in the volatility of rates along the yield curve; there will typically be one risk factor corresponding to each maturity segment. For material exposures to interest rate movements in the major currencies and markets, banks must model the yield curve using a minimum of six factors. However, the number of risk factors used should ultimately be driven by the nature of the bank's trading strategies. For instance, a bank which has a portfolio of various types of securities across many points of the yield curve and which engages in complex arbitrage strategies would require a greater number of risk factors to capture interest rate risk accurately.
              The risk measurement system must incorporate separate risk factors to capture spread risk (e.g. between bonds and swaps). A variety of approaches may be used to capture the spread risk arising from less than perfectly correlated movements between government and other fixed-income interest rates, such as specifying a completely separate yield curve for non-government fixed-income instruments (for instance, swaps or municipal securities) or estimating the spread over government rates at various points along the yield curve.
              (b) For exchange rates (which includes gold):
              The risk measurement system should incorporate risk factors corresponding to the individual foreign currencies in which the bank's positions are denominated. Since the value-at-risk figure calculated by the risk measurement system will be expressed in the bank's reporting currency, any net position denominated in a currency other than the reporting currency will introduce a foreign exchange risk. Thus, there must be risk factors corresponding to the exchange rate between the reporting currency and each other currency in which the bank has a significant exposure.
              (c) For equity prices:
              There should be risk factors corresponding to each of the equity markets in which the bank holds significant positions.
              At a minimum, there should be a risk factor that is designed to capture market-wide movements in equity prices (e.g., a market index). Positions in individual securities or in sector indices may be expressed in "beta-equivalents"19 relative to this market-wide index.
              A somewhat more detailed approach would be to have risk factors corresponding to various sectors of the overall equity market (for instance, industry sectors or cyclical and non-cyclical sectors). As above, positions in individual stocks within each sector could be expressed in "beta-equivalents" relative to the sector index.
              The most extensive approach would be to have risk factors corresponding to the volatility of individual equity issues.
              The sophistication and nature of the modelling technique for a given market should correspond to the bank's exposure to the overall market as well as its concentration in individual equity issues in that market.
              (d) For commodity prices:
              There should be risk factors corresponding to each of the commodity markets in which the bank holds significant positions (also see section CA-7.1).
              For banks with relatively limited positions in commodity-based instruments, a straight-forward specification of risk factors is acceptable. Such a specification would likely entail one risk factor for each commodity price to which the bank is exposed. In cases where the aggregate positions are reasonably small, it may be acceptable to use a single risk factor for a relatively broad sub-category of commodities (for instance, a single risk factor for all types of oil). However, banks which propose to use this simplified approach should obtain the prior written approval of the Agency.
              For more active trading, the model should also take account of variation in the "convenience yield"20 between derivatives positions such as forwards and swaps and cash positions in the commodity.

              19 A "beta-equivalent" position would be calculated from a market model of equity (such as the CAPM model) by regressing the return on the individual stock or sector index or the risk-free rate of return and the return on the market index.

              20 The convenience yield reflects the benefits of direct ownership of the physical commodity (for example, the ability to profit from temporary market shortages), and is affected by both market conditions and factors such as physical storage costs.

          • CA-9.5 CA-9.5 Quantitative standards

            • CA-9.5.1

              The following minimum quantitative standards will apply for the purpose of calculating the capital charge.

              (a) "Value-at-risk" must be computed on a daily basis.
              (b) In calculating the value-at-risk, a 99th percentile, one-tailed confidence interval is to be used.
              (c) In calculating the value-at-risk, an instantaneous price shock equivalent to a 10-day movement in prices is to be used, i.e., the minimum "holding period" will be ten trading days. Banks may use value-at-risk numbers calculated according to shorter holding periods scaled up to ten days by the square root of time (for the treatment of options, also see (h) below).
              (d) The minimum historical observation period (sample period) for calculating value-at-risk is one year. For banks which use a weighting scheme or other methods for the historical observation period, the "effective" observation period must be at least one year (i.e., the weighted average time lag of the individual observations cannot be less than 6 months).

              The Agency may, as an exceptional case, require a bank to calculate its value-at-risk using a shorter observation period if, in the Agency's judgement, this is justified by a significant upsurge in price volatility.
              (e) Banks should update their data sets no less frequently than once every week and should also reassess them whenever market prices are subject to material changes.
              (f) No particular type of model is prescribed by the Agency. So long as each model used captures all the material risks run by the bank, as set out in section CA-9.4, banks will be free to use models based, for example, on variance-covariance matrices, historical simulations, or Monte Carlo simulations.
              (g) Banks shall have discretion to recognise empirical correlations within broad risk categories (i.e., interest rates, exchange rates, equity prices and commodity prices, including related options volatilities in each risk factor category). Banks are not permitted to recognise empirical correlations across broad risk categories without the prior approval of the Agency. Banks may apply, on a case-by-case basis, for empirical correlations across broad risk categories to be recognised by the Agency, subject to its satisfaction with the soundness and integrity of the bank's system for measuring those correlations.
              (h) Banks' models must accurately capture the unique risks associated with options within each of the broad risk categories. The following criteria shall apply to the measurement of options risk:
              banks' models must capture the non-linear price characteristics of options positions;
              banks are expected to ultimately move towards the application of a full 10-day price shock to options positions or positions that display option-like characteristics. In the interim period, banks may adjust their capital measure for options risk through other methods, e.g., periodic simulations or stress testing;
              each bank's risk measurement system must have a set of risk factors that captures the volatilities of the rates and prices underlying the option positions, i.e., vega risk. Banks with relatively large and/or complex options portfolios should have detailed specifications of the relevant volatilities. This means that banks should measure the volatilities of options positions broken down by different maturities.
              (i) Each bank must meet, on a daily basis, a capital requirement expressed as the higher of (i) and (ii) below, multiplied by a multiplication factor (see (j) below):
              (i) its previous day's value-at-risk number measured according to the parameters specified in (a) to (h) above; and
              (ii) an average of the daily value-at-risk measures on each of the preceding sixty business days.
              (j) The multiplication factor will be set by the Agency, separately for each individual bank, on the basis of the Agency's assessment of the quality of the bank's risk management system, subject to an absolute minimum of 3. Banks will be required to add to the factor set by the Agency, a "plus" directly related to the ex-post performance of the model, thereby introducing a built-in positive incentive to maintain the predictive quality of the model. The plus will range from 0 to 1 based on the outcome of the bank's backtesting. If the backtesting results are satisfactory and the bank meets all of the qualitative standards set out in section CA-9.3 above, the plus factor could be zero. The Basel Committee's document titled "Supervisory framework for the use of 'backtesting' in conjunction with the internal models approach to market risk capital requirements" (see http://www.bis.org/publ/bcbs22.htm), referred to earlier in section CA-9.3, presents in detail the approach to be followed for backtesting and the plus factor. Banks are expected to strictly comply with this approach.
              (k) As stated earlier in section CA-9.1, banks using models will also be subject to a capital charge to cover specific risk (as defined under the standardised approach) of interest rate related instruments and equity instruments. The manner in which the specific risk capital charge is to be calculated is set out in section CA-9.10.

          • CA-9.6 CA-9.6 Backtesting

            • CA-9.6.1

              The contents of this section outline the key requirements as set out in the Basel Committee's paper titled "Supervisory framework for the use of 'backtesting' in conjunction with the internal models approach to market risk capital requirements" (see http://www.bis.org/publ/bcbs22.htm). The paper presents in detail the approach to be followed for backtesting by banks.

            • Key requirements

              • CA-9.6.2

                The contents of this paper lay down recommendations for carrying out backtesting procedures in order to determine the accuracy and robustness of bank's internal models for measuring market risk capital requirements. These backtesting procedures typically consist of a periodic comparison of the bank's daily value-at-risk measures with the subsequent daily profit or loss ("trading outcome"). The procedure involves calculating and identifying the number of times over the prior 250 business days that observed daily trading losses exceed the bank's one-day, 99% confidence level VaR estimate (so-called "exceptions").

              • CA-9.6.3

                Based on the number of exceptions identified from the backtesting procedures, the banks will be classified into three exception categories for the determination of the "scaling factor" to be applied to the banks' market risk measure generated by its internal models. The three categories, termed as zones and distinguished by colours into a hierarchy of responses, are listed below:

                (a) Green zone
                (b) Yellow zone
                (c) Red zone

              • CA-9.6.4

                The green zone corresponds to backtesting results that do not themselves suggest a problem with the quality or accuracy of a bank's internal model. The yellow zone encompasses results that do raise questions in this regard, but where such a conclusion is not definitive. The red zone indicates a backtesting result that almost certainly indicates a problem with a bank's risk model.

              • CA-9.6.5

                The corresponding "scaling factors" applicable to banks falling into respective zones based on their backtesting results are shown in Table 2 of the paper mentioned in paragraph CA-9.6.1.

          • CA-9.7 CA-9.7 Stress testing

            • CA-9.7.1

              Banks that use the internal models approach for calculating market risk capital requirements must have in place a rigorous and comprehensive stress testing programme. Stress testing to identify events or influences that could greatly impact the bank is a key component of a bank's assessment of its capital position.

            • CA-9.7.2

              Banks' stress scenarios need to cover a range of factors that can create extraordinary losses or gains in trading portfolios, or make the control of risk in those portfolios very difficult. These factors include low-probability events in all major types of risks, including the various components of market, credit and operational risks. Stress scenarios need to shed light on the impact of such events on positions that display both linear and non-linear characteristics (i.e., options and instruments that have option-like characteristics).

            • CA-9.7.3

              Banks' stress tests should be both of a quantitative and qualitative nature, incorporating both market risk and liquidity aspects of market disturbances. Quantitative criteria should identify plausible stress scenarios to which banks could be exposed. Qualitative criteria should emphasise that two major goals of stress testing are to evaluate the capacity of the bank's capital to absorb potential large losses and to identify steps the bank can take to reduce its risk and conserve capital. This assessment is integral to setting and evaluating the bank's management strategy and the results of stress testing should be routinely communicated to senior management and, periodically, to the bank's Board of Directors.

            • CA-9.7.4

              Banks should combine the use of stress scenarios as advised under (a), (b) and (c) below by the Agency, with stress tests developed by the banks themselves to reflect their specific risk characteristics. The Agency may ask banks to provide information on stress testing in three broad areas, as discussed below.

              (a) Scenarios requiring no simulation by the bank

              Banks should have information on the largest losses experienced during the reporting period available for review by the Agency. This loss information will be compared with the level of capital that results from a bank's internal measurement system. For example, it could provide the Agency with a picture of how many days of peak day losses would have been covered by a given value-at-risk estimate.
              (b) Scenarios requiring simulation by the bank

              Banks should subject their portfolios to a series of simulated stress scenarios and provide the Agency with the results. These scenarios could include testing the current portfolio against past periods of significant disturbance, for example, the 1987 equity crash, the ERM crises of 1992 and 1993 or the fall in the international bond markets in the first quarter of 1994, the Far East and ex-Soviet bloc equity crises of 1997–99 and the collapse of the TMT equities market of 2000–01 incorporating both the large price movements and the sharp reduction in liquidity associated with these events. A second type of scenario would evaluate the sensitivity of the bank's market risk exposure to changes in the assumptions about volatilities and correlations. Applying this test would require an evaluation of the historical range of variation for volatilities and correlations and evaluation of the bank's current positions against the extreme values of the historical range. Due consideration should be given to the sharp variation that, at times, has occurred in a matter of days in periods of significant market disturbance. The four market events, cited above as examples, all involved correlations within risk factors approaching the extreme values of 1 and –1 for several days at the height of the disturbance.
              (c) Scenarios developed by the bank to capture the specific characteristics of its portfolio

              In addition to the general scenarios prescribed by the Agency under (a) and (b) above, each bank should also develop its own stress scenarios which it identifies as most adverse based on the characteristics of its portfolio (e.g. any significant political or economic developments that may result in a sharp move in oil prices). Banks should provide the Agency with a description of the methodology used to identify and carry out the scenarios as well as with a description of the results derived from these stress tests.

            • CA-9.7.5

              Once a stress scenario has been identified, it should be used for conducting stress tests at least once every quarter, as long as the scenario continues to be relevant to the bank's portfolio.

            • CA-9.7.6

              The results of all stress tests should be reviewed by senior management within 15 days from the time they are available, and should be promptly reflected in the policies and limits set by management and the Board of Directors. Moreover, if the testing reveals particular vulnerability to a given set of circumstances, the Agency would expect the bank to take prompt steps to manage those risks appropriately (e.g., by hedging against that outcome or reducing the size of its exposures).

          • CA-9.8 CA-9.8 External validation of models

            • CA-9.8.1

              Before granting its approval for the use of internal models by a bank, the Agency will require that the models are validated by both the internal and external auditors of the bank. The Agency will review the validation procedures performed by the internal and external auditors, and may independently carry out further validation procedures.

            • CA-9.8.2

              The internal validation procedures to be carried out by the internal auditors are set out in section CA-9.3. As stated in that paragraph, the internal auditor's review of the overall risk management process should take place at regular intervals (not less than once every six months). The internal auditor shall make a report to senior management and the Board of Directors, in writing, of the results of the validation procedures. The report shall be made available to the Agency for its review.

            • CA-9.8.3

              The validation of the models by the external auditors should include, at a minimum, the following steps:

              (a) verifying and ensuring that the internal validation processes described in section CA-9.3 are operating satisfactorily;
              (b) ensuring that the formulae used in the calculation process as well as for the pricing of options and other complex instruments are validated by a qualified unit, which in all cases should be independent from the trading area;
              (c) checking and ensuring that the structure of the internal models is adequate with respect to the bank's activities and geographical coverage;
              (d) checking the results of the bank's backtesting of its internal measurement system (i.e., comparing value-at-risk estimates with actual profits and losses) to ensure that the model provides a reliable measure of potential losses over time; and
              (e) making sure that data flows and processes associated with the risk measurement system are transparent and accessible.

            • CA-9.8.4

              The external auditors should carry out their validation/review procedures, at a minimum, once every year. Based on the above procedures, the external auditors shall make a report, in writing, on the accuracy of the bank's models, including all significant findings of their work. The report shall be addressed to the senior management and/or the Board of Directors of the bank, and a copy of the report shall be made available to the Agency. The mandatory annual review by the external auditors shall be carried out during the third quarter of the calendar year, and the Agency expects to receive their final report by 30 September each year. The results of additional validation procedures carried out by the external auditors at other times during the year, should be made available to the Agency promptly.

            • CA-9.8.5

              Banks are required to ensure that external auditors and the Agency's representatives are in a position to have easy access, whenever they judge it necessary and under appropriate procedures, to the models' specifications and parameters as well as to the results of, and the underlying inputs to, their value-at-risk calculations.

          • CA-9.9 CA-9.9 Letter of model recognition

            • CA-9.9.1

              As stated in section CA-9.1, banks which propose to use internal models for the calculation of their market risk capital requirements should submit their detailed proposals, in writing, to the Agency. The Agency will review these proposals, and upon ensuring that the bank's internal models meet all the criteria for recognition set out earlier in this chapter, and after satisfying itself with the results of validation procedures carried out by the internal and external auditors and/or by itself, will issue a letter of model recognition to the bank.

            • CA-9.9.2

              The letter of model recognition should be specific. It will set out the products covered, the method for calculating capital requirements on the products and the conditions of model recognition. In the case of pre-processing models, the bank will also be told how the output of recognised models should feed into the processing of other interest rate, equity, foreign exchange and commodities risk. The conditions of model recognition may include additional reporting requirements. The Agency's prior written approval should be obtained for any modifications proposed to be made to the models previously recognised by the Agency. In cases where a bank proposes to apply the model to new but similar products, there will be a requirement to obtain the Agency's prior approval. In some cases, the Agency may be able to give provisional approval for the model to be applied to a new class of products, in others it will be necessary to revisit the bank.

            • CA-9.9.3

              The Agency may withdraw its approval granted for any bank's model if it believes that the conditions on which the approval was based are no longer valid or have changed significantly.

          • CA-9.10 CA-9.10 Combination of internal models and the standardised methodology

            • CA-9.10.1

              Unless a bank's exposure to a particular risk factor is insignificant, the internal models approach will, in principle, require banks to have an integrated risk measurement system that captures the broad risk factor categories (i.e., interest rates, exchange rates (which includes gold), equity prices and commodity prices, with related options volatilities being included in each risk factor category). Thus, banks which start to use models for one or more risk factor categories will, over a reasonable period of time, be expected to extend the models to all their market risks.

            • CA-9.10.2

              A bank which has obtained the Agency's approval for the use of one or more models will no longer be able to revert to measuring the risk measured by those models according to the standardised methodology (unless the Agency withdraws its approval for the model(s), as explained in section CA-9.9). However, what constitutes a reasonable period of time for an individual bank which uses a combination of internal models and the standardised methodology to move to a comprehensive model, will be decided by the Agency after taking into account the relevant circumstances of the bank.

            • CA-9.10.3

              Notwithstanding the goal of moving to comprehensive internal models as set out in paragraph CA-9.10.1 above, for banks which, for the time being, will be using a combination of internal models and the standardised methodology, the following conditions will apply:

              (a) each broad risk factor category must be assessed using a single approach (either internal models or the standardised approach), i.e., no combination of the two methods will, in principle, be permitted within a risk factor category or across a bank's different entities for the same type of risk (see, however, the transitional provisions in section CA-1.6)21;
              (b) all of the criteria laid down in this chapter will apply to the models being used;
              (c) banks may not modify the combination of the two approaches which they are using, without justifying to the Agency that they have a valid reason for doing so, and obtaining the Agency's prior written approval;
              (d) no element of market risk may escape measurement, i.e. the exposure for all the various risk factors, whether calculated according to the standardised approach or internal models, would have to be captured; and
              (e) the capital charges assessed under the standardised approach and under the models approach should be aggregated using the simple sum method.

              21 However, banks may incur risks in positions which are not captured by their models, for example, in minor currencies or in negligible business areas. Such risks should be measured according to the standard methodology.

          • CA-9.11 CA-9.11 Treatment of specific risk

            • CA-9.11.1

              Banks using models will be permitted to base their specific risk capital charge on modelled estimates if they meet all of the qualitative and quantitative requirements for general risk models as well as the additional criteria set out in paragraph CA-9.11.2. Banks which are unable to meet these additional criteria will be required to base their specific risk capital charge on the full amount of the specific risk charge calculated by the standardised methodology (as illustrated in chapters CA-4 to CA-8).

            • CA-9.11.2

              The criteria for applying modelled estimates of specific risk require that a bank's model:

              •  explain the historical price variation in the portfolio22;
              •  demonstrably capture concentration (magnitude and changes in composition)23;
              •  be robust to an adverse environment24; and
              •  be validated through backtesting aimed at assessing whether specific risk is being accurately captured.

              In addition, the bank must be able to demonstrate that it has methodologies in place which allow it to adequately capture event and default risk for its traded debt and equity positions.


              22 The key measurement of model quality are "goodness-of-fit" measures which address the question of how much of the historical variation in price value is explained by the model. One measure of this type which can often be used is an R-squared measure from regression methodology. If this measure is to be used, the bank's model would be expected to be able to explain a high percentage, such as 90%, of the historical price variation or to explicitly include estimates of the residual variability not captured in the factors included in this regression. For some types of model, it may not be feasible to calculate a goodness-of-fit measure. In such an instance, a bank is expected to contact the Agency to define an acceptable alternative measure which would meet this regulatory objective.

              23 The bank should be expected to demonstrate that the model is sensitive to changes in portfolio construction and that higher capital charges are attracted for portfolios that have increasing concentrations.

              24 The bank should be able to demonstrate that the model will signal rising risk in an adverse environment. This could be achieved by incorporating in the historical estimation period of the model at least one full credit cycle and ensuring that the model would not have been inaccurate in modelling at least one full the downward portion of the cycle. Another approach for demonstrating this is through simulation of historical or plausible worst-case environments

            • CA-9.11.3

              Banks which meet the criteria set out above for models but do not have methodologies in place to adequately capture event and default risk will be required to calculate their specific risk capital charge based on the internal model measurements plus an additional prudential surcharge as defined in paragraph CA-9.11.4. The surcharge is designed to treat the modelling of specific risk on the same basis as a general market risk model that has proven deficient during backtesting. That is, the equivalent of a scaling factor of four would apply to the estimate of specific risk until such time as a bank can demonstrate that the methodologies it uses adequately capture event and default risk. Once a bank is able to demonstrate this, the minimum multiplication factor of three can be applied. However, a higher multiplication factor of four on the modelling of specific risk would remain possible if future backtesting results were to indicate a serious deficiency in the model.

            • CA-9.11.4

              For banks applying the surcharge, the total market risk measure will equal a minimum of three times the internal model's general and specific risk measure plus a surcharge in the amount of either:

              (a) the specific risk portion of the value-at-risk measure which should be isolated25; or, at the bank's option,
              (b) the value-at-risk measures of sub-portfolios of debt and equity positions that contain specific risk26.

              Banks using option (b) above are required to identify their sub-portfolios structure ahead of time and should not change it without the Agency's prior written consent.


              25 Techniques for separating general market risk and specific risk would include the following:

              Equities:

              The market should be identified with a single factor that is representative of the market as a whole, for example, a widely accepted broadly based stock index for the country concerned.

              Banks that use factor models may assign one factor of their model, or a single linear combination of factors, as their general market risk factor.

              Bonds:

              The market should be identified with a reference curve for the currency concerned. For example, the curve might be a government bond yield curve or a swap curve; in any case, the curve should be based on a well-established and liquid underlying market and should be accepted by the market as a reference curve for the currency concerned.

              Banks may select their own technique for identifying the specific risk component of the value-at-risk measure for purposes of applying the multiplier of 4. Techniques would include:
              •  Using the incremental increase in value-at-risk arising from the modelling of specific risk factors;
              •  Using the difference between the value-at-risk measure and a measure calculated by substituting each individual equity position by a representative index; or
              •  Using an analytic separation between general market risk and specific risk by a particular model.

              26 This would apply to sub-portfolios containing positions that would be subject to specific risk under the standardised approach.

            • CA-9.11.5

              Banks which apply modelled estimates of specific risk are required to conduct backtesting aimed at assessing whether specific risk is being accurately captured. The methodology a bank should use for validating its specific risk estimates is to perform separate backtests on sub-portfolios using daily data on sub-portfolios subject to specific risk. The key sub-portfolios for this purpose are traded debt and equity positions. However, if a bank itself decomposes its trading portfolio into finer categories (e.g., emerging markets, traded corporate debt, etc.), it is appropriate to keep these distinctions for sub-portfolio backtesting purposes. Banks are required to commit to a sub-portfolio structure and stick to it unless it can be demonstrated to the Agency that it would make sense to change the structure.

            • CA-9.11.6

              Banks are required to have in place a process to analyse exceptions identified through the backtesting of specific risk. This process is intended to serve as the fundamental way in which banks correct their models of specific risk in the event they become inaccurate. There will be a presumption that models that incorporate specific risk are "unacceptable" if the results at the sub-portfolio level produce a number of exceptions commensurate with the Red Zone27. Banks with "unacceptable" specific risk models are expected to take immediate action to correct the problem in the model and to ensure that there is a sufficient capital buffer to absorb the risk that, the backtest showed, had not been adequately captured.


              27 As defined in the Basel Committee's document titled "Supervisory framework for the use of backtesing in conjunction with the internal models approach to market risk capital requirements".

        • CA-10 CA-10 Gearing requirements

          • CA-10.1 CA-10.1 Gearing

            • CA-10.1.1

              The content of this chapter is applicable to locally incorporated banks and FCB branches (licensed by the Agency) of foreign banks.

            • Measurement

              • CA-10.1.2

                Gearing ratio is measured with reference to the ratio of deposit liabilities against the bank's capital and reserves as reported in its PIR.

            • Gearing limit

              • CA-10.1.3

                For Full Commercial Bank and Offshore Banking Unit licensees, deposit liabilities should not exceed 20 times the respective bank's capital and reserves.

              • CA-10.1.4

                For Investment Bank licensees, deposit liabilities should not exceed 10 times the respective bank's capital and reserves.

      • CA CA Capital Adequacy (October 2007)

        • CA-A CA-A Introduction

          • CA-A.1 CA-A.1 Application

            • CA-A.1.1

              Regulations in this Module are applicable to locally incorporated banks on both a stand-alone basis (i.e. including their foreign branches), and on a consolidated group basis (i.e. including their subsidiaries and any other investments which are included or consolidated into the group accounts or are required to be consolidated for regulatory purposes by the CBB).

              October 07

            • CA-A.1.2

              In addition to licensees mentioned in Paragraph CA-A.1.1, certain of these regulations (in particular gearing and market risk requirements) are also applicable to Bahrain branches of foreign retail bank licensees.

              October 07

          • CA-A.2 CA-A.2 Purpose

            • Executive Summary

              • CA-A.2.1

                The purpose of this Module is to set out the Central Bank's capital adequacy regulations and provide guidance on the calculation of capital requirements by locally incorporated banks. This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).

                October 07

              • CA-A.2.2

                Principle 9 of the Principles of Business requires that conventional bank licensees maintain adequate human, financial and other resources, sufficient to run their business in an orderly manner (see Section PB-1.9). In addition, Condition 5 of CBB's Licensing Conditions (Section LR-2.5) requires conventional bank licensees to maintain financial resources in excess of the minimum requirements specified in Module CA (Capital Adequacy).

                October 07

              • CA-A.2.3

                The Module also sets out the minimum gearing requirements which relevant banks (referred to in Section CA-A.1) must meet as a condition of their licensing.

                October 07

              • CA-A.2.4

                The requirements specified in this Module vary according to the Category of conventional bank licensee concerned, their inherent risk profile, and the volume and type of business undertaken. The purpose of such requirements is to ensure that conventional bank licensees hold sufficient capital to provide some protection against unexpected losses, and otherwise allow conventional banks to effect an orderly wind-down of their operations, without loss to their depositors. The minimum capital requirements specified here may not be sufficient to absorb all unexpected losses.

                October 07

              • CA-A.2.5

                The Central Bank requires in particular that the relevant banks maintain adequate capital, in accordance with the requirements of this Module, against their risks.

                October 07

            • Legal Basis

              • CA-A.2.6

                This Module contains the CBB's Directive relating to the capital adequacy of conventional bank licensees, and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to all conventional bank licensees.

                October 07

              • CA-A.2.7

                For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                October 07

          • CA-A.3 CA-A.3 Module History

            • CA-A.3.1

              This Module was first issued in July 2004 as part of the conventional principles volume. All requirements in this volume have been effective since this date. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG 3 provides further details on Rulebook maintenance and version control. The most recent changes made to this Module are detailed in the table below:

              Summary of changes

              Module Ref. Change Date Description of Changes
              CA-A.2 10/07 Change categorising Module as a Directive
              October 07

            • Evolution of the Module

              • CA-A.3.2

                Prior to the development of the Rulebook, the Central Bank had issued various circulars representing regulations relating to capital adequacy requirements. These circulars were consolidated into this Module. These circulars are listed below:

                Circular Ref. Date of Issue Module Ref. Circular Subject
                ODG/50/98 11 Sep 1998 CA-1 - CA-9 Market Risk Capital Regulations
                BC/07/02 26 Jun 2002 CA-1.4 Review of PIR by External Auditors
                OG/78/01 20 Feb 2001 CA-2.5 Monitoring of Capital Adequacy
                BC/01/98 10 Jan 1998 CA-2.5 Risk Asset Ratio
                October 07

            • Effective date

              • CA-A.3.3

                The contents in this Module are effective from the date depicted in the original circulars (see Paragraph CA-A.3.2) from which the requirements are compiled or from the dates mentioned in the Summary of Changes.

                October 07

        • CA-B CA-B General guidance and best practice

          • CA-B.1 CA-B.1 Guidance provided by other international bodies

            • Basel Committee: Use of 'Backtesting' in Conjunction with the Internal Models Approach to Market Risk Capital Requirements

              • CA-B.1.1

                In January 1996, the Basel Committee on Banking Supervision issued technical guidance on the 'use of 'Backtesting' in Conjunction with the Internal Models Approach to Market Risk Capital Requirements' (see http://www.bis.org/publ/bcbs22.htm).

                October 07

              • CA-B.1.2

                This technical guidance presents a methodology for testing the accuracy of the internal models used by banks to measure market risks.

                October 07

              • CA-B.1.3

                Backtesting offers the best opportunity for incorporating suitable incentives into the internal models in a consistent manner.

                October 07

              • CA-B.1.4

                The Central Bank will rely upon technical guidance for its assessment and review of bank's market risk capital requirements including, but not limited to, the determination of the add-on factor.

                October 07

            • Basel Committee: The management of banks' off-balance-sheet exposures – a supervisory perspective

              • CA-B.1.5

                In March 1986, the Basel Committee on Banking Supervision issued a paper titled 'The management of banks' off-balance-sheet exposures — a supervisory perspective' (see www.bis.org/publ/bcbsc134.pdf).

                October 07

              • CA-B.1.6

                This paper examines off-balance-sheet risks from three angles: market/position risk, credit risk and operational/control risk. Part III of this paper examines credit risk (including control of large exposures, settlement risk and country risk), with particular emphasis given to the assessment of the relative risks of the different types of off-balance-sheet activity.

                October 07

        • CA-1 CA-1 Scope and coverage of capital charges

          • CA-1.1 CA-1.1 Introduction

            • CA-1.1.1

              All locally incorporated banks are required to measure and apply capital charges in respect of their credit and market risk capital requirements.

              October 07

            • CA-1.1.2

              Credit risk is defined as the potential that a bank's borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk exists throughout the activities of a bank in the banking book and in the trading book including both on- and off-balance-sheet exposures.

              October 07

            • CA-1.1.3

              Market risk is defined as the risk of losses in on- or off-balance-sheet positions arising from movements in market prices. The risks subject to the capital requirement of this Module are:

              (a) The risks pertaining to interest rate related instruments and equities in the trading book: and
              (b) Foreign exchange and commodities risks throughout the bank.
              October 07

          • CA-1.2 CA-1.2 Measuring credit risks

            • CA-1.2.1

              In measuring credit risk for the purpose of capital adequacy, banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative riskiness.

              October 07

            • CA-1.2.2

              The framework of weights consists of four weights – 0%, 20%, 50% and 100% for on- and off-balance-sheet items, which based on a broad-brush judgement, are applied to the different types of assets and off-balance-sheet exposures (with the exception of derivative transactions) within the banking book.

              October 07

            • CA-1.2.3

              The resultant different weighted assets and off-balance-sheet exposures are then added together to calculate the total credit-risk-weighted assets of the bank.

              October 07

          • CA-1.3 CA-1.3 Measuring market risks

            • Trading book

              • CA-1.3.1

                The trading book means the bank's proprietary positions in financial instruments (including positions in derivative products and off-balance-sheet instruments) which are intentionally held for short-term resale and/or which are taken on by the bank with the intention of benefiting in the short-term from actual and/or expected differences between their buying and selling prices, or from other price or interest rate variations, and positions in financial instruments arising from matched principal brokering and market making, or positions taken in order to hedge other elements of the trading book.

                October 07

              • CA-1.3.2

                Each bank should agree a written policy statement with the Central Bank on which activities are normally considered trading and which, therefore, constitute the trading book.

                October 07

              • CA-1.3.3

                It is expected that the trading activities will be managed and monitored by a separate unit and that such activities should be identifiable because of their intent, as defined in Paragraph CA-1.3.1 above.

                October 07

            • Interest rate and equity risk

              • CA-1.3.4

                The capital charges for interest rate related instruments and equities will apply based on the current market values of items in a bank's trading book.

                October 07

            • Foreign exchange and commodities risk

              • CA-1.3.5

                The capital charges for foreign exchange risk and for commodities risk will apply to a bank's total currency and commodity positions, with the exception of structural foreign exchange positions in accordance with Section CA-6.3 of this Module.

                October 07

            • Exemptions

              • CA-1.3.6

                Banks will be allowed certain de minimis exemptions from the capital requirements for foreign exchange risk, as described in Section CA-6.2. For the time being, there shall be no exemptions from the trading book capital requirements, or from the capital requirements for commodities risk.

                October 07

            • Hedging instruments

              • CA-1.3.7

                A trading book exposure may be hedged, completely or partially, by an instrument that, in its own right, is not normally considered eligible to be a part of the trading book. Subject to the policy statement agreed by the bank with the Central Bank as explained in Paragraph CA-1.3.2 above, and with the prior written approval of the Central Bank, banks will be allowed to include within their market risk measure non-trading instruments (on- or off-balance-sheet) which are deliberately used to hedge the trading activities. The positions in these instruments will attract counterparty risk capital requirements and general market risk, but not specific risk requirements.

                October 07

              • CA-1.3.8

                Where a financial instrument which would normally qualify as part of the trading book is used to hedge an exposure in the banking book, it should be carved out of the trading book for the period of the hedge, and included in the banking book with the exposure it is hedging. Such instruments will be subject to the credit risk capital requirements.

                October 07

              • CA-1.3.9

                It is possible that general market risk arising from the trading book may hedge positions in the banking book without reference to individual financial instruments. In such circumstances, there must nevertheless be underlying positions in the trading book. The positions in the banking book which are being hedged must remain in the banking book, although the general market risk exposure associated with them should be incorporated within the calculation of general market risk capital requirements for the trading book (i.e. the general market risk element on the banking book side of the hedge should be added to the trading book calculation, rather than that on the trading book side of the hedge being deducted from it). As no individual financial instruments are designated, there is no resultant specific risk requirement in the trading book and the risk-weighted assets in the banking book will not be reduced. Any such arrangement for the transfer of risk must be subject to the policy statement agreed with the Central Bank as explained in Paragraph CA-1.3.2 above, and should have the specific prior written approval of the Central Bank.

                October 07

            • Allocation of financial and hedging instruments

              • CA-1.3.10

                The allocation of a financial instrument between the trading book and the banking book, or the allocation of hedging instruments described in Paragraph CA-1.3.7 above, or the transfer of general market risk as explained in Paragraph CA-1.3.9 above, should be subject to appropriate and adequate documentation to ensure that it can be established through audit verification that the item is treated correctly for the purposes of capital requirements, in compliance with the bank's established criteria for allocating items to the trading or banking book, and subject to the policy statement agreed with the Central Bank.

                October 07

              • CA-1.3.11

                The Central Bank intends to carefully monitor the way in which banks allocate financial instruments and will seek, in particular, to ensure that no abusive switching designed to minimise capital charges occurs and to prevent 'gains trading' in respect of securities which are not marked to market.

                October 07

            • Review of compliance by internal and external auditors

              • CA-1.3.12

                The bank's compliance with the established criteria for allocating items to the trading and banking books, and with the policy statement agreed with the Central Bank, should be reviewed by the bank's internal auditors at least on a quarterly basis, and by the external auditors at least once a year.

                October 07

              • CA-1.3.13

                Any cases of non-compliance identified by the internal auditor should be immediately brought to the attention of the Central Bank, in writing, by the senior management of the bank. Any non-compliance identified by the external auditors, requires them to submit a written report directly to the Central Bank (in accordance with the requirements in Section CA-9.8), in addition to a report to be submitted by the management.

                October 07

            • Valuation requirements

              • CA-1.3.14

                To establish a relevant base for measuring the market risk in the trading book, all positions should be marked to market daily, including the recognition of accruing interest, dividends or other benefits as appropriate. Banks are required to have, and discuss with the Central Bank, a written policy statement on the subject of valuing trading book positions, which in particular should address the valuation process for those items where market prices are not readily available. This policy statement should have been developed in conjunction with the bank's internal and external auditors. Having arrived at a valuation mechanism for a single position or a group of similar positions, the valuation approach should be applied consistently. In addition to the considerations of prudence and consistency, the bank's valuation policy should reflect the points set out below:

                (a) A bank may mark to market positions using either a close-out valuation based on two-way prices (i.e., a long position shall be valued at its current bid price and a short position at its current offer price) or, alternatively, using a mid-market price but making a provision for the spread between bid and offer prices for different instruments. The bank must have due regard to the liquidity of the position concerned and any special factors which may adversely affect the closure of the position.
                (b) Where a bank has obtained the Central Bank's approval for the use of a risk assessment model in the calculation of the capital requirements for options (in accordance with Chapter CA-9 of these regulations), it may value its options using the values derived from that model.
                (c) Where a bank does not use a model and the prices are not published for its options positions, it must determine the market value as follows:
                (i) For purchased options, the marked-to-market value is the product of the 'in the money' amount and the quantity underlying the option; and
                (ii) For written options, the marked-to-market value is the initial premium received for the option plus the product of the amount by which the current 'in the money' amount exceeds either the 'in the money' amount at the time the contract was written, or zero if the contract was 'out of the money' at the time that it was written; and the quantity underlying the option.
                (d) A bank must calculate the value of a swap contract or an FRA having regard to the net present value of the future cash flows of the contract, using current interest rates relevant to the periods in which the cash flows will arise.
                (e) Where a bank is a market maker in an instrument(s), the valuation should be the bank's own bid or offer price which should reflect the bank's exposure to the market as a whole and its views on future prices. Where the bank is the sole market maker in a particular instrument, it should take proper care to ensure that the valuation used is prudent in all circumstances.
                (f) In the event that a bank is only able to access indicative prices, having regard to the fact that they are only a guide, such prices may have to be adjusted to some degree in order to arrive at a prudent valuation.
                (g) In the event that the bank is only able to access mid-market or single values, it should have regard to the fact that these prices will have to be adjusted to some degree in order to arrive at a prudent valuation.
                October 07

            • Consolidation

              • CA-1.3.15

                Both credit risk and market risk capital requirements will apply on a worldwide consolidated basis. Only a bank which is running a global consolidated book may apply the offsetting rules contained in the remainder of these regulations, on a consolidated basis with the prior written agreement of the Central Bank. However, where it would not be prudent to offset or net positions within the group as, for example, where there are obstacles to the quick repatriation of profits from a foreign subsidiary or where there are legal and procedural difficulties in carrying out the timely management of risks on a consolidated basis, the Central Bank will require the bank to take individual positions into account without any offsetting.

                October 07

              • CA-1.3.16

                Notwithstanding that the market risk capital requirements will apply on a worldwide consolidated basis, the Central Bank retains the right to monitor the market risks of banks on a non-consolidated basis to ensure that significant imbalances within a group do not escape supervision. The Central Bank will be particularly vigilant to ensure that banks do not pass positions on reporting dates in such a way as to escape measurement.

                October 07

            • Approach to measurement

              • CA-1.3.17

                For the measurement of their market risks, banks will have a choice, subject to the written approval of the Central Bank, between two broad methodologies. One alternative is to measure the risks in a standardised approach, using the measurement frameworks described in Chapters CA-4 to CA-8 of these regulations. Chapters CA-4 to CA-7 deal with the four risks addressed by these regulations; namely interest rate risk, equity position risk, foreign exchange risk and commodities risk. Chapter CA-8 sets out a number of possible methods for measuring the price risk in options of all kinds. The capital charge under the standardised approach is the arithmetical sum of the risk measures obtained from the measurement frameworks in Chapters CA-4 to CA-8.

                October 07

              • CA-1.3.18

                The standardised approach uses a 'building-block' approach in which the specific risk and the general market risk arising from interest rate and equity positions are calculated separately.

                October 07

              • CA-1.3.19

                The second alternative methodology, which is subject to the fulfilment of certain conditions and the use of which is, therefore, conditional upon the explicit approval of the Central Bank, is set out in detail in Chapter CA-9 including the procedure for obtaining the Central Bank's approval. This method allows banks to use risk measures derived from their own internal risk measurement models (Internal Models Approach), subject to seven sets of conditions which are described in detail in Chapter CA-9.

                October 07

              • CA-1.3.20

                The focus of most internal models currently used by banks is the general market risk exposure, typically leaving specific risk (i.e. exposures to specific issuers of debt securities or equities1) to be measured largely through separate credit risk measurement systems. Banks using internal models for the measurement of their market risk capital requirements will be subject to a separate capital charge for specific risk, to the extent that the model does not capture specific risk. The capital charge for banks which are modelling specific risk is set out in Chapter CA-9.


                1 Specific risk includes the risk that an individual debt or equity security moves by more or less than the general market in day-to-day trading (including periods when the whole market is volatile) and event risk (where the price of an individual debt or equity security moves precipitously relative to the general market, e.g. on a take-over bid or some other shock event; such events would also include the risk of 'default').

                October 07

              • CA-1.3.21

                In measuring the price risk in options under the standardised approach, a number of alternatives with varying degrees of sophistication are allowed (see Chapter CA-8). The more a bank is engaged in writing options, the more sophisticated its measurement method needs to be. In the longer term, banks with significant options business will be expected to move to comprehensive value-at-risk models and become subject to the full range of quantitative and qualitative standards set out in Chapter CA-9.

                October 07

              • CA-1.3.22

                All transactions, including forward sales and purchases, shall be included in the calculation of capital requirements as from the date on which they were entered into.

                October 07

            • Monitoring

              • CA-1.3.23

                Banks are expected to manage their market risk in such a way that the capital requirements for market risk are being met on a continuous basis, i.e. at the close of each business day and not merely at the end of each calendar quarter, both in the case of banks that use the standardised approach and those that use internal models. Banks are also expected to maintain strict risk management systems to ensure that their intra-day exposures are not excessive.

                October 07

              • CA-1.3.24

                Banks' daily compliance with the capital requirements for market risk shall be verified by the independent risk management department and the internal auditor. It is expected that the external auditors will perform appropriate tests of the banks' daily compliance with the capital requirements for market risk. Where a bank fails to meet the minimum capital requirements for market risk on any business day, the Central Bank should be informed in writing. The Central Bank will then seek to ensure that the bank takes immediate measures to rectify the situation.

                October 07

              • CA-1.3.25

                Besides what is stated in Paragraphs CA-1.3.2, CA-1.3.3, CA-1.3.10, CA-1.3.11, CA-1.3.19 and Section CA-1.6, the Central Bank will consider a number of other appropriate and effective measures to ensure that banks do not 'window-dress' by showing significantly lower market risk positions on reporting dates.

                October 07

          • CA-1.4 CA-1.4 Reporting

            • CA-1.4.1

              Formal reporting, to the Central Bank, of capital adequacy shall be made in accordance with the requirements set out under Section BR-3.1.

              October 07

            • Review of Prudential Information Returns by External Auditors

              • CA-1.4.2

                The Central Bank requires all relevant banks to request their external auditors to conduct a review of the prudential returns on a quarterly basis in accordance with the requirements set out under Section BR-3.1.

                October 07

          • CA-1.5 CA-1.5 Summary of overall capital adequacy requirement

            • CA-1.5.1

              Each bank is expected to monitor and report the level of risk against which a capital requirement is to be applied, in accordance with Section CA-1.3 above. The bank's overall minimum capital requirement will be:

              The credit risk requirements laid down by the Central Bank, excluding debt and equity securities in the trading book and all positions in commodities, but including the credit counterparty risk on all over-the-counter derivatives whether in the trading or the banking books: PLUS one of the following:

              (a) The capital charges for market risks calculated according to the measurement frameworks described in Chapters CA-4 to CA-8, summed arithmetically: OR
              (b) The measure of market risk derived from the models approach set out in Chapter CA-9 (with the prior written approval of the Central Bank for adopting this approach - see Chapter CA-9); OR
              (c) A mixture of (a) and (b) above, summed arithmetically (with the prior written approval of the Central Bank for adopting a combination of the standardised approach and the internal models approach - see Chapter CA-9).
              October 07

          • CA-1.6 CA-1.6 Transitional provisions

            • CA-1.6.1

              Banks which start to use internal models for one or more market risk categories should, over a reasonable period of time, extend the models to all of their operations, subject to the exceptions mentioned in Paragraph CA-1.6.4 below, and to move towards a comprehensive model (i.e. one which captures all market risk categories).

              October 07

            • CA-1.6.2

              On a transitional basis, banks will be allowed to use a combination of the standardised approach and the internal models approach to measure their market risks provided they should cover a complete risk Category (e.g. interest rate risk or foreign exchange risk), i.e. a combination of the two methods will not be allowed within the same risk Category.2 However, for banks that are, at present, still implementing or further improving their internal models, they will be allowed some flexibility, even within risk categories, in including all their operations on a worldwide basis. This flexibility shall be subject to the specific prior written approval of the Central Bank, and such approval will be given on a case-by-case basis and reviewed by the Central Bank from time to time.


              2This does not, however, apply to pre-processing techniques which are used to simplify the calculation and whose results become subject to the standardised methodology.

              October 07

            • CA-1.6.3

              The Central Bank will closely monitor banks to ensure that there will be no 'cherry-picking' between the standardised approach and the models approach within a risk Category. Banks which adopt a model will not be permitted, save in exceptional circumstances, to revert to the standardised approach.

              October 07

            • CA-1.6.4

              The Central Bank recognises that even a bank which uses a comprehensive model may still incur risks in positions which are not captured by their internal models3, for example, in remote locations, in minor currencies or in negligible business areas4. Any such risks that are not included in a model should be separately measured and reported using the standardised approach described in Chapters CA-4 to CA-8.


              3Banks may also incur interest rate and equity risks outside of their trading activities. However, there are no explicit capital charges for the price risk in such positions.

              4 For example, if a bank is hardly engaged in commodities it will not necessarily be expected to model its commodities risk.

              October 07

            • CA-1.6.5

              Transitioning banks are required to move towards a comprehensive internal model approach.

              October 07

            • CA-1.6.6

              The Central Bank will closely monitor the risk management practices of banks moving towards the models approach, to ensure that they will be in a position to meet all the standards once they are applying a fully-fledged model for any risk Category.

              October 07

        • CA-2 CA-2 The capital requirement

          • CA-2.1 CA-2.1 Introduction

            • CA-2.1.1

              Regulatory Capital is the sum of the following three components (as defined in Rules CA-2.2.1 to CA-2.2.4), subject to the restrictions set out in Section CA-2.3:

              Tiers 1 and 2: May be used to support credit risk and market risk; and
              Tier 3: May be used solely to support market risk.
              October 07

            • CA-2.1.2

              For a branch of a foreign bank operating as a retail bank licensee, a designated amount of capital is required, as agreed between the CBB and the licensee, taking into consideration the gearing requirement stated in Section CA-10.1.

              October 07

          • CA-2.2 CA-2.2 Definition of capital

            • Tier 1: Core capital

              • CA-2.2.1

                Tier 1 capital shall consist of the sum of items (a) to (c) below, less the sum of items (d) to (e) below:

                (a) Permanent shareholders' equity (including issued and fully paid ordinary shares / common stock and perpetual non-cumulative preference shares, but excluding cumulative preference shares);
                (b) Disclosed reserves, which are audited and approved by the shareholders, in the form of legal, general and other reserves created by appropriations of retained earnings, share premiums, capital redemption reserves and other surplus but excluding revaluation reserves; and
                (c) Minority interests, arising on consolidation, in the equity of subsidiaries which are less than wholly owned.
                LESS:
                (d) Goodwill; and
                (e) Current year's cumulative net losses which have been reviewed or audited as per the International Standards on Auditing (ISA) by the external auditors.
                October 07

            • Tier 2: Supplementary capital

              • CA-2.2.2

                Tier 2 capital shall consist of the following items:

                (a) Interim retained profits which have been reviewed as per the ISA by the external auditors;
                (b) Asset revaluation reserves, which arise in two ways. Firstly, these reserves can arise from the revaluation of fixed assets from time to time in line with the change in market values, and are reflected on the face of the balance sheet as a revaluation reserve. Secondly, hidden values or 'latent' revaluation reserves may be present as a result of long-term holdings of equity securities valued in the balance sheet at the historical cost of acquisition. Both types of revaluation reserve may be included in tier 2 capital, with the concurrence of the external auditors, provided that the assets are prudently valued, fully reflecting the possibility of price fluctuation and forced sale. In the case of 'latent' revaluation reserves, a discount of 55% will be applied to the difference between the historical cost book value and the market value to reflect the potential volatility of this form of unrealised capital.
                (c) General provisions held against future, presently unidentified losses which are freely available to meet losses which subsequently materialise and, therefore, qualify for inclusion within supplementary elements of capital, subject to a maximum of 1.25% of total risk-weighted assets (both credit and market risk-weighted assets). Provisions ascribed to impairment of particular assets or known liabilities should be excluded.
                (d) Hybrid instruments, which include a range of instruments which combine characteristics of equity capital and of debt, and which meet the following requirements:
                •   They are unsecured, subordinated and fully paid-up;
                •   They are not redeemable at the initiative of the holder or without the prior consent of the Central Bank;
                •   They are available to participate in losses without the bank being obliged to cease trading (unlike conventional subordinated debt); and
                •   Although the capital instrument may carry an obligation to pay interest that cannot permanently be reduced or waived (unlike dividends on ordinary shareholders' equity), it should allow service obligations to be deferred (as with cumulative preference shares) where the profitability of the bank would not support payment.
                Cumulative preference shares, having the above characteristics, would be eligible for inclusion in tier 2 capital. Debt capital instruments which do not meet the above criteria may be eligible for inclusion in item (e) below.
                (e) Subordinated term debt, which comprises all conventional unsecured borrowing subordinated (in respect of both interest and principal) to all other liabilities of the bank except the share capital and limited life redeemable preference shares. To be eligible for inclusion in tier 2 capital, subordinated debt capital instruments should have a minimum original fixed term to maturity of over five years. During the last five years to maturity, a cumulative discount (or amortisation) factor of 20% per year will be applied to reflect the diminishing value of these instruments as a continuing source of strength. Unlike instruments included in item (d) above, these instruments are not normally available to participate in the losses of a bank which continues trading. For this reason, these instruments will be limited to a maximum of 50% of tier 1 capital.
                (f) 45% of unrealised gains on equity securities held as available-for-sale (on an aggregate net-basis).
                October 07

            • Deduction from tiers 1 and 2 capital

              • CA-2.2.3

                The following item shall be deducted from tiers 1 and 2 capital on a pro-rata basis:

                Investments in and lending of a capital nature to unconsolidated subsidiaries engaged in banking and financial activities. The assets representing the investments in subsidiary companies whose capital is deducted from that of the parent would not be included in total assets for the purpose of computing the capital ratio.
                October 07

            • Tier 3: Trading book ancillary capital

              • CA-2.2.4

                Tier 3 capital will consist of short-term subordinated debt which, if circumstances demand, needs to be capable of becoming part of the bank's permanent capital and thus be available to absorb losses in the event of insolvency. It must, therefore, at a minimum meet the following conditions:

                (a) Be unsecured, subordinated and fully paid up;
                (b) Have an original maturity of at least two years;
                (c) Not be repayable before the agreed repayment date; and
                (d) Be subject to a lock-in clause which stipulates that neither interest nor principal may be paid (even at maturity) if such payment means that the bank falls below or remains below its minimum capital requirement.
                October 07

          • CA-2.3 CA-2.3 Limits on the use of different forms of capital

            • Tier 1: Core capital

              • CA-2.3.1

                Tier 1 capital should represent at least half of the total eligible capital, i.e., the sum total of tier 2 plus tier 3 eligible capital should not exceed total tier 1 eligible capital.

                October 07

            • Tier 2 : Supplementary capital

              • CA-2.3.2

                Tier 2 elements may be substituted for tier 3 up to the tier 3 limit of 250% of tier 1 capital (as below) in so far as eligible tier 2 capital does not exceed total tier 1 capital, and long-term subordinated debt does not exceed 50% of tier 1 capital.

                October 07

            • Tier 3: Ancillary capital

              • CA-2.3.3

                Tier 3 capital is limited to 250% of a bank's tier 1 capital that is required to support market risks. This means that a minimum of about 28.57% of market risks needs to be supported by tier 1 capital that is not required to support risks in the remainder of the book.

                October 07

          • CA-2.4 CA-2.4 Calculation of the capital ratio

            • CA-2.4.1

              A bank should start the calculation of the capital ratio with the measure of market risk (i.e. specific risk plus general market risk) in accordance with the regulations in this Module, including interest rate risk, equity risk, foreign exchange and commodities risks.

              October 07

            • CA-2.4.2

              The bank should next calculate its credit risk-weighted assets in accordance with the regulations in this Module.

              October 07

            • CA-2.4.3

              The next step is to create an explicit numerical link between the capital requirements for credit and market risks. This is accomplished by multiplying the measure of market risk (calculated as stated in Paragraphs CA-2.4.1 and CA-2.4.2above) by 12.5 and adding the resulting figure to the sum of the credit risk-weighted assets. The capital ratio will then be calculated in relation to the sum of the two, using as the numerator only the eligible capital.

              October 07

            • CA-2.4.4

              In calculating the eligible capital, it will be necessary first to calculate the bank's minimum capital requirement for credit risk, and only afterwards its market risk requirement, to establish how much tier 1 and tier 2 capital is available to support market risk. Eligible capital will be the sum of the whole of the bank's tier 1 capital, plus tier 2 capital under the limits set out in Section CA-2.3 above. Tier 3 capital will be regarded as eligible only if it can be used to support market risks under the conditions set out in Section CA-2.2 and CA-2.3 above. The quoted capital ratio will thus represent capital that is available to meet both credit risk and market risk. Where a bank has tier 3 capital, which meets the conditions set out in Section CA-2.2 above and which is not at present supporting market risks, it may report that excess as unused but eligible tier 3 capital alongside its capital ratio. A worked example of the calculation of the capital ratio is set out in Appendix CA-1.

              October 07

          • CA-2.5 CA-2.5 Minimum capital ratio requirement

            • Banking group

              • CA-2.5.1

                On a consolidated basis, the Central Bank has set a minimum Risk Asset Ratio ('RAR') of 12.0% for all locally incorporated banks. Furthermore, on a solo basis, the parent bank of a group is required to maintain a minimum RAR of 8.0% (i.e. unconsolidated).

                October 07

              • CA-2.5.2

                This means where a bank is required to complete both form PIR (Appendix BR 5) and form PIRC (Appendix BR 6), 8.0% is the minimum RAR necessary for the solo bank (PIR), and 12.0% for the consolidated bank (PIRC).

                October 07

            • Individual bank

              • CA-2.5.3

                For banks that are required to complete only the PIR form, the Central Bank has set a minimum Risk Asset Ratio ('RAR') of 12.0%.

                October 07

            • Maintaining minimum RAR

              • CA-2.5.4

                To clarify the effect of these minimum ratios (as identified in Paragraphs CA-2.5.1 to CA-2.5.3) on differing banking groups and individual banks, four examples (see Appendix CA-1) are given. In the examples, the parent and the subsidiary are Bahrain incorporated banks, but the cases could apply to overseas incorporated subsidiaries (with adjustment to the minimum RAR where appropriate in individual cases).

                (a) Case One: Compliant solo bank - No subsidiaries (PIR only).
                (b) Case Two: Compliant parent bank, compliant group (PIR and PIRC).
                (c) Case Three: Compliant parent bank, compliant subsidiary bank, but non - compliant group.
                (d) Case Four: Non - compliant parent bank, compliant subsidiary bank and compliant group.

                For detailed workings of the above cases, refer to Appendix CA-1.

                October 07

              • CA-2.5.5

                All locally incorporated banks must give the Central Bank, immediate written notification of any actual breach by such banks of either or both of the above RARs. Where such notification is given, the bank must also:

                (a) Provide the Central Bank no later than one calendar week after the notification, with a written action plan setting out how the bank proposes to restore the relevant RAR(s) to the required minimum level(s) set out above and, further, describing how the bank will ensure that a breach of such RAR(s) will not occur again in the future; and
                (b) Report on a weekly basis thereafter on the bank's relevant RAR(s) until such RAR(s) have reached the required target level(s) set out below.
                October 07

              • CA-2.5.6

                In addition, the Central Bank considers it a matter of basic prudential practice that, in order to ensure that these RARs are constantly met, banks set up internal 'targets' of 12.5% (on a consolidated basis) and 8.5% (on a solo basis) to warn them of a potential fall by the bank below the Central Bank's required minimum RARs as set out above.

                October 07

              • CA-2.5.7

                Where a bank's capital ratio falls below its target ratio, the General Manager should notify the Director of Banking Supervision at the Central Bank immediately. No formal action plan will be necessary, however the General Manager should explain what measures are being implemented to ensure that the bank will remain above its minimum RAR(s).

                October 07

              • CA-2.5.8

                The bank will be required to submit form PIR (and PIRC where applicable) to the Central Bank on a monthly basis, until the RAR(s) exceeds its target ratio(s).

                October 07

              • CA-2.5.9

                The Central Bank will notify banks in writing of any action required of them with regard to the corrective and preventive action (as appropriate) proposed by the bank pursuant to the above, as well as of any other requirement of the Central Bank in any particular case.

                October 07

              • CA-2.5.10

                Banks should note that the Central Bank considers the breach of RARs to be a very serious matter. Consequently, the Central Bank may (at its discretion) subject a bank which breaches its RAR(s) to a formal licensing reappraisal. Such reappraisal may be effected either through the Central Bank's own inspection function or through the use of Reporting Accountants, as appropriate. Following such appraisal, the Central Bank will notify the bank concerned in writing of its conclusions with regard to the continued licensing of the bank.

                October 07

              • CA-2.5.11

                The Central Bank recommends that the bank's compliance officer supports and cooperates with the Central Bank in the monitoring and reporting of the capital ratios and other regulatory reporting matters. Compliance officers should ensure that their banks have adequate internal systems and controls to comply with these regulations.

                October 07

        • CA-3 CA-3 Credit risk

          • CA-3.1 CA-3.1 Introduction

            • CA-3.1.1

              This Chapter describes the standardised approach for the measurement of the credit risk exposure in the bank's banking book.

              October 07

            • CA-3.1.2

              As illustrated in Sections CA-3.2, CA-3.3 and CA-3.4, banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative risk.

              October 07

          • CA-3.2 CA-3.2 Risk weighting – On-balance-sheet asset Category

            • CA-3.2.1

              Risk weights by Category of on-balance-sheet asset are illustrated in the table below:

              Risk weights Category of on-balance-sheet assets/claims
              0%
              (a) Cash and balances with Central Banks
              (b) Holdings of Gold bullion and other commodities
              (c) Claims on & guaranteed by:
              (i) The Government of Bahrain & Bahrain public sector entities
              (ii) Government-owned GCC companies incorporated in Bahrain
              (d) Claims on & guaranteed by or collateralised by cash or securities issued by central governments and central banks of Group A countries; and
              (e) Claims on the central governments and central banks of Group B countries, where denominated in national currency and funded in that currency.
                 
              20%
              (a) Claims on and guaranteed by or collateralised by securities issued by multilateral development banks
              (b) Claims on and guaranteed by banks and securities firms incorporated in Group A countries
              (c) Claims on and guaranteed by banks incorporated in Group B countries with a residual maturity of 1 year or less
              (d) Claims on and guaranteed by public sector entities in Group A countries
              (e) Claims on and guaranteed by government-owned GCC companies incorporated outside Bahrain; and
              (f) Cash items in process of collection
                 
              50% Claims secured by mortgage on residential property
              100%
              (a) Claims on related parties
              (b) Holdings of other (non-subsidiary) banks' and securities firms' capital instruments
              (c) Claims on and guaranteed by banks incorporated in Group B countries with a residual maturity over one year
              (d) Claims on central governments and central banks of Group B countries (not included above)
              (e) Claims on and guaranteed by public sector entities of Group B countries
              (f) Claims on and guaranteed by government-owned companies in non-GCC countries
              (g) Claims on and guaranteed by private sector persons and entities in and outside Bahrain
              (h) Premises and equipment, real estate investments and assets not reported elsewhere
              October 07

          • CA-3.3 CA-3.3 Risk weighting – Off-balance-sheet items

            • CA-3.3.1

              The framework takes account of the credit risk on off-balance-sheet exposures by applying credit conversion factors to the different types of off-balance-sheet instruments or transactions (with the exception of derivatives).

              October 07

            • CA-3.3.2

              The conversion factors are derived from the estimated size and likely occurrence of the credit exposure, as well as the relative degree of credit risk as identified in the Basel Committee's paper on 'The management of banks' off-balance-sheet exposures: a supervisory perspective' (see www.bis.org/publ/bcbsc134.pdf) issued in March 1986.

              October 07

            • CA-3.3.3

              The credit conversion factors applicable to the off-balance-sheet items are set out in the table below:

              Credit Conversion factors Off-balance-sheet items
              100% Direct credit substitutes, including general guarantees of indebtedness and acceptances
              50% Transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions)
              20% Short-term self-liquidating trade-related contingencies (such as documentary credits collateralised by the underlying shipments)
              100% Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank
              100% Forward asset purchases, forward forward deposits and the unpaid part of partly-paid shares and securities, which represent commitments with certain draw-down
              50% Underwriting commitments under note issuance and revolving underwriting facilities (minus own holdings of notes underwritten)
              50% Other commitments (e.g. formal standby facilities and credit lines) with an original maturity of 1 year and over
              0% Similar commitments with an original maturity of up to 1 year, or which can be unconditionally cancelled at any time
              October 07

            • CA-3.3.4

              The applicable credit conversion factors should be multiplied by the weights applicable to the Category of the counterparty as set out below:

              Risk weights Counterparty
              0% Type (a)
               
              •   The Government of Bahrain.
              •   Bahrain public sector entities.
              •   Government-owned (non-banking) GCC companies incorporated in Bahrain.
              •   Central government and central banks of Group A countries.
              20% Type (b)
               
              •   Banks incorporated in Bahrain or Group A countries and securities firms.
              •   Banks incorporated in Group B countries (if the commitment has a residual life of 1 year or less).
              •   Public sector entities in Group A countries.
              •   Government-owned (non-banking) GCC companies incorporated outside Bahrain.
              100% Type (c)
               
              •   Banks incorporated in Group B countries (if the commitment has a residual life of more than 1 year).
              •   Central governments, central banks and public sector entities in Group B countries.
              •   Government-owned companies incorporated in non-GCC countries.
              •   Private sector persons and entities in Bahrain and abroad.
              October 07

          • CA-3.4 CA-3.4 Treatment of derivatives contracts in the banking book

            • CA-3.4.1

              The treatment of forwards, swaps, purchased options and similar derivative contracts needs special attention because banks are not exposed to credit risk for the full face value of their contracts, but only to the potential cost of replacing the cash flow (on contracts showing positive value) if the counterparty defaults. The credit equivalent amounts (as referred to under Paragraph CA-3.4.13) will depend inter alia on the maturity of the contract and on the volatility of the rates and prices underlying that type of instrument.

              October 07

            • CA-3.4.2

              Instruments traded on exchanges may be excluded where they are subject to daily receipt and payment of cash variation margins.

              October 07

            • CA-3.4.3

              Options purchased over-the-counter are included with the same conversion factors as other instruments.

              October 07

            • Interest rate contracts

              • CA-3.4.4

                Interest rate contracts are defined to include single-currency interest rate swaps, basis swaps, forward rate agreements, interest rate futures, interest rate options purchased and similar instruments.

                October 07

            • Exchange rate contracts

              • CA-3.4.5

                Exchange rate contracts include cross-currency interest rate swaps, forward foreign exchange contracts, currency futures, currency options purchased and similar instruments.

                October 07

              • CA-3.4.6

                Exchange rate contracts with an original maturity of 14 calendar days or less may be excluded.

                October 07

            • Equity contracts

              • CA-3.4.7

                Equity contracts include forwards, swaps, purchased options and similar derivative contracts based on individual equities or on equity indices.

                October 07

            • Gold contracts

              • CA-3.4.8

                Gold contracts are treated the same as foreign exchange contracts for the purpose of calculating credit risk except that contracts with original maturity of 14 calendar days or less are included.

                October 07

              • CA-3.4.9

                Precious metals other than gold receive a separate treatment (see Section BR-4.1) and include forwards, swaps, purchased options and similar derivative contracts that are based on precious metals (e.g. silver, platinum, and palladium).

                October 07

            • Other commodities

              • CA-3.4.10

                Other commodities are also treated separately (see Section BR-4.1) and include forwards, swaps, purchased options and similar derivative contracts based on energy contracts, agricultural contracts, base metals (e.g. aluminium, copper, and zinc), and any other non-precious metal commodity contracts.

                October 07

            • General guidance on treatment of derivatives contracts

              • CA-3.4.11

                The following points should be noted for the treatment of certain derivatives contracts:

                (a) For contracts with multiple exchange of principal, the add-on factors are to be multiplied by the number of remaining payments in the contracts.
                (i) For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be set equal to the time until the next reset date.
                (ii) Forwards, swaps, purchased options and similar derivative contracts not covered in any of the above mentioned categories should be treated as 'other commodities'.
                (iii) No potential future credit exposure (as referred to under Paragraph CA-3.4.12) would be calculated for single currency floating/floating interest rate swaps.
                October 07

            • Calculation of weighted derivative exposures

              • CA-3.4.12

                Banks should calculate their weighted exposure under the above mentioned contracts according to the Current Exposure Method, which involves calculating the current replacement cost by marking contracts to market, thus capturing the current exposure without any need for estimation, and then adding a factor (the 'add-on') to reflect the potential future exposure over the remaining life of the contract.

                The 'add-on' factor table:

                  Residual maturity of contracts
                1 year or less Over 1 year to 5 years Over 5 years
                Interest rate related contracts 0.000 0.005 0.015
                Foreign exchange & gold contracts 0.010 0.050 0.075
                Equity contracts 0.060 0.080 0.100
                Precious metals (except gold) 0.070 0.070 0.070
                Other commodities 0.120 0.120 0.150
                October 07

              • CA-3.4.13

                In order to reflect counterparty risk, the total credit equivalent amount, which results from the calculation in Paragraph CA-3.4.12 has to be broken down again according to type of counterparty, using the same classification into types (a), (b) and (c) given in Section CA-3.3. Finally, the exposure to each type of counterparty has to be weighted as 0%, 20% or 50% respectively, and the total weighted exposure calculated.

                October 07

        • CA-4 CA-4 Interest rate risk - Standardised approach

          • CA-4.1 CA-4.1 Introduction

            • CA-4.1.1

              This Chapter describes the standardised approach for the measurement of the interest rate risk in the bank's trading book, in order to determine the capital requirement for this risk. The interest rate exposure captured includes exposure arising from interest-bearing and discounted financial instruments, derivatives which are based on the movement of interest rates, foreign exchange forwards, and interest rate exposure embedded in derivatives which are based on non-interest rate related instruments.

              October 07

            • CA-4.1.2

              For the guidance of the banks, and without being exhaustive, the following list includes financial instruments in the trading book to which interest rate risk capital requirements will apply, irrespective of whether or not the instruments carry coupons:

              (a) Bonds/loan stocks, debentures etc.;
              (b) Non-convertible preference shares;
              (c) Convertible securities such as preference shares and bonds, which are treated as debt instruments5;
              (d) Mortgage backed securities and other securitised assets6;
              (e) Certificates of Deposit;
              (f) Treasury bills, local authority bills, banker's acceptances;
              (g) Commercial paper;
              (h) Euronotes, medium term notes, etc.;
              (i) Floating rate notes, FRCDs etc.;
              (j) Foreign exchange forward positions;
              (k) Derivatives based on the above instruments and interest rates; and
              (l) Interest rate exposure embedded in other financial instruments.

              5See Section CA-5.1 for an explanation of the circumstances in which convertible securities, should be treated as equity instruments. In other circumstances, they should be treated as debt instruments.

              6 Traded mortgage securities and mortgage derivative products possess unique characteristics because of the risk of pre-payment. It is possible that including such products within the standardised methodology as if they were similar to other securitised assets may not capture all the risks of holding positions in them. Banks which have traded mortgage securities and mortgage derivative products should discuss their proposed treatment with the Central Bank and obtain the Central Bank's prior written approval for it.

              October 07

            • CA-4.1.3

              For instruments that deviate from the above structures, or could be considered complex, each bank should agree a written policy statement with the Central Bank about the intended treatment, on a case-by-case basis. In some circumstances, the treatment of an instrument may be uncertain, for example bonds whose coupon payments are linked to equity indices. The position risk of such instruments should be broken down into its components and allocated appropriately between the equity, interest rate and foreign exchange risk categories. Advice must be sought from the Central Bank in cases of doubt, particularly when a bank is trading an instrument for the first time.

              October 07

            • CA-4.1.4

              A security which is the subject of a repurchase or securities lending agreement will be treated as if it were still owned by the lender of the security, i.e., it will be treated in the same manner as other securities positions.

              October 07

            • CA-4.1.5

              The minimum capital requirement is expressed in terms of two separately calculated charges, one applying to the 'specific risk' of each position, and the other to the interest rate risk in the portfolio, termed 'general market risk'. The aggregate capital requirement for interest rate risk is the sum of the general market interest rate risk capital requirements across currencies, and the specific risk capital requirements.

              October 07

            • CA-4.1.6

              The specific risk capital requirement recognises that individual instruments may change in value for reasons other than shifts in the yield curve of a given currency. The general risk capital requirement reflects the price change of these products caused by parallel and non-parallel shifts in the yield curve, as well as the difficulty of constructing perfect hedges.

              October 07

            • CA-4.1.7

              There is general market risk inherent in all interest rate risk positions. This may be accompanied by one or more out of specific interest rate risk, counterparty risk, equity risk and foreign exchange risk, depending on the nature of the position. Banks should consider carefully which risks are generated by each individual position. It should be recognised that the identification of the risks will require the application of the appropriate level of technical skills and professional judgement.

              October 07

            • CA-4.1.8

              Banks which have the intention and capability to use internal models for the measurement of general and specific interest rate risks and, hence, for the calculation of the capital requirement, should seek the prior written approval of the Central Bank for those models. The Central Bank's detailed rules for the recognition and use of internal models are included in Chapter CA-9. Banks which do not use internal models should adopt the standardised approach to calculate the interest rate risk capital requirement, as set out in detail in this Chapter.

              October 07

          • CA-4.2 CA-4.2 Specific risk calculation

            • CA-4.2.1

              The capital charge for specific risk is designed to protect against a movement in the price of an individual instrument, owing to factors related to the individual issuer.

              October 07

            • CA-4.2.2

              In measuring the specific risk for interest rate related instruments, a bank may net, by value, long and short positions (including positions in derivatives) in the same debt instrument to generate the individual net position in that instrument. Instruments will be considered to be the same where the issuer is the same, they have an equivalent ranking in a liquidation, and the currency, the coupon and the maturity are the same.

              October 07

            • CA-4.2.3

              The specific risk capital requirement is determined by weighting the current market value of each individual net position, whether long or short, according to its allocation among the following five broad categories:

              (a) Eligible central government debt instrument 0.00%
              (b) Qualifying items with residual maturity up to 6 months 0.25%
              (c) Qualifying items with residual maturity between 6 and 24 months 1.00%
              (d) Qualifying items with residual maturity exceeding 24 months 1.60%
              (e) Non-qualifying items 8.00%
              October 07

            • CA-4.2.4

              Eligible central 'government' debt instruments will include all forms of government paper, including bonds, treasury bills and other short-term instruments, but the Central Bank reserves the right to apply a specific risk weight to securities issued by certain foreign governments, especially to securities denominated in a currency other than that of the issuing government.

              October 07

            • CA-4.2.5

              Governments eligible are those which are members of either the Gulf Co-operation Council (GCC) or the Organisation for Economic Co-operation and Development (OECD).

              October 07

            • CA-4.2.6

              The 'qualifying' Category includes securities issued by or fully guaranteed by public sector entities and multilateral development banks (refer to Appendix CA-2), plus other securities that are:

              (a) Rated investment grade by at least two internationally recognised credit rating agencies (to be agreed with the Central Bank); or
              (b) Deemed to be of comparable investment quality by the reporting bank, provided that the issuer is rated investment grade by at least two internationally recognised credit rating agencies (to be agreed with the Central Bank); or
              (c) Rated investment grade by one credit rating agency and not less than investment grade by any internationally recognised credit rating agencies (to be agreed with the Central Bank); or
              (d) Unrated (subject to the approval of the Central Bank), but deemed to be of comparable investment quality by the reporting bank and where the issuer has securities listed on a recognised stock exchange, may also be included.
              October 07

          • CA-4.3 CA-4.3 General market risk calculation

            • CA-4.3.1

              The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest rates, i.e. the risk of parallel and non-parallel shifts in the yield curve. A choice between two principal methods of measuring the general market risk is permitted, a 'maturity' method and a 'duration' method. In each method, the capital charge is the sum of the following four components:

              (a) The net short or long position in the whole trading book;
              (b) A small proportion of the matched positions in each time-band (the 'vertical disallowance');
              (c) A larger proportion of the matched positions across different time-bands (the 'horizontal disallowance'); and
              (d) A net charge for positions in options, where appropriate (see Chapter CA-8).
              October 07

            • CA-4.3.2

              Separate maturity ladders should be used for each currency and capital charges should be calculated for each currency separately and then summed, by applying the prevailing foreign exchange spot rates, with no off-setting between positions of opposite sign.

              October 07

            • CA-4.3.3

              In the case of those currencies in which the value and volume of business is insignificant, separate maturity ladders for each currency are not required. Instead, the bank may construct a single maturity ladder and slot, within each appropriate time-band, the net long or short position for each currency. However, these individual net positions are to be summed within each time-band, irrespective of whether they are long or short positions, to arrive at the gross position figure for the time-band.

              October 07

            • CA-4.3.4

              A combination of the two methods (referred to under Paragraph CA-4.3.1) is not permitted. Any exceptions to this rule will require the prior written approval of the Central Bank. It is expected that such approval will only be given in cases where a bank clearly demonstrates to the Central Bank, the difficulty in applying, to a definite Category of trading instruments, the method otherwise chosen by the bank as the normal method. It is further expected that the Central Bank may, in future years, consider recognising the duration method as the approved method, and the use of the maturity method may be discontinued.

              October 07

          • CA-4.4 CA-4.4 Maturity method

            • CA-4.4.1

              A worked example of the maturity method is included in Appendix CA-3. The various time-bands and their risk weights, relevant to the maturity method, are illustrated in Paragraph CA-4.4.2(a) below.

              October 07

            • CA-4.4.2

              The steps in the calculation of the general market risk for interest rate positions, under this method, are set out below:

              (a) Individual long or short positions in interest-rate related instruments, including derivatives, are slotted into a maturity ladder comprising thirteen time-bands (or fifteen time-bands in the case of zero-coupon and deep-discount instruments, defined as those with a coupon of less than 3%), on the following basis:
              (i) Fixed rate instruments are allocated according to their residual term to maturity (irrespective of embedded puts and calls), and whether their coupon is below 3%;
              (ii) Floating rate instruments are allocated according to the residual term to the next repricing date;
              (iii) Positions in derivatives, and all positions in repos, reverse repos and similar products are decomposed into their components within each time band. Derivative instruments are covered in greater detail in Sections CA-4.6 to CA-4.9;
              (iv) Opposite positions of the same amount in the same issues (but not different issues by the same issuer), whether actual or notional, can be omitted from the interest rate maturity framework, as well as closely matched swaps, forwards, futures and FRAs which meet the conditions set out in Section CA-4.8. In other words, these positions are netted within their relevant time-bands; and
              (v) The Central Bank's advice must be sought on the treatment of instruments that deviate from the above structures, or which may be considered sufficiently complex to warrant the Central Bank's attention.
              Maturity method: time-bands and risk weights
                  Coupon > 3% Coupon < 3% Risk weight
                Zone 1 1 month or less 1 month or less 0.00%
                1 to 3 months 1 to 3 months 0.20%
                  3 to 6 months 3 to 6 months 0.40%
                  6 to 12 months 6 to 12 months 0.70%
                Zone 2 1 to 2 years 1 to 1.9 years 1.25%
                  2 to 3 years 1.9 to 2.8 years 1.75%
                  3 to 4 years 2.8 to 3.6 years 2.25%
                Zone 3 4 to 5 years 3.6 to 4.3 years 2.75%
                  5 to 7 years 4.3 to 5.7 years 3.25%
                  7 to 10 years 5.7 to 7.3 years 3.75%
                  10 to 15 years 7.3 to 9.3 years 4.50%
                  15 to 20 years 9.3 to 10.6 years 5.25%
                  > 20 years 10.6 to 12 years 6.00%
                    12 to 20 years 8.00%
                    >> 20 years 12.50%
              (b) The market values of the individual long and short net positions in each maturity band are multiplied by the respective risk weighting factors given in Paragraph CA-4.4.2(a) above.
              (c) Matching of positions within each maturity band (i.e. vertical matching) is done as follows:
              •   Where a maturity band has both weighted long and short positions, the extent to which the one offsets the other is called the matched weighted position. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a band) is called the unmatched weighted position for that band.
              (d) Matching of positions, across maturity bands, within each zone (i.e. horizontal matching - level 1), is done as follows:
              (e) Where a zone has both unmatched weighted long and short positions for various bands, the extent to which the one offsets the other is called the matched weighted position for that zone. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a zone) is called the unmatched weighted position for that zone.
              (f) Matching of positions, across zones (i.e. horizontal matching - level 2), is done as follows:
              (i) The unmatched weighted long or short position in zone 1 may be offset against the unmatched weighted short or long position in zone 2. The extent to which the unmatched weighted positions in zones 1 and 2 are offsetting is described as the matched weighted position between zones 1 and 2.
              (ii) After step (i) above, any residual unmatched weighted long or short position in zone 2 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 2 and 3 are offsetting is described as the matched weighted position between zones 2 and 3.
              The calculations in steps (i) and (ii) above may be carried out in reverse order (i.e. zones 2 and 3, followed by zones 1 and 2).
              (iii) After steps (i) and (ii) above, any residual unmatched weighted long or short position in zone 1 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 1 and 3 are offsetting is described as the matched weighted position between zones 1 and 3.
              (g) Any residual unmatched weighted positions, following the matching within and between maturity bands and zones as described above, will be summed.
              (h) The general interest rate risk capital requirement is the sum of:
              (i) Matched weighted positions in all maturity bands × 10%
              (ii) Matched weighted positions in zone 1 × 40%
              (iii) Matched weighted positions in zone 2 × 30%
              (iv) Matched weighted positions in zone 3 × 50%
              (v) Matched weighted positions between zones 1&2 × 40%
              (vi) Matched weighted positions between zones 2&3 × 40%
              (vii) Matched weighted positions between zones 1&3 × 100%
              (viii) Residual unmatched weighted positions × 100%

              Item (i) is referred to as the vertical disallowance, items (ii) through (iv) as the first set of horizontal disallowances, and items (v) through (vii) as the second set of horizontal disallowances.
              October 07

          • CA-4.5 CA-4.5 Duration method

            • CA-4.5.1

              The duration method is an alternative approach to measuring the exposure to parallel and non-parallel shifts in the yield curve, and recognises the use of duration as an indicator of the sensitivity of individual positions to changes in market yields. Under this method, banks may use a duration-based system for determining their general interest rate risk capital requirements for traded debt instruments and other sources of interest rate exposures including derivatives. A worked example of the duration method is included in Appendix CA-4. The various time-bands and assumed changes in yield, relevant to the duration method, are illustrated below.

              October 07

            • Duration method: time-bands and assumed changes in yield

                Time-band Assumed change in yield
              Zone 1 1 month or less 1.00
                1 to 3 months 1.00
                3 to 6 months 1.00
                6 to 12 months 1.00
              Zone 2 1 to 1.9 years 0.90
                1.9 to 2.8 years 0.80
                2.8 to 3.6 years 0.75
              Zone 3 3.6 to 4.3 years 0.75
                4.3 to 5.7 years 0.70
                5.7 to 7.3 years 0.65
                7.3 to 9.3 years 0.60
                9.3 to 10.6 years 0.60
                10.6 to 12 years 0.60
                12 to 20 years 0.60
                > 20 years 0.60
              October 07

              • CA-4.5.2

                Banks should notify the Central Bank of the circumstances in which they elect to use this method. Once chosen, the duration method must be consistently applied, in accordance with the requirements of Section CA-4.3.

                October 07

              • CA-4.5.3

                Where a bank has chosen to use the duration method, it is possible that it will not be suitable for certain instruments. In such cases, the bank should seek the advice of the Central Bank or obtain approval for application of the maturity method to the specific Category(ies) of instruments, in accordance with the provisions of Section CA-4.3.

                October 07

              • CA-4.5.4

                The steps in the calculation of the general market risk for interest rate positions, under this method, are set out below:

                (a) The bank will determine the Yield-to-Maturity (YTM) for each individual net position in fixed rate and floating rate instruments, based on the current market value. The basis of arriving at individual net positions is explained in Section CA-4.4 above. The YTM for fixed rate instruments is determined without any regard to whether the instrument is coupon bearing, or whether the instrument has any embedded options. In all cases, YTM for fixed rate instruments is calculated with reference to the final maturity date and, for floating rate instruments, with reference to the next repricing date.
                (b) The bank will calculate, for each debt instrument, the modified duration (M) on the basis of the following formula:

                M = D/(1+r)
                where, Sigma m t = 1 t × C/(1+r) t
                D (duration) = Sigma m t = 1 C/(1+r) t


                r = YTM % per annum expressed as a decimal

                C = Cash flow at time t

                t = time at which cash flows occur, in years

                m = time to maturity, in years
                (c) Individual net positions, at current market value, are allocated to the time-bands illustrated in Paragraph CA-4.5.1, based on their modified duration.
                (d) The bank will then calculate the modified duration-weighted position for each individual net position by multiplying its current market value by the modified duration and the assumed change in yield.
                (e) Matching of positions within each time band (i.e. vertical matching) is done as follows:
                •   Where a time band has both weighted long and short positions, the extent to which the one offsets the other is called the matched weighted position. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a band) is called the unmatched weighted position for that band.
                (f) Matching of positions, across time bands, within each zone (i.e. horizontal matching - level 1), is done as follows:
                •   Where a zone has both unmatched weighted long and short positions for various bands, the extent to which the one offsets the other is called the matched weighted position for that zone. The remainder (i.e. the excess of the weighted long positions over the weighted short positions, or vice versa, within a zone) is called the unmatched weighted position for that zone.
                (g) Matching of positions, across zones (i.e. horizontal matching - level 2), is done as follows:
                (i) The unmatched weighted long or short position in zone 1 may be offset against the unmatched weighted short or long position in zone 2. The extent to which the unmatched weighted positions in zones 1 and 2 are offsetting is described as the matched weighted position between zones 1 and 2.
                (ii) After step (i) above, any residual unmatched weighted long or short position in zone 2 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 2 and 3 are offsetting is described as the matched weighted position between zones 2 and 3.
                The calculations in steps (i) and (ii) above may be carried out in reverse order (i.e. zones 2 and 3, followed by zones 1 and 2).
                (iii) After steps (a) and (b) above, any residual unmatched weighted long or short position in zone 1 may be matched by offsetting the unmatched weighted short or long position in zone 3. The extent to which the unmatched positions in zones 1 and 3 are offsetting is described as the matched weighted position between zones 1 and 3.
                (h) Any residual unmatched weighted positions, following the matching within and between maturity bands and zones as described above, will be summed.
                (i) The general interest rate risk capital requirement is the sum of:
                (i) Matched weighted positions in all maturity bands × 5%
                (ii) Matched weighted positions in zone 1 × 40%
                (iii) Matched weighted positions in zone 2 × 30%
                (iv) Matched weighted positions in zone 3 × 30%
                (v) Matched weighted positions between zones 1 & 2 × 40%
                (vi) Matched weighted positions between zones 2 & 3 × 40%
                (vii) Matched weighted positions between zones 1 & 3 × 100%
                (viii) Residual unmatched weighted positions × 100%

                Item (i) is referred to as the vertical disallowance, items (ii) through (iv) as the first set of horizontal disallowances, and items (v) through (vii) as the second set of horizontal disallowances.
                October 07

          • CA-4.6 CA-4.6 Derivatives

            • CA-4.6.1

              Banks which propose to use internal models to measure the interest rate risk inherent in derivatives will seek the prior written approval of the Central Bank for using those models. The use of internal models to measure market risk, and the Central Bank's rules applicable to them, are discussed in detail in Chapter CA-9.

              October 07

            • CA-4.6.2

              Where a bank, with the prior written approval of the Central Bank, uses an interest rate sensitivity model, the output of that model is used, by the duration method, to calculate the general market risk as described in Section CA-4.5.

              October 07

            • CA-4.6.3

              Where a bank does not propose to use models, it must use the techniques described in the following Paragraphs, for measuring the market risk on interest rate derivatives. The measurement system should include all interest rate derivatives and off-balance-sheet instruments in the trading book which react to changes in interest rates (e.g. forward rate agreements, other forward contracts, bond futures, interest rate and cross-currency swaps, options and forward foreign exchange contracts). Where a bank has obtained the approval of the Central Bank for the use of non-interest rate derivatives models, the embedded interest rate exposures should be incorporated in the standardised measurement framework described in Sections CA-4.7 to CA-4.9.

              October 07

            • CA-4.6.4

              Derivative positions will attract specific risk only when they are based on an underlying instrument or security. For instance, where the underlying exposure is an interest rate exposure, as in a swap based upon interbank rates, there will be no specific risk, but only counterparty risk. A similar treatment applies to FRAs, forward foreign exchange contracts and interest rate futures. However, for a swap based on a bond yield, or a futures contract based on a debt security or an index representing a basket of debt securities, the credit risk of the issuer of the underlying bond will generate a specific risk capital requirement. Future cash flows derived from positions in derivatives will generate counterparty risk requirements related to the counterparty in the trade, in addition to position risk requirements (specific and general market risk) related to the underlying security.

              October 07

            • CA-4.6.5

              A summary of the rules for dealing with interest rate derivatives (other than options) is set out in Section CA-4.9. The treatment of options, being a complex issue, is dealt with in detail in Chapter CA-8.

              October 07

          • CA-4.7 CA-4.7 Calculation of derivative positions

            • CA-4.7.1

              The derivatives should be converted to positions in the relevant underlying and become subject to specific and general market risk charges as described in Sections CA-4.2 and CA-4.3, respectively. For the purpose of calculation by the standard formulae, the amounts reported are the market values of the principal amounts of the underlying or of the notional underlying. For instruments where the apparent notional amount differs from the effective notional amount, banks should use the latter.

              October 07

            • CA-4.7.2

              The remaining Paragraphs in this Section include the guidelines for the calculation of positions in different categories of interest rate derivatives. Banks which need further assistance in the calculation, particularly in relation to complex instruments, should contact the Central Bank in writing.

              October 07

            • Forward foreign exchange contracts

              • CA-4.7.3

                A forward foreign exchange position is decomposed into legs representing the paying and receiving currencies. Each of the legs is treated as if it were a zero coupon bond, with zero specific risk, in the relevant currency and included in the measurement framework as follows:

                (a) If the maturity method is used, each leg is included at the notional amount.
                (b) If the duration method is used, each leg is included at the present value of the notional zero coupon bond.
                October 07

            • Deposit futures and FRAs

              • CA-4.7.4

                Deposit futures, forward rate agreements and other instruments where the underlying is a money market exposure will be split into two legs as follows:

                (a) The first leg will represent the time to expiry of the futures contract, or settlement date of the FRA as the case may be.
                (b) The second leg will represent the time to expiry of the underlying instrument.
                (c) Each leg will be treated as a zero coupon bond with zero specific risk.
                (d) For deposit futures, the size of each leg is the notional amount of the underlying money market exposure. For FRAs, the size of each leg is the notional amount of the underlying money market exposure discounted to present value, although in the maturity method, the notional amount may be used without discounting.
                For example, under the maturity method, a single 3-month Euro$ 1,000,000 deposit futures contract expiring in 3 months' time will have one leg of $ 1,000,000 representing the 8 months to contract expiry, and another leg of $ 1,000,000 in the 11 months' time-band representing the time to expiry of the deposit underlying the futures contract.
                October 07

            • Bonds futures and forwards bond transactions

              • CA-4.7.5

                Bond futures, forward bond transactions and the forward leg of repos, reverse repos and other similar transactions will use the two-legged approach. A forward bond transaction is one where the settlement is for a period other than the prevailing norm for the market.

                (a) The first leg is a zero coupon bond with zero specific risk. Its maturity is the time to expiry of the futures or forward contract. Its size is the cash flow on maturity discounted to present value, although in the maturity method, the cash flow on maturity may be used without discounting.
                (b) The second leg is the underlying bond. Its maturity is that of the underlying bond for fixed rate bonds, or the time to the next reset for floating rate bonds. Its size is as set out in (c) and (d) below.
                (c) For forward bond transactions, the underlying bond and amount is used at the present spot price.
                (d) For bond futures, the principal amounts for each of the two legs is reckoned as the futures price times the notional underlying bond amount.
                (e) Where a range of deliverable instruments may be delivered to fulfil a futures contract (at the option of the 'short'), then the following rules are used to determine the principal amount, taking account of any conversion factors defined by the exchange:
                (i) The 'long' may use one of the deliverable bonds, or the notional bond on which the contract is based, as the underlying instrument, but this notional long leg may not be offset against a short cash position in the same bond.
                (ii) The 'short' may treat the notional underlying bond as if it were one of the deliverable bonds, and it may be offset against a short cash position in the same bond.
                (f) For futures contracts based on a corporate bond index, the positions will be included at the market value of the notional underlying portfolio of securities.
                (g) A repo (or sell-buy or stock lending) involving exchange of a security for cash should be represented as a cash borrowing - i.e. a short position in a government bond with maturity equal to the repo and coupon equal to the repo rate. A reverse repo (or buy-sell or stock borrowing) should be represented as a cash loan - i.e. a long position in a government bond with maturity equal to the reverse repo and coupon equal to the repo rate. These positions are referred to as 'cash legs'.
                (h) It should be noted that, where a security owned by the bank (and included in its calculation of market risk) is repo'd, it continues to contribute to the bank's interest rate or equity position risk calculation.
                October 07

            • Swaps

              • CA-4.7.6

                Swaps are treated as two notional positions in government securities with the relevant maturities.

                (a) Interest rate swaps will be decomposed into two legs, and each leg will be allocated to the maturity band equating to the time remaining to repricing or maturity. For example, an interest rate swap in which a bank is receiving floating rate interest and paying fixed is treated as a long position in a floating rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed rate instrument of maturity equivalent to the residual life of the swap.
                (b) For swaps that pay or receive a fixed or floating interest rate against some other reference price, e.g. a stock index, the interest rate component should be slotted into the appropriate repricing or maturity Category, with the equity component being included in the equity risk measurement framework as described in Chapter CA-5.
                (c) For cross currency swaps, the separate legs are included in the interest rate risk measurement for the currencies concerned, as having a fixed/floating leg in each currency. Alternatively, the two parts of a currency swap transaction are split into forward foreign exchange contracts and treated accordingly.
                (d) Where a swap has a deferred start, and one or both legs have been fixed, then the fixed leg(s) will be sub-divided into the time to the commencement of the leg and the actual swap leg with fixed or floating rate. A swap is deemed to have a deferred start when the commencement of the interest rate calculation periods is more than two business days from the transaction date, and one or both legs have been fixed at the time of the commitment. However, when a swap has a deferred start and neither leg has been fixed, there is no interest rate exposure, albeit there will be counterparty exposure.
                (e) Where a swap has a different structure from those discussed above, it may be necessary to adjust the underlying notional principal amount, or the notional maturity of one or both legs of the transaction.
                October 07

              • CA-4.7.7

                Banks with large swap books may use alternative formulae for these swaps to calculate the positions to be included in the maturity or duration ladder. One method would be to first convert the cash flows required by the swap into their present values. For this purpose, each cash flow should be discounted using the zero coupon yields, and a single net figure for the present value of the cash flows entered into the appropriate time-band using procedures that apply to zero or low coupon (less than 3%) instruments. An alternative method would be to calculate the sensitivity of the net present value implied by the change in yield used in the duration method (as set out in Section CA-4.5), and allocate these sensitivities into the appropriate time-bands.

                October 07

              • CA-4.7.8

                Banks which propose to use the approaches described in Paragraph CA-4.7.7, or any other similar alternative formulae, should obtain the prior written approval of the Central Bank. The Central Bank will consider the following factors before approving any alternative methods for calculating the swap positions:

                (a) Whether the systems proposed to be used are accurate;
                (b) Whether the positions calculated fully reflect the sensitivity of the cash flows to interest rate changes and are entered into the appropriate time-bands; and
                (c) Whether the positions are denominated in the same currency.
                October 07

          • CA-4.8 CA-4.8 Netting of derivative positions

            • Permissible offsetting of fully matched positions for both specific and general market risk

              • CA-4.8.1

                Banks may exclude from the interest rate risk calculation, altogether, the long and short positions (both actual and notional) in identical instruments with exactly the same issuer, coupon, currency and maturity. A matched position in a future or a forward and its corresponding underlying may also be fully offset, albeit the leg representing the time to expiry of the future is included in the calculation.

                October 07

              • CA-4.8.2

                When the future or the forward comprises a range of deliverable instruments, offsetting of positions in the futures or forward contract and its underlying is only permitted in cases where there is a readily identifiable underlying security which is most profitable for the trader with a short position to deliver. The price of this security, sometimes called the 'cheapest-to-deliver', and the price of the future or forward contract should, in such cases, move in close alignment. No offsetting will be allowed between positions in different currencies. The separate legs of cross-currency swaps or forward foreign exchange contracts are treated as notional positions in the relevant instruments and included in the appropriate calculation for each currency.

                October 07

            • Permissible offsetting of closely matched positions for general market risk only

              • CA-4.8.3

                For the purpose of calculation of the general market risk, in addition to the permissible offsetting of fully matched positions as described in Paragraph CA-4.8.1 above, opposite positions giving rise to interest rate exposure can be offset if they relate to the same underlying instruments, are of the same nominal value and are denominated in the same currency and, in addition, fulfil the following conditions:

                (a) For futures:
                Offsetting positions in the notional or underlying instruments to which the futures contract relates should be for identical products and mature within seven days of each other.
                (b) For swaps and FRAs:
                The reference rate (for floating rate positions) must be identical and the coupons must be within 15 basis points of each other.
                (c) For swaps, FRAs and forwards:
                The next interest fixing date or, for fixed coupon positions or forwards, the residual maturity must correspond within the following limits:
                •   less than one month: same day;
                •   between one month and one year: within 7 days;
                •   over one year: within 30 days.
                October 07

          • CA-4.9 CA-4.9 Calculation of capital charge for derivatives

            • CA-4.9.1

              After calculating the derivatives positions, taking account of the permissible offsetting of matched positions, as explained in Section CA-4.8, the capital charges for specific and general market risk for interest rate derivatives are calculated in the same manner as for cash positions, as described earlier in this Chapter.

              Summary of treatment of interest rate derivative

              Instrument Specific risk charge* General market risk charge
              Exchange-traded futures    
                   
              - Government** debt security No Yes, as two positions
                   
              - Corporate debt security Yes Yes, as two positions
                   
              - Index on interest rates (e.g. LIBOR) No Yes, as two positions
                   
              - Index on basket of debt securities Yes Yes, as two positions
                   
              OTC forwards    
                   
              - Government** debt security No Yes, as two positions
                   
              - Corporate debt security Yes Yes, as two positions
                   
              - Index on interest rates No Yes, as two positions
                   
              FRAs No Yes, as two positions
                   
              Swaps    
              - Based on interbank rates No Yes, as two positions
                   
              - Based on Government** bond yields No Yes, as two positions
                   
              - Based on corporate bond yields Yes Yes, as two positions
                   
              Forward foreign exchange No Yes, as one position in each currency
                   
              Options    
              - Government** debt security No Either (a) or (b) as below (see Chapter CA-8 for a detailed description):
                   
              •   Corporate debt security
              •   Index on interest rates
              •   FRAs, swaps
              Yes

              No

              No
              (a) Carve out together with the associated hedging positions, and use:
              •   simplified approach; or
              •   scenario analysis; or
              •   internal models (see Chapter CA-9).
              (b) General market risk charge according to the delta-plus method (gamma and vega should receive separate capital charges).
              *This is the specific risk charge relating to the issuer of the instrument. Under the credit risk rules, there remains a separate capital charge for the counterparty risk.

              **As defined in Section CA-4.2.
              October 07

        • CA-5 CA-5 Equity position risk - Standardised approach

          • CA-5.1 CA-5.1 Introduction

            • CA-5.1.1

              This Chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in equities in the bank's trading book.

              October 07

            • CA-5.1.2

              For the guidance of the banks, and without being exhaustive, the following list includes financial instruments in the trading book, including forward positions, to which equity position risk capital requirements will apply:

              (a) Common stocks, whether voting or non-voting;
              (b) Depository receipts (which should be included in the measurement framework in terms of the underlying shares);
              (c) Convertible preference securities (non-convertible preference securities are treated as bonds);
              (d) Convertible debt securities which convert into equity instruments and are, therefore, treated as equities (see Paragraph CA-5.1.3 below);
              (e) Commitments to buy or sell equity securities;
              (f) Derivatives based on the above instruments.
              October 07

            • CA-5.1.3

              Convertible debt securities must be treated as equities where:

              (a) The first date at which the conversion may take place is less than three months ahead, or the next such date (where the first date has passed) is less than a year ahead; and
              (b) The convertible is trading at a premium of less than 10%, where the premium is defined as the current marked-to-market value of the convertible less the marked-to-market value of the underlying equity, expressed as a percentage of the latter.
              In other instances, convertibles should be treated as either equity or debt securities, based reasonably on their market behaviour.
              October 07

            • CA-5.1.4

              For instruments that deviate from the structures described in Paragraphs CA-5.1.2 and CA-5.1.3 above, or which could be considered complex, each bank should agree a written policy statement with the Central Bank about the intended treatment, on a case-by-case basis. In some circumstances, the treatment of an instrument may be uncertain, for example bonds whose coupon payments are linked to equity indices. The position risk of such instruments should be broken down into its components and allocated appropriately between the equity, interest rate and foreign exchange risk categories. Advice must be sought from the Central Bank in cases of doubt, particularly when a bank is trading an instrument for the first time.

              October 07

            • CA-5.1.5

              Where equities are part of a forward contract, a future or an option (i.e. a quantity of equities to be received or delivered), any interest rate or foreign currency exposure from the other leg of the contract should be included in the measurement framework as described in Chapters CA-4 and CA-6, respectively.

              October 07

            • CA-5.1.6

              As with interest rate related instruments, the minimum capital requirement for equities is expressed in terms of two separately calculated charges, one applying to the 'specific risk' of holding a long or short position in an individual equity, and the other to the 'general market risk' of holding a long or short position in the market as a whole.

              October 07

            • CA-5.1.7

              Banks which have the intention and capability to use internal models for the measurement of general and specific equity risk and, hence, for the calculation of the capital requirement, should seek the prior written approval of the Central Bank for those models. The Central Bank's detailed rules for the recognition and use of internal models are included in Chapter CA-9. Banks which do not use internal models should adopt the standardised approach to calculate the equity position risk capital requirement, as set out in detail in this Chapter.

              October 07

          • CA-5.2 CA-5.2 Calculation of equity positions

            • CA-5.2.1

              A bank may net long and short positions in the same equity instrument, arising either directly or through derivatives, to generate the individual net position in that instrument. For example, a future in a given equity may be offset against an opposite cash position in the same equity, albeit the interest rate risk arising out of the future should be calculated separately in accordance with the rules set out in Chapter CA-4.

              October 07

            • CA-5.2.2

              A bank may net long and short positions in one tranche of an equity instrument against another tranche only where the relevant tranches:

              (a) Rank pari passu in all respects; and
              (b) Become fungible within 180 days, and thereafter the equity instruments of one tranche can be delivered in settlement of the other tranche.
              October 07

            • CA-5.2.3

              Positions in depository receipts may only be netted against positions in the underlying stock if the stock is freely deliverable against the depository receipt. If a bank takes a position in depository receipts against an opposite position in the underlying equity in different markets (i.e. arbitrage), it may offset the position provided that any costs on conversion are fully taken into account. Furthermore, the foreign exchange risk arising out of these positions should be included in the measurement framework as set out in Chapter CA-6.

              October 07

            • CA-5.2.4

              More detailed guidance on the treatment of equity derivatives is set out in Section CA-5.

              October 07

            • CA-5.2.5

              Equity positions, arising either directly or through derivatives, should be allocated to the country in which each equity is listed. Where an equity is listed in more than one country, the bank should discuss the appropriate country allocation with the Central Bank.

              October 07

          • CA-5.3 CA-5.3 Specific risk calculation

            • CA-5.3.1

              Specific risk is defined as the bank's gross equity positions (i.e. the sum of all long equity positions and of all short equity positions), and is calculated for each country or equity market. For each national market in which the bank holds equities, it should sum the market values of its individual net positions as determined in accordance with Section CA-5.2, irrespective of whether they are long or short positions, to produce the overall gross equity position for that market.

              October 07

            • CA-5.3.2

              The capital charge for specific risk is 8%, unless the portfolio is both liquid and well-diversified, in which case the capital charge will be 4%. To qualify for the reduced 4% capital charge, the following requirements need to be met:

              (a) The portfolio should be listed on a recognised stock exchange;
              (b) No individual equity position shall comprise more than 10% of the gross value of the country portfolio; and
              (c) The total value of the equity positions which individually comprise between 5% and 10% of the gross value of the country portfolio, shall not exceed 50% of the gross value of the country portfolio.
              October 07

          • CA-5.4 CA-5.4 General risk calculation

            • CA-5.4.1

              The general market risk is the difference between the sum of the long positions and the sum of the short positions (i.e. the overall net position) in each national equity market. In other words, to calculate the general market risk, the bank should sum the market value of its individual net positions for each national market, as determined in accordance with Section CA-5.2, taking into account whether the positions are long or short.

              October 07

            • CA-5.4.2

              The general market equity risk measure is 8% of the overall net position in each national market.

              October 07

          • CA-5.5 CA-5.5 Equity derivatives

            • CA-5.5.1

              For the purpose of calculating the specific and general market risk by the standardised approach, equity derivative positions should be converted into notional underlying equity positions, whether long or short. All equity derivatives and off-balance-sheet positions which are affected by changes in equity prices should be included in the measurement framework. This includes futures and swaps on both individual equities and on stock indices.

              October 07

            • CA-5.5.2

              The following guidelines will apply to the calculation of positions in different categories of equity derivatives. Banks which need further assistance in the calculation, particularly in relation to complex instruments, should contact the Central Bank.

              (a) Futures and forward contracts relating to individual equities should, in principle, be included in the calculation at current market prices.
              (b) Futures relating to stock indices should be included in the calculation, at the marked-to-market value of the notional underlying equity portfolio, i.e. as a single position based on the sum of the current market values of the underlying instruments.
              (c) Equity swaps are treated as two notional positions. For example, an equity swap in which a bank is receiving an amount based on the change in value of one particular equity or stock index, and paying a different index is treated as a long position in the former and a short position in the latter. Where one of the swap legs involves receiving/paying a fixed or floating interest rate, that exposure should be slotted into the appropriate time-band for interest rate related instruments as set out in Chapter CA-4. The stock index leg should be covered by the equity treatment as set out in this Chapter.
              (d) Equity options and stock index options are either 'carved out' together with the associated underlying instruments, or are incorporated in the general market risk measurement framework, described in this Chapter, based on the delta-plus method. The treatment of options, being a complex issue, is dealt with in detail in Chapter CA-8.
              October 07

            • CA-5.5.3

              A summary of the treatment of equity derivatives is set out in Paragraph CA-5.5.8.

              October 07

            • Specific risk on positions in equity indices

              • CA-5.5.4

                Positions in highly liquid equity indices whether they arise directly or through derivatives, attract a 2% capital charge in addition to the general market risk, to cover factors such as execution risk.

                October 07

              • CA-5.5.5

                For positions in equity indices not regarded as highly liquid, the specific risk capital charge is the highest specific risk charge that would apply to any of its components, as set out in Section CA-5.3.

                October 07

              • CA-5.5.6

                In the case of the futures-related arbitrage strategies set out below, the specific risk capital charge described above may be applied to only one index with the opposite position exempt from a specific risk capital charge. The strategies are as follows:

                (a) Where a bank takes an opposite position in exactly the same index, at different dates or in different market centres;
                (b) Where a bank takes opposite positions in contracts at the same date in different but similar indices, provided the two indices contain at least 90% common components.
                October 07

              • CA-5.5.7

                Where a bank engages in a deliberate arbitrage strategy, in which a futures contract on a broad-based index matches a basket of stocks, it will be allowed to carve out both positions from the standardised methodology on the following conditions:

                (a) The trade has been deliberately entered into, and separately controlled; and
                (b) The composition of the basket of stocks represents at least 90% of the index when broken down into its notional components.

                In such a case, the minimum capital requirement is limited to 4% (i.e. 2% of the gross value of the positions on each side) to reflect divergence and execution risks. This applies even if all of the stocks comprising the index are held in identical proportions. Any excess value of the stocks comprising the basket over the value of the futures contract or vice versa is treated as an open long or short position.

                October 07

            • Counterparty risk

              • CA-5.5.8

                Derivative positions may also generate counterparty risk exposure related to the counterparty in the trade, in addition to position risk requirements (specific and general) related to the underlying instrument, e.g. counterparty risk related to OTC trades through margin payments, fees payable or settlement exposures. The credit risk capital requirements will apply to such counterparty risk exposure.

                Summary of treatment of equity derivatives

                Instrument Specific risk charge* General market risk charge
                Exchange-traded or OTC futures    
                - Individual equity Yes Yes, as underlying
                - Index Yes (see Section CA 5.5) Yes, as underlying
                Options
                •   Individual equity
                •   Index
                Yes

                Yes
                Either (a) or (b) as below (Chapter CA-8 for a detailed description):
                (a) Carve out together with the associated hedging positions, and use:
                •   simplified approach; or
                •   scenario analysis; or
                •   internal models (Chapter CA-9).
                (b) General market risk charge according to the delta-plus method (gamma and vega should receive separate capital charges).
                * This is the specific risk charge relating to the issuer of the instrument. Under the credit risk rules, there remains a separate capital charge for the counterparty risk.
                October 07

        • CA-6 CA-6 Foreign exchange risk - Standardised approach

          • CA-6.1 CA-6.1 Introduction

            • CA-6.1.1

              A bank which holds net open positions (whether long or short) in foreign currencies is exposed to the risk that exchange rates may move against it. The open positions may be either trading positions or, simply, exposures caused by the bank's overall assets and liabilities.

              October 07

            • CA-6.1.2

              This Chapter describes the standardised method for calculation of the bank's foreign exchange risk, and the capital required against that risk. The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold7and, as a second step, the measurement of the risks inherent in the bank's mix of long and short positions in different currencies.


              7 Positions in gold should be treated as if they were foreign currency positions, rather than as commodity positions, because the volatility of gold is more in line with that of foreign currencies and most banks manage it in similar manner to foreign currencies.

              October 07

            • CA-6.1.3

              The open positions and the capital requirements are calculated with reference to the entire business, i.e. the banking and trading books combined.

              October 07

            • CA-6.1.4

              The open positions are calculated with reference to the bank's base currency, which will be either Bahrain Dinars or United States dollars.

              October 07

            • CA-6.1.5

              Banks which have the intention and capability to use internal models for the measurement of their foreign exchange risk and, hence, for the calculation of the capital requirement, should seek the prior written approval of the Central Bank for those models. The Central Bank's detailed rules for the recognition and use of internal models are included in Chapter CA-9. Banks which do not use internal models should adopt the standardised approach, as set out in detail in this Chapter.

              October 07

            • CA-6.1.6

              In addition to foreign exchange risk, positions in foreign currencies may be subject to interest rate risk and credit risk which should be treated separately.

              October 07

          • CA-6.2 CA-6.2 De minimis exemptions

            • CA-6.2.1

              A bank doing negligible business in foreign currencies and which does not take foreign exchange positions for its own account may, at the discretion of the Central Bank evidenced by the Central Bank's prior written approval, be exempted from calculating the capital requirements on these positions. The Central Bank is likely to be guided by the following criteria in deciding to grant exemption to any bank:

              (a) The bank's holdings or taking of positions in foreign currencies, including gold, defined as the greater of the sum of the gross long positions and the sum of the gross short positions in all foreign currencies and gold, does not exceed 100% of its eligible capital; and
              (b) The bank's overall net open position, as defined in Paragraph CA-6.3.1, does not exceed 2% of its eligible capital as defined in Chapter CA-2.
              October 07

            • CA-6.2.2

              The criteria listed in Paragraph CA-6.2.1 above are only intended to be guidelines, and a bank will not automatically qualify for exemptions upon meeting them. The Central Bank may also, in its discretion, fix a minimum capital requirement for a bank which is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.

              October 07

            • CA-6.2.3

              The Central Bank may, at a future date, revoke an exemption previously granted to a bank, if the Central Bank is convinced that the conditions on which the exemption was granted no longer exist.

              October 07

          • CA-6.3 CA-6.3 Calculation of net open positions

            • CA-6.3.1

              A bank's exposure to foreign exchange risk in any currency is its net open position in that currency, which is calculated by summing the following items:

              (a) The net spot position in the currency (i.e. all asset items less all liability items, including accrued interest, other income and expenses, denominated in the currency in question, assets are included gross of provisions for bad and doubtful debts, except in cases where the provisions are maintained in the same currency as the underlying assets);
              (b) The net forward position in the currency (i.e. all amounts to be received less all amounts to be paid under forward foreign exchange contracts, in the concerned currency, including currency futures and the principal on currency swaps not included in the spot position);
              (c) Guarantees and similar off-balance-sheet contingent items that are certain to be called and are likely to be irrecoverable where the provisions, if any, are not maintained in the same currency;
              (d) Net future income/expenses not yet accrued but already fully hedged by forward foreign exchange contracts may be included provided that such anticipatory hedging is part of the bank's formal written policy and the items are included on a consistent basis;
              (e) Profits (i.e. the net value of income and expense accounts) held in the currency in question;
              (f) Specific provisions held in the currency in question where the underlying asset is in a different currency, net of assets held in the currency in question where a specific provision is held in a different currency; and
              (g) The net delta-based equivalent of the total book of foreign currency options (subject to a separately calculated capital charge for gamma and vega as described in Chapter CA-8, alternatively, options and their associated underlying positions are dealt with by one of the other methods described in Chapter CA-8).

              All assets and liabilities, as described above, should be included at closing mid-market spot exchange rates. Marked-to-market items should be included on the basis of the current market value of the positions. However, banks which base their normal management accounting on net present values are expected to use the net present values of each position, discounted using current interest rates and valued at current spot rates, for measuring their forward currency and gold positions.

              October 07

            • CA-6.3.2

              Net positions in composite currencies, such as the SDR, may either be broken down into the component currencies according to the quotas in force and included in the net open position calculations for the individual currencies, or treated as a separate currency. In any case, the mechanism for treating composite currencies should be consistently applied.

              October 07

            • CA-6.3.3

              For calculating the net open position in gold, the bank will first express the net position (spot plus forward) in terms of the standard unit of measurement (i.e. ounces or grams) and then convert it at the current spot rate into the base currency.

              October 07

            • CA-6.3.4

              Forward currency and gold positions should be valued at current spot market exchange rates. Using forward exchange rates is inappropriate as it will result in the measured positions reflecting current interest rate differentials, to some extent.

              October 07

            • CA-6.3.5

              Where gold is part of a forward contract (i.e. quantity of gold to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract should be reported as set out in Chapter CA-4 or Section CA-6.1 above, respectively.

              October 07

            • Structural positions

              • CA-6.3.6

                Positions of a structural, i.e. non-dealing, nature as set out below, may be excluded from the calculation of the net open currency positions:

                (a) Positions are taken deliberately in order to hedge, partially or totally, against the adverse effects of exchange rate movements on the bank's capital adequacy ratio;
                (b) Positions related to items that are deducted from the bank's capital when calculating its capital base in accordance with the rules and guidelines in this Module, such as investments in non-consolidated subsidiaries; and
                (c) Retained profits held for payout to parent.

                The Central Bank will consider approving the exclusion of the above positions for the purpose of calculating the capital requirement, only if the following conditions are met:

                (i) The concerned bank provides adequate documentary evidence to the Central Bank which establishes the fact that the positions proposed to be excluded are, indeed, of a structural, i.e. non-dealing, nature and are merely intended to protect the bank's capital adequacy ratio. For this purpose, the Central Bank may ask for written representations from the bank's management or Directors; and
                (ii) Any exclusion of a position is consistently applied, with the treatment of the hedge remaining the same for the life of the associated assets or other items.
                October 07

            • Derivatives

              • CA-6.3.7

                A currency swap is treated as a combination of a long position in one currency and a short position in the second currency.

                October 07

              • CA-6.3.8

                There are a number of alternative approaches to the calculation of the foreign exchange risk in options. As stated in Section CA-6.1, with the Central Bank's prior written approval, a bank may choose to use internal models to measure the options risk. Extra capital charges will apply to those option risks that the bank's internal model does not capture. The standardised framework for the calculation of options risks and the resultant capital charges is described, in detail, in Chapter CA-8. Where, as explained in Paragraph CA-6.3.1, the option delta value is incorporated in the net open position, the capital charges for the other option risks are calculated separately.

                October 07

          • CA-6.4 CA-6.4 Calculation of the overall net open positions

            • CA-6.4.1

              The net long or short position in each currency is converted, at the spot rate, into the reporting currency. The overall net open position is measured by aggregating the following:

              (a) The sum of the net short positions or the sum of the net long positions, whichever is greater; plus
              (b) The net position (short or long) in gold, regardless of sign.
              October 07

            • CA-6.4.2

              Where the bank is assessing its foreign exchange risk on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the bank. In such cases, the internal limit for that branch/subsidiary, in each currency, may be used as a proxy for the positions. The branch/subsidiary limits should be added, without regard to sign, to the net open position in each currency involved. When this simplified approach to the treatment of currencies with marginal operations is adopted, the bank should adequately monitor the actual positions of the branch/subsidiary against the limits, and revise the limits, if necessary, based on the results of the ex-post monitoring.

              October 07

          • CA-6.5 CA-6.5 Calculation of the capital charge

            • CA-6.5.1

              The capital charge is 8% of the overall net open position.

              October 07

            • CA-6.5.2

              The table below illustrates the calculation of the overall net open position and the capital charge:

              Example of the calculation of the foreign exchange overall net open position and the capital charge

              GBP EURO SAR US$ JPY Gold
              +100 +150 +50 -180 -20 -20
              +300 -200 20
              The capital charge is 8% of the higher of either the sum of the net long currency positions or the sum of the net short positions (i.e. 300) and of the net position in gold (i.e. 20) = 320 x 8% = 25.6
              October 07

        • CA-7 CA-7 Commodities risk - Standardised approach

          • CA-7.1 CA-7.1 Introduction

            • CA-7.1.1

              This Chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in commodities, including precious metals, but excluding gold (which is treated as a foreign currency according to the methodology explained in Chapter CA-6).

              October 07

            • CA-7.1.2

              The commodities position risk and the capital charges are calculated with reference to the entire business of a bank, i.e. the banking and trading books combined.

              October 07

            • CA-7.1.3

              The price risk in commodities is often more complex and volatile than that associated with currencies and interest rates. Commodity markets may also be less liquid than those for interest rates and currencies and, as a result, changes in supply and demand can have a more dramatic effect on price and volatility. Banks need also to guard against the risk that arises when a short position falls due before the long position. Owing to a shortage of liquidity in some markets, it might be difficult to close the short position and the bank might be 'squeezed by the market'. All these market characteristics of commodities can make price transparency and the effective hedging of risks more difficult.

              October 07

            • CA-7.1.4

              For spot or physical trading, the directional risk arising from a change in the spot price is the most important risk. However, banks using portfolio strategies involving forward and derivative contracts are exposed to a variety of additional risks, which may well be larger than the risk of a change in spot prices (directional risk). These include:

              (a) 'Basis risk', i.e., the risk that the relationship between the prices of similar commodities alters through time;
              (b) 'Interest rate risk', i.e., the risk of a change in the cost of carry for forward positions and options; and
              (c) 'Forward gap risk', i.e., the risk that the forward price may change for reasons other than a change in interest rates.
              October 07

            • CA-7.1.5

              The capital charges for commodities risk envisaged by the rules within this Chapter are intended to cover the risks identified in Paragraph CA-7.1.4. In addition, however, banks face credit counterparty risk on over-the-counter derivatives, which must be incorporated into their credit risk capital requirements. Furthermore, the funding of commodities positions may well open a bank to interest rate or foreign exchange risk which should be captured within the measurement framework set out in Chapters CA-4 and CA-6, respectively.8


              8 Where a commodity is part of a forward contract (i.e.. a quantity of commodity to be received or to be delivered), any interest rate or foreign exchange risk from the other leg of the contract should be captured, within the measurement framework set out in Chapters 4 and 6, respectively. However, positions which are purely of a stock financing nature (i.e., a physical stock has been sold forward and the cost of funding has been locked in until the date of the forward sale) may be omitted from the commodities risk-calculation although they will be subject to the interest rate and counterparty risk capital requirements.

              October 07

            • CA-7.1.6

              Banks which have the intention and capability to use internal models for the measurement of their commodities risks and, hence, for the calculation of the capital requirement, should seek the prior written approval of the Central Bank for those models. The Central Bank's detailed rules for the recognition and use of internal models are included in Chapter CA-9. It is essential that the internal models methodology captures the directional risk, forward gap and interest rate risks, and the basis risk which are defined in Paragraph CA-7.1.4. It is also particularly important that models take proper account of market characteristics, notably the delivery dates and the scope provided to traders to close out positions.

              October 07

            • CA-7.1.7

              Banks which do not propose to use internal models should adopt either the maturity ladder approach or the simplified approach to calculate their commodities risk and the resultant capital charges. Both these approaches are described in Sections CA-7.3 and CA-7.4, respectively.

              October 07

          • CA-7.2 CA-7.2 Calculation of commodities positions

            • Netting

              • CA-7.2.1

                Banks should first express each commodity position (spot plus forward) in terms of the standard unit of measurement (i.e., barrels, kilograms, grams etc.). Long and short positions in a commodity are reported on a net basis for the purpose of calculating the net open position in that commodity. For markets which have daily delivery dates, any contracts maturing within ten days of one another may be offset. The net position in each commodity is then converted, at spot rates, into the bank's reporting currency.

                October 07

              • CA-7.2.2

                Positions in different commodities cannot be offset for the purpose of calculating the open positions as described in Paragraph CA-7.2.1 above. However, where two or more sub-categories9of the same Category are, in effect, deliverable against each other, netting between those sub-Categories is permitted. Furthermore, if two or more sub-categories of the same Category are considered as close substitutes for each other, and minimum correlation of 0.9 between their price movements is clearly established over a minimum period of one year, the bank may, with the prior written approval of the Central Bank, net positions in those sub-categories. Banks which wish to net positions based on correlations, in the manner discussed above, will need to satisfy the Central Bank of the accuracy of the method which it proposes to adopt.


                9 Commodities can be grouped into clans, families, sub-groups and individual commodities. For example, a clan might be Energy Commodities, within which Hydro-Carbons is a family with Crude Oil being a sub-group and West Texas Intermediate, Arabian Light and Brent being individual commodities.

                October 07

            • Derivatives

              • CA-7.2.3

                All commodity derivatives and off-balance-sheet positions which are affected by changes in commodity prices should be included in the measurement framework for commodities risks. This includes commodity futures, commodity swaps, and options where the 'delta plus' method is used10. In order to calculate the risks, commodity derivatives are converted into notional commodities positions and assigned to maturities as follows:

                (a) Futures and forward contracts relating to individual commodities should be incorporated in the measurement framework as notional amounts of barrels, kilograms etc., and should be assigned a maturity with reference to their expiry date;
                (b) Commodity swaps where one leg is a fixed price and the other one is the current market price, should be incorporated as a series of positions equal to the notional amount of the contract, with one position corresponding to each payment on the swap and slotted into the maturity time-bands accordingly. The positions would be long positions if the bank is paying fixed and receiving floating, and short positions if vice versa. (If one of the legs involves receiving/paying a fixed or floating interest rate, that exposure should be slotted into the appropriate repricing maturity band for the calculation of the interest rate risk, as described in Chapter CA-4);
                (c) Commodity swaps where the legs are in different commodities should be incorporated in the measurement framework of the respective commodities separately, without any offsetting. Offsetting will only be permitted if the conditions set out in Paragraphs CA-7.2.1 and CA-7.2.2 are met.

                10 For banks using other approaches to measure options risks, all Options and the associated underlying instruments should be excluded from both the maturity ladder approach and the simplified approach. The treatment of options is described, in detail, in Chapter 8.

                October 07

          • CA-7.3 CA-7.3 Maturity ladder approach

            • CA-7.3.1

              A worked example of the maturity ladder approach is set out in Appendix CA-5 and the table in Paragraph CA-7.3.2 illustrates the maturity time-bands of the maturity ladder for each commodity.

              October 07

            • CA-7.3.2

              The steps in the calculation of the commodities risk by the maturity ladder approach are:

              (a) The net positions in individual commodities, expressed in terms of the standard unit of measurement, are first slotted into the maturity ladder. Physical stocks are allocated to the first time-band. A separate maturity ladder is used for each commodity as defined in Section CA-7.2 earlier in this Chapter. The net positions in commodities are calculated as explained in Section CA-7.2.
              (b) Long and short positions in each time-band are matched. The sum of the matched long and short positions is multiplied first by the spot price of the commodity, and then by a spread rate of 1.5% for each time-band as set out in the table below. This represents the capital charge in order to capture forward gap and interest rate risk within a time-band (which, together, are sometimes referred to as curvature/spread risk).
              Time-bands11
              0–1 months

              1–3 months

              3–6 months

              6–12 months

              1–2 years

              2–3 years

              over 3 years
              (c) The residual (unmatched) net positions from nearer time-bands are then carried forward to offset opposite positions (i.e. long against short, and vice versa) in time-bands that are further out. However, a surcharge of 0.6% of the net position carried forward is added in respect of each time-band that the net position is carried forward, to recognise that such hedging of positions between different time-bands is imprecise. The surcharge is in addition to the capital charge for each matched amount created by carrying net positions forward, and is calculated as explained in step (b) above.
              (d) At the end of step (c) above, there will be either only long or only short positions, to which a capital charge of 15% will apply. The Central Bank recognises that there are differences in volatility between different commodities, but has, nevertheless, decided that one uniform capital charge for open positions in all commodities shall apply in the interest of simplicity of the measurement, and given the fact that banks normally run rather small open positions in commodities. Banks will be required to submit, in writing, details of their commodities business, to enable the Central Bank to evaluate whether the models approach should be adopted by the bank, to capture the market risk on this business.

              11 For instruments, the maturity of which is on the boundary of two maturity time-bands, the instrument should be placed into the earlier maturity band. For example, instruments with a maturity of exactly one year are placed into the 6 to 12 months time-band.

              October 07

          • CA-7.4 CA-7.4 Simplified approach

            • CA-7.4.1

              By the simplified approach, the capital charge of 15% of the net position, long or short, in each commodity is applied to capture directional risk. Net positions in commodities are calculated as explained in Section CA-7.2.

              October 07

            • CA-7.4.2

              An additional capital charge equivalent to 3% of the bank's gross positions, long plus short, in each commodity is applied to protect the bank against basis risk, interest rate risk and forward gap risk. In valuing the gross positions in commodity derivatives for this purpose, banks should use the current spot price.

              October 07

        • CA-8 CA-8 Options risk - Standardised approach

          • CA-8.1 CA-8.1 Introduction

            • CA-8.1.1

              It is recognised that the measurement of the price risk of options is inherently a difficult task, which is further complicated by the wide diversity of banks' activities in options. The Central Bank has decided that the following approaches should be adopted to the measurement of options risks:

              (a) Banks which solely use purchased options are permitted to use the simplified (carve-out) approach described later in this Chapter.
              (b) Banks which also write options should use either the delta-plus (buffer) approach or the scenario approach, or alternatively use a comprehensive risk management model. The Central Bank's detailed rules for the recognition and use of internal models are included in Chapter CA-9.
              October 07

            • CA-8.1.2

              The scenario approach and the internal models approach are generally regarded as more satisfactory for managing and measuring options risk, as they assess risk over a range of outcomes rather than focusing on the point estimate of the 'Greek' risk parameters as in the delta-plus approach. The more significant the level and/or complexity of the bank's options trading activities, the more the bank will be expected to use a sophisticated approach to the measurement of options risks. The Central Bank will monitor the banks' options trading activities, and the adequacy of the risk measurement framework adopted.

              October 07

            • CA-8.1.3

              Where written option positions are hedged by perfectly matched long positions in exactly the same options, no capital charge for market risk is required in respect of those matched positions.

              October 07

          • CA-8.2 CA-8.2 Simplified approach (carve-out)

            • CA-8.2.1

              In the simplified approach, positions for the options and the associated underlying (hedges), cash or forward, are entirely omitted from the calculation of capital charges by the standardised methodology and are, instead, 'carved out' and subject to separately calculated capital charges that incorporate both general market risk and specific risk. The capital charges thus generated are then added to the capital charges for the relevant risk Category, i.e., interest rate related instruments, equities, foreign exchange and commodities as described in Chapters CA-4, CA-5, CA-6 and CA-7 respectively.

              October 07

            • CA-8.2.2

              The capital charges for the carved out positions are as set out in the table below. As an example of how the calculation would work, if a bank holds 100 shares currently valued at $ 10 each, and also holds an equivalent put option with a strike price of $ 11, the capital charge would be as follows:

              [$ 1,000 × 16%12] minus [($ 11 - $ 10)13 × 100] = $ 60

              A similar methodology applies to options whose underlying is a foreign currency, an interest rate related instrument or a commodity.


              128% specific risk plus 8% general market risk.

              13 The amount the option is 'in the money'.

              Simplified approach: Capital charges

              Position Treatment
              Long cash and long put

              or

              Short cash and long call (i.e. hedged positions)
              The capital charge is:

              [Market value of underlying instrument14 x Sum of specific and general market risk charges15 for the underlying] minus [Amount, if any, the option is in the money16]

              The capital charge calculated as above is bounded at zero, i.e., it cannot be a negative number.
              Long call

              or

              Long put (i.e. naked option positions)
              The capital charge is the lesser of:

              i) Market value of the underlying instrument x Sum of specific and general market risk charges for the underlying; and

              ii) Market value of the option17.

              14 In some cases such as foreign exchange, it may be unclear which side is the 'underlying instrument'; this should be taken to be the asset which would be received if the option were exercised. In addition, the nominal value should be used for items where the market value of the underlying instrument could be zero, e.g., caps and floors, swaptions etc.

              15 Some options (e.g., where the underlying is an interest rate, a currency or a commodity) bear no specific risk, but specific risk is present in the case of options on certain interest rate related instruments (e.g., options on a corporate debt security or a corporate bond index - see Chapter CA-4 for the relevant capital charges), and in the case of options on equities and stock indices (see Chapter CA-5 for the relevant capital charges). The capital charge for currency options is 8% and for options on commodities is 15%.

              16 For options with a residual maturity of more than six months, the strike price should be compared with the forward, not the current, price. A bank unable to do this should take the 'in the money' amount to be zero.

              17 Where the position does not fall within the trading book options on certain foreign exchange and commodities positions not belonging to the trading book), it is acceptable to use the book value instead of the market value.

              October 07

          • CA-8.3 CA-8.3 Delta-plus method (buffer approach)

            • CA-8.3.1

              Banks which write options are allowed to include delta-weighted option positions within the standardised methodology set out in Chapters CA-4 through CA-7. Each option should be reported as a position equal to the market value of the underlying multiplied by the delta. The delta should be calculated by an adequate model with appropriate documentation of the process and controls, to enable the Central Bank to review such models, if considered necessary. A worked example of the delta-plus method is set out in Appendix CA-6.

              October 07

            • CA-8.3.2

              Since delta does not sufficiently cover the risks associated with options positions, there will be additional capital buffers to cover gamma (which measures the rate of change of delta) and vega (which measures the sensitivity of the value of an option with respect to a change in volatility), in order to calculate the total capital charge. The gamma and vega buffers should be calculated by an adequate exchange model or the bank's proprietary options pricing model, with appropriate documentation of the process and controls, to enable the Central Bank to review such models, if considered necessary.

              October 07

            • Treatment of delta

              • CA-8.3.3

                The treatment of the delta-weighted positions, for the calculation of the capital charges arising from delta risk, is summarised in Paragraphs CA-8.3.4 to CA-8.3.9.

                October 07

            • Where the underlying is a debt security or an interest rate

              • CA-8.3.4

                The delta-weighted option positions are slotted into the interest rate time-bands as set out in Chapter CA-4. A two-legged approach should be used as for other derivatives, as explained in Chapter CA-4, requiring one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures. A few examples to elucidate the two-legged treatment are set out below:

                (a) A bought call option on a June three-month interest rate future will, in April, be considered, on the basis of its delta-equivalent value, to be a long position with a maturity of five months and a short position with a maturity of two months.
                (b) A written option with the same underlying as in (a) above, will be included in the measurement framework as a long position with a maturity of two months and a short position with a maturity of five months.
                (c) A two months call option on a bond future where delivery of the bond takes place in September will be considered in April, as being long the bond and short a five months deposit, both positions being delta-weighted.
                October 07

              • CA-8.3.5

                Floating rate instruments with caps or floors are treated as a combination of floating rate securities and a series of European-style options. For example, the holder of a three-year floating rate bond indexed to six month LIBOR with a cap of 10% will treat it as:

                (a) A debt security that reprices in six months; and
                (b) A series of five written call options on an FRA with a reference rate of 10%, each with a negative sign at the time the underlying FRA takes effect and a positive sign at the time the underlying FRA matures.
                October 07

              • CA-8.3.6

                The rules applying to closely matched positions, set out in Paragraph CA-4.8.2, will also apply in this respect.

                October 07

            • Where the underlying is an equity instrument

              • CA-8.3.7

                The delta-weighted positions are incorporated in the measure of market risk described in Chapter CA-5. For purposes of this calculation, each national market is treated as a separate underlying.

                October 07

            • Options on foreign exchange and gold positions

              • CA-8.3.8

                The net delta-based equivalent of the foreign currency and gold options are incorporated in the measurement of the exposure for the respective currency or gold position, as described in Chapter CA-6.

                October 07

            • Options on commodities

              • CA-8.3.9

                The delta-weighted positions are incorporated in the measurement of the commodities risk by the simplified approach or the maturity ladder approach, as described in Chapter CA-7.

                October 07

            • Calculation of the gamma and vega buffers

              • CA-8.3.10

                As explained in Paragraph CA-8.3.2, in addition to the above capital charges to cover delta risk, banks are required to calculate additional capital charges to cover the gamma and vega risks. The additional capital charges are calculated as follows:

                •   Gamma
                (a) For each individual option position (including hedge positions), a gamma impact is calculated according to the following formula derived from the Taylor series expansion:

                Gamma impact = 0.5 × Gamma × VU

                where VU = variation of the underlying of the option, calculated as in (b) below
                (b) VU is calculated as follows:
                (i) For interest rate options18, where the underlying is a bond, the market value of the underlying is multiplied by the risk weights set out in Section CA-4.4. An equivalent calculation is carried out where the underlying is an interest rate, based on the assumed changes in yield as set out in the table in Section CA-4.5;
                (ii) For options on equities and equity indices18, the market value of the underlying is multiplied by 8%;
                (iii) For foreign exchange and gold options, the market value of the underlying is multiplied by 8%;
                (iv) For commodities options, the market value of the underlying is multiplied by 15%.
                (c) For the purpose of the calculation of the gamma buffer, the following positions are treated as the same underlying:
                (i) For interest rates, each time-band as set out in the table in Section CA-4.4. Positions should be slotted into separate maturity ladders by currency. Banks using the duration method should use the time-bands as set out in the table in Section CA-4.5;
                (ii) For equities and stock indices, each individual national market;
                (iii) For foreign currencies and gold, each currency pair and gold; and
                (iv) For commodities, each individual commodity as defined in Section CA-7.2.
                (d) Each option on the same underlying will have a gamma impact that is either positive or negative. These individual gamma impacts are summed, resulting in a net gamma impact for each underlying that is either positive or negative. Only those net gamma impacts that are negative are included in the capital calculation.
                (e) The total gamma capital charge is the sum of the absolute value of the net negative gamma impacts calculated for each underlying as explained in (d) above.
                •   Vega
                (f) For volatility risk (vega), banks are required to calculate the capital charges by multiplying the sum of the vegas for all options on the same underlying, as defined above, by a proportional shift in volatility of ±25%.
                (g) The total vega capital charge is the sum of the absolute value of the individual vega capital charges calculated for each underlying.

                18 For interest rate and equity options, the present set of rules do not attempt to capture specific risk when calculating gamma capital charges. See Section CA-8.4 for an explanation of the Central Bank's views on this subject.

                October 07

              • CA-8.3.11

                The capital charges for delta, gamma and vega risks described in Paragraphs CA-8.3.1 through CA-8.3.10 are in addition to the specific risk capital charges which are determined separately by multiplying the delta-equivalent of each option position by the specific risk weights set out in Chapters CA-4 through CA-7.

                October 07

              • CA-8.3.12

                To summarise, capital requirements for, say OTC options, using the delta-plus method are as follows:

                (a) Counterparty risk capital charges (on purchased options only), calculated in accordance with the credit risk regulations; PLUS
                (b) Specific risk capital charges (calculated as explained in Paragraph CA-8.3.11); PLUS
                (c) Delta risk capital charges (calculated as explained in Paragraphs CA-8.3.3 through CA-8.3.9) PLUS
                (d) Gamma and vega capital buffers (calculated as explained in Paragraph CA-8.3.10).
                October 07

          • CA-8.4 CA-8.4 Scenario approach

            • CA-8.4.1

              As stated in Section CA-8.1, banks which have a significant level of options trading activities, or have complex options trading strategies, are expected to use more sophisticated methods for measuring and monitoring the options risks. Banks with the appropriate capability will be permitted, with the prior approval of the Central Bank, to base the market risk capital charge for options portfolios and associated hedging positions on scenario matrix analysis. Before giving its approval, the Central Bank will closely review the accuracy of the analysis that is constructed. Furthermore, like in the case of internal models, the banks' use of scenario analysis as part of the standardised methodology will also be subject to external validation, and to those of the qualitative standards listed in Chapter CA-9 which are appropriate given the nature of the business.

              October 07

            • CA-8.4.2

              The scenario matrix analysis involves specifying a fixed range of changes in the option portfolio's risk factors and calculating changes in the value of the option portfolio at various points along this 'grid' or 'matrix'. For the purpose of calculating the capital charge, the bank will revalue the option portfolio using matrices for simultaneous changes in the option's underlying rate or price and in the volatility of that rate or price. A different matrix is set up for each individual underlying as defined in Section CA-8.3 above. As an alternative, in respect of interest rate options, banks which are significant traders in such options are permitted to base the calculation on a minimum of six sets of time-bands. When using this alternative method, not more than three of the time-bands as defined in Chapter CA-4 should be combined into any one set.

              October 07

            • CA-8.4.3

              The first dimension of the matrix involves a specified range of changes in the option's underlying rate or price. The Central Bank has set the range for each risk Category as follows:

              (a) Interest rate related instruments - The range for interest rates is consistent with the assumed changes in yield set out in Section CA-4.5. Those banks using the alternative method of grouping time-bands into sets, as explained in Paragraph CA-8.4.2, should use, for each set of time-bands, the highest of the assumed changes in yield applicable to the individual time-bands in that group. If, for example, the time-bands 3 to 4 years, 4 to 5 years and 5 to 7 years are combined, the highest assumed change in yield of these three bands would be 0.75 which would be applicable to that set.
              (b) For equity instruments, the range is ±8%.
              (c) For foreign exchange and gold, the range is ±8%.
              (d) For commodities, the range is ±15%,

              For all risk categories, at least seven observations (including the current observation) should be used to divide the range into equally spaced intervals.

              October 07

            • CA-8.4.4

              The second dimension of the matrix entails a change in the volatility of the underlying rate or price. A single change in the volatility of the underlying rate or price equal to a shift in volatility of ±25% is applied.

              October 07

            • CA-8.4.5

              The Central Bank will closely monitor the need to reset the parameters for the amounts by which the price of the underlying instrument and volatility must be shifted to form the rows and columns of the scenario matrix. For the time being, the parameters set, as above, only reflect general market risk (see Paragraphs CA-8.4.10 to CA-8.4.12).

              October 07

            • CA-8.4.6

              After calculating the matrix, each cell contains the net profit or loss of the option and the underlying hedge instrument. The general market risk capital charge for each underlying is then calculated as the largest loss contained in the matrix.

              October 07

            • CA-8.4.7

              In addition to the capital charge calculated as above, the specific risk capital charge is determined separately by multiplying the delta-equivalent of each option position by the specific risk weights set out in Chapters CA-4 through CA-7.

              October 07

            • CA-8.4.8

              To summarise, capital requirements for, say OTC options, using the scenario approach are as follows:

              (a) Counterparty risk capital charges (on purchased options only), calculated in accordance with the credit risk regulations; PLUS
              (b) Specific risk capital charges (calculated as explained in Paragraph CA-8.4.7); PLUS
              (c) Directional and volatility risk capital charges (i.e., the worst case loss from a given scenario matrix analysis).
              October 07

            • CA-8.4.9

              Banks doing business in certain classes of complex exotic options (e.g. barrier options involving discontinuities in deltas etc.), or in options at the money that are close to expiry, are required to use either the scenario approach or the internal models approach, both of which can accommodate more detailed revaluation approaches. The Central Bank expects the concerned banks to work with it closely to produce an agreed method, within the framework of these rules. If a bank uses scenario matrix analysis, it must be able to demonstrate that no substantially larger loss could fall between the nodes.

              October 07

            • CA-8.4.10

              In drawing up the delta-plus and the scenario approaches, the Central Bank's present set of rules do not attempt to capture specific risk other than the delta-related elements (which are captured as explained in Paragraphs CA-8.4.7 and CA-8.4.11). The Central Bank recognises that introduction of those other specific risk elements will make the measurement framework much more complex. On the other hand, the simplifying assumptions used in these rules will result in a relatively conservative treatment of certain options positions.

              October 07

            • CA-8.4.11

              In addition to the options risks described earlier in this Chapter, the Central Bank is conscious of the other risks also associated with options, e.g. rho or interest rate risk (the rate of change of the value of the option with respect to the interest rate) and theta (the rate of change of the value of the option with respect to time). While not proposing a measurement system for those risks at present, the Central Bank expects banks undertaking significant options business, at the very least, to monitor such risks closely. Additionally, banks will be permitted to incorporate rho into their capital calculations for interest rate risk, if they wish to do so.

              October 07

            • CA-8.4.12

              The Central Bank will closely review the treatment of options for the calculation of market risk capital charges, particularly in the light of the aspects described in Paragraphs CA-8.4.10 and CA-8.4.11.

              October 07

        • CA-9 CA-9 Use of internal models

          • CA-9.1 CA-9.1 Introduction

            • CA-9.1.1

              As stated in Chapter CA-1, as an alternative to the standardised approach to the measurement of market risks (which is described in Chapters CA-4 through CA-8), and subject to the explicit prior approval of the Central Bank, banks will be allowed to use risk measures derived from their own internal models.

              October 07

            • CA-9.1.2

              This Chapter describes the seven sets of conditions that should be met before a bank is allowed to use the internal models approach, namely:

              (a) General criteria regarding the adequacy of the risk management system;
              (b) Qualitative standards for internal oversight of the use of models, notably by senior management;
              (c) Guidelines for specifying an appropriate set of market risk factors (i.e. the market rates and prices that affect the value of a bank's positions);
              (d) Quantitative standards setting out the use of common minimum statistical parameters for measuring risk;
              (e) Guidelines for stress testing;
              (f) Validation procedures for external oversight of the use of models; and
              (g) Rules for banks which use a mixture of the internal models approach and the standardised approach.
              October 07

            • CA-9.1.3

              The standardised methodology, described in Chapters CA-4 through CA-8, uses a 'building-block' approach in which the specific risk and the general market risk arising from debt and equity positions are calculated separately. The focus of most internal models is a bank's general market risk exposure, typically leaving specific risk (i.e. exposures to specific issuers of debt securities and equities) to be measured largely through separate credit risk measurement systems. Banks using models are subject to separate capital charges for the specific risk not captured by their models, which shall be calculated by the standardised methodology. The capital charge for banks which are modelling specific risk is set out in Section CA-9.10.

              October 07

            • CA-9.1.4

              While the models recognition criteria described in this Chapter are primarily intended for comprehensive Value-at-Risk (VaR) models, nevertheless, the same set of criteria will be applied, to the extent that it is appropriate, to other pre-processing or valuation models the output of which is fed into the standardised measurement system, e.g., interest rate sensitivity models (from which the residual positions are fed into the duration ladders) and option pricing models (for the calculation of the delta, gamma and vega sensitivities).

              October 07

            • CA-9.1.5

              As a number of strict conditions are required to be met before internal models can be recognised by the Central Bank, including external validation, banks which are contemplating using internal models should submit their detailed written proposals for the Central Bank's approval, immediately upon receipt of these regulations.

              October 07

            • CA-9.1.6

              As the model approval process will encompass a review of both the model and its operating environment, it is not the case that a commercially produced model which is recognised for one bank will automatically be recognised for another bank.

              October 07

          • CA-9.2 CA-9.2 General criteria

            • CA-9.2.1

              The Central Bank will give its approval for the use of internal models to measure market risks only if, in addition to the detailed requirements described later in this Chapter, it is satisfied that the following general criteria are met:

              (a) That the bank's risk management system is conceptually sound and is implemented with integrity;
              (b) That the bank has, in the Central Bank's view, sufficient numbers of staff skilled in the use of sophisticated models not only in the trading area but also in the risk control, audit and the back office areas;
              (c) That the bank's models have, in the Central Bank's judgement, a proven track record of reasonable accuracy in measuring risk. The Central Bank recognises that the use of internal models is, for most banks in Bahrain, a relatively new development and, therefore, it is difficult to establish a track record of reasonable accuracy. The Central Bank, therefore, will require a period of initial monitoring and live testing of a bank's internal model before it is used for supervisory capital purposes; and
              (d) That the bank regularly conducts stress tests as outlined in Section CA-9.7 and conducts backtesting as described in Section CA-9.6.
              October 07

          • CA-9.3 CA-9.3 Qualitative standards

            • CA-9.3.1

              In order to ensure that banks using models have market risk management systems that are conceptually sound and implemented with integrity, the Central Bank has set the following qualitative criteria that banks are required to meet before they are permitted to use the models-based approach. Apart from influencing the Central Bank's decision to permit a bank to use internal models, where such permission is granted, the extent to which the bank meets the qualitative criteria will further influence the level at which the Central Bank will set the multiplication factor for that bank, referred to in Section CA-9.5. Only those banks whose models, in the Central Bank's judgement, are in full compliance with the qualitative criteria will be eligible for application of the minimum multiplication factor of 3. The qualitative criteria include the following:

              (a) The bank should have an independent risk management unit that is responsible for the design and implementation of the bank's risk management system. The unit should produce and analyse daily reports on the output of the bank's risk measurement model, including an evaluation of the relationship between the measures of risk exposure and the trading limits. This unit must be independent from the business trading units and should report directly to the senior management of the bank.
              (b) The independent risk management unit should conduct a regular backtesting programme, i.e. an ex-post comparison of the risk measure generated by the model against the actual daily changes in portfolio value over longer periods of time, as well as hypothetical changes based on static positions. The document issued by the Basel Committee on Banking Supervision in January 1996, titled 'Supervisory framework for the use of 'backtesting' in conjunction with the internal models approach to market risk capital requirements' (see http://www.bis.org/publ/bcbs22.htm), presents in detail the approach to be applied by banks for backtesting.
              (c) The Board of Directors and senior management of the bank should be actively involved in the risk management process and must regard such process as an essential aspect of the business to which significant resources need to be devoted19. In this regard, the daily reports prepared by the independent risk management unit must be reviewed by a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual traders and reductions in the bank's overall risk exposure.
              (d) The bank's internal model must be closely integrated into the day-to-day risk management process of the bank. Its output should, accordingly, be an integral part of the process of planning, monitoring and controlling the bank's market risk profile.
              (e) The risk measurement system should be used in conjunction with the internal trading and exposure limits. In this regard, the trading limits should be related to the bank's risk measurement model in a manner that is consistent over time and that is well-understood by both traders and senior management.
              (f) A routine and rigorous programme of stress testing, along the general lines set out in Section CA-9.6, should be in place as a supplement to the risk analysis based on the day-to-day output of the bank's risk measurement model. The results of stress testing should be reviewed periodically by senior management and should be reflected in the policies and limits set by management and the Board of Directors. Where stress tests reveal particular vulnerability to a given set of circumstances, prompt steps should be taken to manage those risks appropriately (e.g. by hedging against that outcome or reducing the size of the bank's exposures).
              (g) The bank should have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operation of the risk measurement system. The bank's risk measurement system must be well documented, for example, through a risk management manual that describes the basic principles of the risk management system and that provides an explanation of the empirical techniques used to measure market risk.
              (h) An independent review of the risk measurement system should be carried out regularly in the bank's own internal auditing process. This review should include both the activities of the business trading units and of the independent risk management unit. A review, by the internal auditor, of the overall risk management process should take place at regular intervals (ideally not less than once every six months) and should specifically address, at a minimum:
              (i) The adequacy of the documentation of the risk management system and process;
              (ii) The organisation of the risk management unit;
              (iii) The integration of market risk measures into daily risk management;
              (iv) The approval process for risk pricing models and valuation systems used by front- and back-office personnel;
              (v) The validation of any significant changes in the risk measurement process;
              (vi) The scope of market risks captured by the risk measurement model;
              (vii) The integrity of the management information system;
              (viii) The accuracy and completeness of position data;
              (ix) The verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;
              (x) The accuracy and appropriateness of volatility and correlation assumptions;
              (xi) The accuracy of valuation and risk transformation calculations;
              (xii) The verification of the model's accuracy through frequent backtesting as described in (b) above and in the Basel Committee's document referred to therein.

              19 The report, 'Risk management guidelines for derivatives', issued by the Basel Committee in July 1994, further discusses the responsibilities of the board of Directors and senior management.

              October 07

          • CA-9.4 CA-9.4 Specification of market risk factors

            • CA-9.4.1

              An important part of a bank's internal market risk measurement system is the specification of an appropriate set of market risk factors, i.e. the market rates and prices that affect the value of the bank's trading positions. The risk factors contained in a market risk measurement system should be sufficient to capture the risks inherent in the bank's portfolio of on- and off-balance-sheet trading positions. Banks should follow the Central Bank's guidelines, set out below, for specifying the risk factors for their internal models. Where a bank has difficulty in specifying the risk factors for any currency or market within a risk Category, in accordance with the following guidelines, the bank should immediately contact the Central Bank. The Central Bank will review and discuss the specific circumstances of each such case with the concerned bank, and will decide alternative methods of calculating the risks which are not captured by the bank's model.

              (a) For interest rates:
              •  There should be a set of risk factors corresponding to interest rates in each currency in which the bank has interest-rate-sensitive on- or off-balance-sheet positions.
              •  The risk measurement system should model the yield curve using one of a number of generally accepted approaches, for example, by estimating forward rates of zero coupon yields. The yield curve should be divided into various maturity segments in order to capture variation in the volatility of rates along the yield curve; there will typically be one risk factor corresponding to each maturity segment. For material exposures to interest rate movements in the major currencies and markets, banks must model the yield curve using a minimum of six factors. However, the number of risk factors used should ultimately be driven by the nature of the bank's trading strategies. For instance, a bank which has a portfolio of various types of securities across many points of the yield curve and which engages in complex arbitrage strategies would require a greater number of risk factors to capture interest rate risk accurately.
              •  The risk measurement system must incorporate separate risk factors to capture spread risk (e.g. between bonds and swaps). A variety of approaches may be used to capture the spread risk arising from less than perfectly correlated movements between government and other fixed-income interest rates, such as specifying a completely separate yield curve for non-government fixed-income instruments (for instance, swaps or municipal securities) or estimating the spread over government rates at various points along the yield curve.
              (b) For exchange rates (which includes gold):
              •  The risk measurement system should incorporate risk factors corresponding to the individual foreign currencies in which the bank's positions are denominated. Since the value-at-risk figure calculated by the risk measurement system will be expressed in the bank's reporting currency, any net position denominated in a currency other than the reporting currency will introduce a foreign exchange risk. Thus, there must be risk factors corresponding to the exchange rate between the reporting currency and each other currency in which the bank has a significant exposure.
              (c) For equity prices:
              •  There should be risk factors corresponding to each of the equity markets in which the bank holds significant positions.
              •  At a minimum, there should be a risk factor that is designed to capture market-wide movements in equity prices (e.g. a market index). Positions in individual securities or in sector indices may be expressed in 'beta-equivalents'20relative to this market-wide index.
              •  A somewhat more detailed approach would be to have risk factors corresponding to various sectors of the overall equity market (for instance, industry sectors or cyclical and non-cyclical sectors). As above, positions in individual stocks within each sector could be expressed in 'beta-equivalents' relative to the sector index.
              •  The most extensive approach would be to have risk factors corresponding to the volatility of individual equity issues.
              •  The sophistication and nature of the modelling technique for a given market should correspond to the bank's exposure to the overall market as well as its concentration in individual equity issues in that market.
              (d) For commodity prices:
              •  There should be risk factors corresponding to each of the commodity markets in which the bank holds significant positions (also see Section CA-7.1).
              •  For banks with relatively limited positions in commodity-based instruments, a straight-forward specification of risk factors is acceptable. Such a specification would likely entail one risk factor for each commodity price to which the bank is exposed. In cases where the aggregate positions are reasonably small, it may be acceptable to use a single risk factor for a relatively broad sub-Category of commodities (for instance, a single risk factor for all types of oil). However, banks which propose to use this simplified approach should obtain the prior written approval of the Central Bank.
              •  For more active trading, the model should also take account of variation in the 'convenience yield'21between derivatives positions such as forwards and swaps and cash positions in the commodity.

              20 A 'beta-equivalent' position would be calculated from a market model of equity (such as the CAPM model) by regressing the return on the individual stock or sector index or the risk-free rate of return and the return on the market index.

              21 The convenience yield reflects the benefits of direct ownership of the physical commodity (for example, the ability to profit from temporary market shortages), and is affected by both market conditions and factors such as physical storage costs.

              October 07

          • CA-9.5 CA-9.5 Quantitative standards

            • CA-9.5.1

              The following minimum quantitative standards will apply for the purpose of calculating the capital charge.

              (a) 'Value-at-risk' must be computed on a daily basis.
              (b) In calculating the value-at-risk, a 99th percentile, one-tailed confidence interval is to be used.
              (c) In calculating the value-at-risk, an instantaneous price shock equivalent to a 10-day movement in prices is to be used, i.e., the minimum 'holding period' will be ten trading days. Banks may use value-at-risk numbers calculated according to shorter holding periods scaled up to ten days by the square root of time (for the treatment of options, also see (h) below).
              (d) The minimum historical observation period (sample period) for calculating value-at-risk is one year. For banks which use a weighting scheme or other methods for the historical observation period, the 'effective' observation period must be at least one year (i.e. the weighted average time lag of the individual observations cannot be less than 6 months).
              The Central Bank may, as an exceptional case, require a bank to calculate its value-at-risk using a shorter observation period if, in the Central Bank's judgement, this is justified by a significant upsurge in price volatility.
              (e) Banks should update their data sets no less frequently than once every week and should also reassess them whenever market prices are subject to material changes.
              (f) No particular type of model is prescribed by the Central Bank. So long as each model used captures all the material risks run by the bank, as set out in Section CA-9.4, banks will be free to use models based, for example, on variance-covariance matrices, historical simulations, or Monte Carlo simulations.
              (g) Banks shall have discretion to recognise empirical correlations within broad risk categories (i.e., interest rates, exchange rates, equity prices and commodity prices, including related options volatilities in each risk factor Category). Banks are not permitted to recognise empirical correlations across broad risk categories without the prior approval of the Central Bank. Banks may apply, on a case-by-case basis, for empirical correlations across broad risk categories to be recognised by the Central Bank, subject to its satisfaction with the soundness and integrity of the bank's system for measuring those correlations.
              (h) Banks' models must accurately capture the unique risks associated with options within each of the broad risk categories. The following criteria shall apply to the measurement of options risk:
              •  Banks' models must capture the non-linear price characteristics of options positions;
              •  Banks are expected to ultimately move towards the application of a full 10-day price shock to options positions or positions that display option-like characteristics. In the interim period, banks may adjust their capital measure for options risk through other methods, e.g. periodic simulations or stress testing;
              •  Each bank's risk measurement system must have a set of risk factors that captures the volatilities of the rates and prices underlying the option positions, i.e. vega risk. Banks with relatively large and/or complex options portfolios should have detailed specifications of the relevant volatilities. This means that banks should measure the volatilities of options positions broken down by different maturities.
              (i) Each bank must meet, on a daily basis, a capital requirement expressed as the higher of (i) and (ii) below, multiplied by a multiplication factor (see (j) below):
              (i) Its previous day's value-at-risk number measured according to the parameters specified in (a) to (h) above; and
              (ii) An average of the daily value-at-risk measures on each of the preceding sixty business days.
              (j) The multiplication factor will be set by the Central Bank, separately for each individual bank, on the basis of the Central Bank's assessment of the quality of the bank's risk management system, subject to an absolute minimum of 3. Banks will be required to add to the factor set by the Central Bank, a 'plus' directly related to the ex-post performance of the model, thereby introducing a built-in positive incentive to maintain the predictive quality of the model. The plus will range from 0 to 1 based on the outcome of the bank's backtesting. If the backtesting results are satisfactory and the bank meets all of the qualitative standards set out in Section CA-9.3 above, the plus factor could be zero. The Basel Committee's document titled 'Supervisory framework for the use of 'backtesting' in conjunction with the internal models approach to market risk capital requirements' (see http://www.bis.org/publ/bcbs22.htm), referred to earlier in Section CA-9.3, presents in detail the approach to be followed for backtesting and the plus factor. Banks are expected to strictly comply with this approach.
              (k) As stated earlier in Section CA-9.1, banks using models will also be subject to a capital charge to cover specific risk (as defined under the standardised approach) of interest rate related instruments and equity instruments. The manner in which the specific risk capital charge is to be calculated is set out in Section CA-9.10.
              October 07

          • CA-9.6 CA-9.6 Backtesting

            • CA-9.6.1

              The contents of this Section outline the key requirements as set out in the Basel Committee's paper titled 'Supervisory framework for the use of 'backtesting' in conjunction with the internal models approach to market risk capital requirements' (see http://www.bis.org/publ/bcbs22.htm). The paper presents in detail the approach to be followed for backtesting by banks.

              October 07

            • Key requirements

              • CA-9.6.2

                The contents of this paper lay down recommendations for carrying out backtesting procedures in order to determine the accuracy and robustness of bank's internal models for measuring market risk capital requirements. These backtesting procedures typically consist of a periodic comparison of the bank's daily value-at-risk measures with the subsequent daily profit or loss ('trading outcome'). The procedure involves calculating and identifying the number of times over the prior 250 business days that observed daily trading losses exceed the bank's one-day, 99% confidence level VaR estimate (so-called 'exceptions').

                October 07

              • CA-9.6.3

                Based on the number of exceptions identified from the backtesting procedures, the banks will be classified into three exception categories for the determination of the 'scaling factor' to be applied to the banks' market risk measure generated by its internal models. The three categories, termed as zones and distinguished by colours into a hierarchy of responses, are listed below:

                (a) Green zone
                (b) Yellow zone
                (c) Red zone
                October 07

              • CA-9.6.4

                The green zone corresponds to backtesting results that do not themselves suggest a problem with the quality or accuracy of a bank's internal model. The yellow zone encompasses results that do raise questions in this regard, but where such a conclusion is not definitive. The red zone indicates a backtesting result that almost certainly indicates a problem with a bank's risk model.

                October 07

              • CA-9.6.5

                The corresponding 'scaling factors' applicable to banks falling into respective zones based on their backtesting results are shown in Table 2 of the paper mentioned in Paragraph CA-9.6.1.

                October 07

          • CA-9.7 CA-9.7 Stress testing

            • CA-9.7.1

              Banks that use the internal models approach for calculating market risk capital requirements must have in place a rigorous and comprehensive stress testing programme. Stress testing to identify events or influences that could greatly impact the bank is a key component of a bank's assessment of its capital position.

              October 07

            • CA-9.7.2

              Banks' stress scenarios need to cover a range of factors that can create extraordinary losses or gains in trading portfolios, or make the control of risk in those portfolios very difficult. These factors include low-probability events in all major types of risks, including the various components of market, credit and operational risks. Stress scenarios need to shed light on the impact of such events on positions that display both linear and non-linear characteristics (i.e., options and instruments that have option-like characteristics).

              October 07

            • CA-9.7.3

              Banks' stress tests should be both of a quantitative and qualitative nature, incorporating both market risk and liquidity aspects of market disturbances. Quantitative criteria should identify plausible stress scenarios to which banks could be exposed. Qualitative criteria should emphasise that two major goals of stress testing are to evaluate the capacity of the bank's capital to absorb potential large losses and to identify steps the bank can take to reduce its risk and conserve capital. This assessment is integral to setting and evaluating the bank's management strategy and the results of stress testing should be routinely communicated to senior management and, periodically, to the bank's Board of Directors.

              October 07

            • CA-9.7.4

              Banks should combine the use of stress scenarios as advised under (a), (b) and (c) below by the Central Bank, with stress tests developed by the banks themselves to reflect their specific risk characteristics. The Central Bank may ask banks to provide information on stress testing in three broad areas, as discussed below.

              (a) Scenarios requiring no simulation by the bank
              Banks should have information on the largest losses experienced during the reporting period available for review by the Central Bank. This loss information will be compared with the level of capital that results from a bank's internal measurement system. For example, it could provide the Central Bank with a picture of how many days of peak day losses would have been covered by a given value-at-risk estimate.
              (b) Scenarios requiring simulation by the bank
              Banks should subject their portfolios to a series of simulated stress scenarios and provide the Central Bank with the results. These scenarios could include testing the current portfolio against past periods of significant disturbance, for example, the 1987 equity crash, the ERM crises of 1992 and 1993 or the fall in the international bond markets in the first quarter of 1994, the Far East and ex-Soviet bloc equity crises of 1997-99 and the collapse of the TMT equities market of 2000-01 incorporating both the large price movements and the sharp reduction in liquidity associated with these events. A second type of scenario would evaluate the sensitivity of the bank's market risk exposure to changes in the assumptions about volatilities and correlations. Applying this test would require an evaluation of the historical range of variation for volatilities and correlations and evaluation of the bank's current positions against the extreme values of the historical range. Due consideration should be given to the sharp variation that, at times, has occurred in a matter of days in periods of significant market disturbance. The four market events, cited above as examples, all involved correlations within risk factors approaching the extreme values of 1 and -1 for several days at the height of the disturbance.
              (c) Scenarios developed by the bank to capture the specific characteristics of its portfolio
              In addition to the general scenarios prescribed by the Central Bank under (a) and (b) above, each bank should also develop its own stress scenarios which it identifies as most adverse based on the characteristics of its portfolio (e.g. any significant political or economic developments that may result in a sharp move in oil prices). Banks should provide the Central Bank with a description of the methodology used to identify and carry out the scenarios as well as with a description of the results derived from these stress tests.
              October 07

            • CA-9.7.5

              Once a stress scenario has been identified, it should be used for conducting stress tests at least once every quarter, as long as the scenario continues to be relevant to the bank's portfolio.

              October 07

            • CA-9.7.6

              The results of all stress tests should be reviewed by senior management within 15 days from the time they are available, and should be promptly reflected in the policies and limits set by management and the Board of Directors. Moreover, if the testing reveals particular vulnerability to a given set of circumstances, the Central Bank would expect the bank to take prompt steps to manage those risks appropriately (e.g., by hedging against that outcome or reducing the size of its exposures).

              October 07

          • CA-9.8 CA-9.8 External validation of models

            • CA-9.8.1

              Before granting its approval for the use of internal models by a bank, the Central Bank will require that the models are validated by both the internal and external auditors of the bank. The Central Bank will review the validation procedures performed by the internal and external auditors, and may independently carry out further validation procedures.

              October 07

            • CA-9.8.2

              The internal validation procedures to be carried out by the internal auditors are set out in Section CA-9.3. As stated in that Paragraph, the internal auditor's review of the overall risk management process should take place at regular intervals (not less than once every six months). The internal auditor shall make a report to senior management and the Board of Directors, in writing, of the results of the validation procedures. The report shall be made available to the Central Bank for its review.

              October 07

            • CA-9.8.3

              The validation of the models by the external auditors should include, at a minimum, the following steps:

              (a) Verifying and ensuring that the internal validation processes described in Section CA-9.3 are operating satisfactorily;
              (b) Ensuring that the formulae used in the calculation process as well as for the pricing of options and other complex instruments are validated by a qualified unit, which in all cases should be independent from the trading area;
              (c) Checking and ensuring that the structure of the internal models is adequate with respect to the bank's activities and geographical coverage;
              (d) Checking the results of the bank's backtesting of its internal measurement system (i.e. comparing value-at-risk estimates with actual profits and losses) to ensure that the model provides a reliable measure of potential losses over time; and
              (e) Making sure that data flows and processes associated with the risk measurement system are transparent and accessible.
              October 07

            • CA-9.8.4

              The external auditors should carry out their validation/review procedures, at a minimum, once every year. Based on the above procedures, the external auditors shall make a report, in writing, on the accuracy of the bank's models, including all significant findings of their work. The report shall be addressed to the senior management and/or the Board of Directors of the bank, and a copy of the report shall be made available to the Central Bank. The mandatory annual review by the external auditors shall be carried out during the third quarter of the calendar year, and the Central Bank expects to receive their final report by 30 September each year. The results of additional validation procedures carried out by the external auditors at other times during the year, should be made available to the Central Bank promptly.

              October 07

            • CA-9.8.5

              Banks are required to ensure that external auditors and the Central Bank's representatives are in a position to have easy access, whenever they judge it necessary and under appropriate procedures, to the models' specifications and parameters as well as to the results of, and the underlying inputs to, their value-at-risk calculations.

              October 07

          • CA-9.9 CA-9.9 Letter of model recognition

            • CA-9.9.1

              As stated in Section CA-9.1, banks which propose to use internal models for the calculation of their market risk capital requirements should submit their detailed proposals, in writing, to the Central Bank. The Central Bank will review these proposals, and upon ensuring that the bank's internal models meet all the criteria for recognition set out earlier in this Chapter, and after satisfying itself with the results of validation procedures carried out by the internal and external auditors and/or by itself, will issue a letter of model recognition to the bank.

              October 07

            • CA-9.9.2

              The letter of model recognition should be specific. It will set out the products covered, the method for calculating capital requirements on the products and the conditions of model recognition. In the case of pre-processing models, the bank will also be told how the output of recognised models should feed into the processing of other interest rate, equity, foreign exchange and commodities risk. The conditions of model recognition may include additional reporting requirements. The Central Bank's prior written approval should be obtained for any modifications proposed to be made to the models previously recognised by the Central Bank. In cases where a bank proposes to apply the model to new but similar products, there will be a requirement to obtain the Central Bank's prior approval. In some cases, the Central Bank may be able to give provisional approval for the model to be applied to a new class of products, in others it will be necessary to revisit the bank.

              October 07

            • CA-9.9.3

              The Central Bank may withdraw its approval granted for any bank's model if it believes that the conditions on which the approval was based are no longer valid or have changed significantly.

              October 07

          • CA-9.10 CA-9.10 Combination of internal models and the standardised methodology

            • CA-9.10.1

              Unless a bank's exposure to a particular risk factor is insignificant, the internal models approach will, in principle, require banks to have an integrated risk measurement system that captures the broad risk factor categories (i.e. interest rates, exchange rates (which includes gold), equity prices and commodity prices, with related options volatilities being included in each risk factor Category). Thus, banks which start to use models for one or more risk factor categories will, over a reasonable period of time, be expected to extend the models to all their market risks.

              October 07

            • CA-9.10.2

              A bank which has obtained the Central Bank's approval for the use of one or more models will no longer be able to revert to measuring the risk measured by those models according to the standardised methodology (unless the Central Bank withdraws its approval for the model(s), as explained in Section CA-9.9). However, what constitutes a reasonable period of time for an individual bank which uses a combination of internal models and the standardised methodology to move to a comprehensive model, will be decided by the Central Bank after taking into account the relevant circumstances of the bank.

              October 07

            • CA-9.10.3

              Notwithstanding the goal of moving to comprehensive internal models as set out in Paragraph CA-9.10.1 above, for banks which, for the time being, will be using a combination of internal models and the standardised methodology, the following conditions will apply:

              (a) Each broad risk factor Category must be assessed using a single approach (either internal models or the standardised approach), i.e. no combination of the two methods will, in principle, be permitted within a risk factor Category or across a bank's different entities for the same type of risk (see, however, the transitional provisions in Section CA-1.6)22;
              (b) All of the criteria laid down in this Chapter will apply to the models being used;
              (c) Banks may not modify the combination of the two approaches which they are using, without justifying to the Central Bank that they have a valid reason for doing so, and obtaining the Central Bank's prior written approval;
              (d) No element of market risk may escape measurement, i.e. the exposure for all the various risk factors, whether calculated according to the standardised approach or internal models, would have to be captured; and
              (e) The capital charges assessed under the standardised approach and under the models approach should be aggregated using the simple sum method.

              22 However, banks may incur risks in positions which are not captured by their models, for example, in minor currencies or in negligible business areas. Such risks should be measured according to the standard methodology.

              October 07

          • CA-9.11 CA-9.11 Treatment of specific risk

            • CA-9.11.1

              Banks using models will be permitted to base their specific risk capital charge on modelled estimates if they meet all of the qualitative and quantitative requirements for general risk models as well as the additional criteria set out in Paragraph CA-9.11.2. Banks which are unable to meet these additional criteria will be required to base their specific risk capital charge on the full amount of the specific risk charge calculated by the standardised methodology (as illustrated in Chapters CA-4 to CA-8).

              October 07

            • CA-9.11.2

              The criteria for applying modelled estimates of specific risk require that a bank's model:

              •  Explain the historical price variation in the portfolio23;
              •  Demonstrably capture concentration (magnitude and changes in composition)24;
              •  Be robust to an adverse environment25; and
              •  Be validated through backtesting aimed at assessing whether specific risk is being accurately captured.

              In addition, the bank must be able to demonstrate that it has methodologies in place which allow it to adequately capture event and default risk for its traded debt and equity positions.


              23 The key measurement of model quality are 'goodness-of-fit' measures which address the question of how much of the historical variation in price value is explained by the model. One measure of this type which can often be used is an R-squared measure from regression methodology. If this measure is to be used, the bank's model would be expected to be able to explain a high percentage, such as 90%, of the historical price variation or to explicitly include estimates of the residual variability not captured in the factors included in this regression. For some types of model, it may not be feasible to calculate a goodness-of-fit measure. In such an instance, a bank is expected to contact the Central Bank to define an acceptable alternative measure which would meet this regulatory objective.

              24 The bank should be expected to demonstrate that the model is sensitive to changes in portfolio construction and that higher capital charges are attracted for portfolios that have increasing concentrations.

              25 The bank should be able to demonstrate that the model will signal rising risk in an adverse environment. This could be achieved by incorporating in the historical estimation period of the model at least one full credit cycle and ensuring that the model would not have been inaccurate in modelling at least one full the downward portion of the cycle. Another approach for demonstrating this is through simulation of historical or plausible worst-case environments.

              October 07

            • CA-9.11.3

              Banks which meet the criteria set out above for models but do not have methodologies in place to adequately capture event and default risk will be required to calculate their specific risk capital charge based on the internal model measurements plus an additional prudential surcharge as defined in Paragraph CA-9.11.4. The surcharge is designed to treat the modelling of specific risk on the same basis as a general market risk model that has proven deficient during backtesting. That is, the equivalent of a scaling factor of four would apply to the estimate of specific risk until such time as a bank can demonstrate that the methodologies it uses adequately capture event and default risk. Once a bank is able to demonstrate this, the minimum multiplication factor of three can be applied. However, a higher multiplication factor of four on the modelling of specific risk would remain possible if future backtesting results were to indicate a serious deficiency in the model.

              October 07

            • CA-9.11.4

              For banks applying the surcharge, the total market risk measure will equal a minimum of three times the internal model's general and specific risk measure plus a surcharge in the amount of either:

              (a) The specific risk portion of the value-at-risk measure which should be isolated26; or, at the bank's option,
              (b) The value-at-risk measures of sub-portfolios of debt and equity positions that contain specific risk27.

              Banks using option (b) above are required to identify their sub-portfolios structure ahead of time and should not change it without the Central Bank's prior written consent.


              26Techniques for separating general market risk and specific risk would include the following:

              Equities:

              The market should be identified with a single factor that is representative of the market as a whole, for example, a widely accepted broadly based stock index for the country concerned.

              Banks that use factor models may assign one factor of their model, or a single linear combination of factors, as their general market risk factor.

              Bonds:

              The market should be identified with a reference curve for the currency concerned. For example, the curve might be a government bond yield curve or a swap curve; in any case, the curve should be based on a well-established and liquid underlying market and should be accepted by the market as a reference curve for the currency concerned.

              Banks may select their own technique for identifying the specific risk component of the value-at-risk measure for purposes of applying the multiplier of 4. Techniques would include:

              •   Using the incremental increase in value-at-risk arising from the modelling of specific risk factors;
              •   Using the difference between the value-at-risk measure and a measure calculated by substituting each individual equity position by a representative index; or
              •   Using an analytic separation between general market risk and specific risk by a particular model.

              27 This would apply to sub-portfolios containing positions that would be subject to specific risk under the standardised approach.

              October 07

            • CA-9.11.5

              Banks which apply modelled estimates of specific risk are required to conduct backtesting aimed at assessing whether specific risk is being accurately captured. The methodology a bank should use for validating its specific risk estimates is to perform separate backtests on sub-portfolios using daily data on sub-portfolios subject to specific risk. The key sub-portfolios for this purpose are traded debt and equity positions. However, if a bank itself decomposes its trading portfolio into finer categories (e.g. emerging markets, traded corporate debt, etc.), it is appropriate to keep these distinctions for sub-portfolio backtesting purposes. Banks are required to commit to a sub-portfolio structure and stick to it unless it can be demonstrated to the Central Bank that it would make sense to change the structure.

              October 07

            • CA-9.11.6

              Banks are required to have in place a process to analyse exceptions identified through the backtesting of specific risk. This process is intended to serve as the fundamental way in which banks correct their models of specific risk in the event they become inaccurate. There will be a presumption that models that incorporate specific risk are 'unacceptable' if the results at the sub-portfolio level produce a number of exceptions commensurate with the Red Zone28. Banks with 'unacceptable' specific risk models are expected to take immediate action to correct the problem in the model and to ensure that there is a sufficient capital buffer to absorb the risk that, the backtest showed, had not been adequately captured.

              October 07

        • CA-10 CA-10 Gearing requirements

          • CA-10.1 CA-10.1 Gearing

            • CA-10.1.1

              The content of this Chapter is applicable to locally incorporated banks and Bahrain retail bank branches of foreign banks.

              October 07

            • Measurement

              • CA-10.1.2

                The Gearing ratio is measured with reference to the ratio of deposit liabilities against the bank's capital and reserves as reported in its PIR.

                October 07

            • Gearing limit

              • CA-10.1.3

                For Retail Bank and Wholesale Bank licensees, deposit liabilities should not exceed 20 times the respective bank's capital and reserves.

                October 07

      • CA CA Capital Adequacy (April 2008)

        • PART 1: PART 1: Definition of Capital

          • CA-A CA-A Introduction

            • CA-A.1 CA-A.1 Application

              • CA-A.1.1

                Rules in this Module are applicable to locally incorporated banks (hereinafter referred to as "the banks") on both a stand-alone (i.e. including their foreign branches) and on a consolidated group basis (i.e. including their subsidiaries and any other investments which are included or consolidated into the group accounts or which are required to be consolidated or aggregated for regulatory purposes by the Central Bank of Bahrain ('CBB').

                Amended: January 2011
                Apr 08

              • CA-A.1.2

                If the banks have investments in banking, securities, financial, insurance and/or commercial entities, the banks will also need to apply rules set out in the Prudential Consolidation and Deduction Requirements Module (Module PCD) for the calculation of their solo and consolidated Capital Adequacy Ratio (CAR).

                Amended: January 2011
                Apr 08

              • CA-A.1.3

                Certain of the requirements relating to gearing (See Chapter CA-15) also apply to Bahrain branches of foreign retail bank licensees.

                Amended: January 2011
                Apr 08

            • CA-A.2 CA-A.2 Purpose

              • Executive Summary

              • CA-A.2.1

                The purpose of this module is to set out the CBB's capital adequacy Rules and provide guidance on the risk measurements for the calculation of capital requirements by locally incorporated banks. This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).

                Amended: January 2011
                Apr 08

              • CA-A.2.2

                Principle 9 of the Principles of Business requires that conventional bank licensees maintain adequate human, financial and other resources, sufficient to run their business in an orderly manner (see Section PB-1.9). In addition, Condition 5 of CBB's Licensing Conditions (Section LR-2.5) requires conventional bank licensees to maintain financial resources in excess of the minimum requirements specified in Module CA (Capital Adequacy).

                Apr 08

              • CA-A.2.3

                This Module also sets out the minimum gearing requirements which relevant banks (referred to in Section CA-A.1) must meet as a condition of their licensing.

                Apr 08

              • CA-A.2.4

                The requirements specified in this Module vary according to the Category of conventional bank licensee concerned, their inherent risk profile, and the volume and type of business undertaken. The purpose of such requirements is to ensure that conventional bank licensees hold sufficient capital to provide some protection against unexpected losses, and otherwise allow conventional banks to effect an orderly wind-down of their operations, without loss to their depositors. The minimum capital requirements specified here may not be sufficient to absorb all unexpected losses.

                Apr 08

              • CA-A.2.5

                The CBB requires in particular that the banks maintain adequate capital, in accordance with the requirements of this Module, against their risks.

                Apr 08

              • CA-A.2.6

                This module provides support for certain other parts of the Rulebook, mainly:

                (a) Prudential Consolidation and Deduction Requirements;
                (b) Licensing and Authorisation Requirements;
                (c) CBB Reporting Requirements;
                (d) Credit Risk Management;
                (e) Operational Risk Management;
                (f) High Level Controls:
                (g) Relationship with Audit Firms; and
                (h) Penalties and Fines.
                Apr 08

              • Legal Basis

                • CA-A.2.7

                  This Module contains the CBB's Directive (as amended from time to time) relating to the capital adequacy of conventional bank licensees, and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to all conventional bank licensees.

                  Amended: January 2011
                  Apr 08

                • CA-A.2.8

                  For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                  Adopted: January 2011

            • CA-A.3 CA-A.3 Capital Adequacy Ratio

              • CA-A.3.1

                Historically, on a consolidated basis, the CBB has set a minimum Capital Adequacy Ratio ("CAR") of 12.0% for all locally incorporated banks. Furthermore, on a solo basis, the parent bank has been required to maintain a minimum CAR of 8.0% (i.e. unconsolidated). The arrangements outlined below will apply once banks have been subject to a Pillar 2 risk profile assessment by the CBB or an acceptable audit firm. Until such an assessment has been completed, the existing 12% and 8% minimum capital ratio requirements (as outlined in Module CA-2.5 October 2006 edition) will remain in place.

                Apr 08

              • CA-A.3.2

                CAR is calculated by applying the regulatory capital to the numerator and risk-weighted assets to the denominator.

                Apr 08

              • CA-A.3.3

                All locally incorporated banks are required to maintain a capital ratio both on a solo (and a consolidated basis where applicable) above the minimum "trigger" CAR of 8%. Failure to remain above the trigger ratio will result in Enforcement and other measures as outlined in Section CA-1.4.

                Apr 08

              • CA-A.3.4

                All locally incorporated banks will be required to maintain capital ratios above individually set "target" CARs on a solo and on a consolidated basis. These target CARs will be set at an initial minimum of 8.5% and may in the case of high risk banks be set at levels above the 12.5% target ratio set prior to January 2008. Failure to remain above the target ratio will result in Enforcement and other measures as outlined in Section CA-1.4.

                Apr 08

              • Eligible Capital

                • CA-A.3.5

                  Banks are allowed three classes of capital (see section CA-2.1) to meet their capital requirements for credit, operational and market risk, as set out below:

                  Tier 1: Core capital — May be used to support credit, operational and market risk

                  Tier 2: Supplementary capital — May be used to support credit, operational and market risk; and

                  Tier 3: Ancillary capital — May be used solely to support market risk.

                  Apr 08

              • Risk-weighted Assets

                • CA-A.3.6

                  Total risk-weighted assets are determined by:

                  (a) Multiplying the capital requirements for market risk and operational risk by 12.5; and
                  (b) Adding the resulting figures to the sum of risk-weighted assets for credit risk.
                  Amended: January 2011
                  Apr 08

                • CA-A.3.7

                  For the measurement of their credit risks, banks have a choice, subject to the written approval of the CBB, between two broad methodologies:

                  (a) One alternative is to measure the risks in a standardised approach, applying the measurement framework described in Chapter CA-3 of this Module; and
                  (b) The second methodology (i.e. internal ratings-based approach) is set out in detail in Chapter CA-5 including the procedure for obtaining the CBB's approval. This methodology is subject to the fulfilment of certain conditions. The use of this methodology is, therefore, conditional upon the explicit approval of the CBB.
                  Amended: April 2011
                  Amended: January 2011
                  Apr 08

                • CA-A.3.8

                  Credit risk — Securitization framework is set out in Chapter CA-6. Banks must apply the securitisation framework for determining regulatory capital requirements on exposures arising from traditional and synthetic securitisations or similar structures that contain features common to both.

                  Amended: January 2011
                  Apr 08

                • CA-A.3.9

                  For the measurement of their operational risks, banks have a choice, subject to the written approval of the CBB, between two broad methodologies:

                  (a) One alternative is to measure the risks in a basic indicator approach, applying the measurement framework described in Chapter CA-7 of this Module; and
                  (b) The second alternative methodology (i.e. the standardised approach) is set out in detail in Chapter CA-7 including the procedure for obtaining the CBB's approval. This methodology is subject to the fulfilment of certain conditions (as outlined in Module OM).The use of this methodology is, therefore, conditional upon the explicit approval of the CBB.
                  Amended: January 2011
                  Apr 08

                • CA-A.3.10

                  For the measurement of their market risk, banks have a choice, subject to the written approval of the CBB, between two broad methodologies:

                  (a) One alternative is to measure the risks in a standardised approach, applying the measurement frameworks described in Chapters CA-9 to CA-13 of this Module; and
                  (b) The second alternative methodology (i.e. the internal models approach) is set out in detail in Chapter CA-14 including the procedure for obtaining the CBB's approval. This methodology is subject to the fulfilment of certain conditions. The use of this methodology is, therefore, conditional upon the explicit approval of the CBB.
                  Amended: April 2011
                  Amended: January 2011
                  Apr 08

            • CA-A.4 CA-A.4 Transitional Arrangements

              • CA-A.4.1

                For banks applying the IRB approach for credit risk, there will be a capital floor following implementation of this Module. Banks must calculate the difference between: (i) the floor as defined in Paragraph CA-A.4.2 and (ii) the amount as calculated according to Paragraph CA-A.4.3. If the floor amount is larger, banks are required to add 12.5 times the difference to the risk-weighted assets.

                Amended: January 2011
                Apr 08

              • CA-A.4.2

                The capital floor is based on previous capital adequacy Rules issued by CBB dated July 2004. It is derived by applying an adjustment factor to the following amount: (i) 8% of the risk-weighted assets, (ii) plus Tier 1 and Tier 2 deductions. The adjustment factor for banks applying the foundation IRB approach for the year 2008 is 95%. The adjustment factor for the year 2009 is 90%, and for the year 2010 is 80%. The following table illustrates the application of the adjustment factors. Additional transitional arrangements including parallel calculation are set out in Paragraphs CA-5.2.45 to CA-5.2.51.

                  2008 2009 2010
                Foundation IRB approach 95% 90% 80%
                Amended: January 2011
                Apr 08

              • CA-A.4.3

                In the years in which the floor applies, banks must also calculate (i) 8% of total risk-weighted assets as calculated under this Module, (ii) less the difference between total provisions and expected loss amount as described in Section CA-5.7, and (iii) plus other Tier 1 and Tier 2 deductions.

                Amended: January 2011
                Apr 08

              • CA-A.4.4

                These prudential floors are also applicable to banks that that do not complete the transition to IRB approach in the years specified in Paragraph CA-2.4.2 to provide time to ensure that individual bank implementations of the IRB approach are sound. However, CBB may develop appropriate bank-by-bank floors periodically.

                Amended: January 2011
                Apr 08

              • CA-A.4.5

                Banks which start to use internal models for market risk for one or more risk categories should, over a reasonable period of time, extend the models to all of their operations, subject to the exceptions mentioned in Paragraph CA-A.4.6 below, and move towards a comprehensive model (i.e., one which captures all market risk categories).

                Amended: January 2011
                Apr 08

              • CA-A.4.6

                On a transitional basis, banks will be allowed to use a combination of the standardised approach and the internal models approach to measure their market risks provided they should cover a complete risk category (e.g., interest rate risk or foreign exchange risk), i.e., a combination of the two methods will not be allowed within the same risk category1. However, banks presently implementing or further improving their internal models will be allowed some flexibility (including within risk categories) in including all their operations on a worldwide basis. This flexibility shall be subject to the specific prior written approval of the CBB, and such approval will be given on a case-by-case basis and reviewed by the CBB from time to time.


                1 This does not, however, apply to pre-processing techniques which are used to simplify the calculation and whose results become subject to the standardised methodology.

                Amended: January 2011
                Apr 08

              • CA-A.4.7

                The CBB will closely monitor banks to ensure that there will be no "cherry-picking" between the standardised approach and the models approach for market risk within a risk category. Banks which adopt a model will not be permitted, save in exceptional circumstances, to revert to the standardised approach.

                Apr 08

              • CA-A.4.8

                The CBB recognises that even a bank which uses a comprehensive model for market risk may still incur risks in positions which are not captured by their internal models2, for example, in remote locations, in minor currencies or in negligible business areas3. Any such risks that are not included in a model should be separately measured and reported using the standardised approach described in Chapters CA-9 to CA-13.


                2 Banks may also incur interest rate and equity risks outside of their trading activities. However, there are no explicit capital charges for the price risk in such positions.

                3 For example, if a bank is hardly at all engaged in commodities it will not necessarily be expected to model its commodities risk.

                Amended: January 2011
                Apr 08

              • CA-A.4.9

                Transitioning banks are required to move towards a comprehensive internal model approach for market risk.

                Apr 08

              • CA-A.4.10

                The CBB will closely monitor the risk management practices of banks moving towards the models approach for market risk, to ensure that they are in a position to meet all standards once they apply a full-fledged model for any risk category.

                Apr 08

            • CA-A.5 CA-A.5 Module History

              • CA-A.5.1

                This module was first issued in July 2004 as part of the conventional principles volume. Any material changes that have subsequently been made to this module are annotated with the calendar quarter date in which the changes were made. Chapter UG-3 provides further guidance on Rulebook maintenance and version control.

                Amended: January 2011

              • CA-A.5.1A

                The most recent changes are detailed in the Table below.

                Summary of Changes

                Module Ref. Change Date Description of Changes
                CA-A.2 10/07 Change categorising Module as a Directive
                CA-1 to CA-8 01/08 Extensive changes to implement Basel II
                CA-3.4 04/08 Recognition and mapping of grades for Capital Intelligence
                CA-3.2.15–18 01/09 New guidance and rules on SMEs
                CA-A 01/2011 Various minor amendments to ensure consistency in CBB Rulebook.
                CA-A.2.7 01/2011 Clarified legal basis.
                CA-6, CA-8, CA-9, CA-10, CA-14 & CA-16 01/2012 Changes in respect of July 2009 and February 2011 amendments to Basel II.
                CA-3.2.10 and CA-3.2.11A 04/2012 Amendment made for claims on banks dealing with self-liquidating letters of credit.
                CA-2.1.5, CA-2.1.5A and CA-2.1.5B 04/2013 Clarified Rules dealing with subordinated debt issued.
                CA-2.1.5(h) 10/2013 Added Rule to include limited general provision against unidentified future losses as part of Tier 2.
                CA-11.3.7 10/2013 Clarified Rules for excluding positions of a structural nature from the calculation of the net open currency positions.

              • Evolution of Module

                • CA-A.5.2

                  Prior to the development of this Module, the CBB had issued various circulars representing regulations relating to capital adequacy requirements. These circulars and their incorporation into this module are listed below:

                  Circular Ref. Date of Issue Module Ref. Circular Subject
                  ODG/50/98 11 Sep 1998 CA-8CA-14 Market Risk Capital Regulations
                  BC/07/02 26 Jun 2002 CA-1.5 Review of PIR by External Auditors
                  OG/78/01 20 Feb 2001 CA-A.3 & CA-1.4 Monitoring of Capital Adequacy
                  BC/01/98 10 Jan 1998 CA-A.3 & CA-1.4 Capital Adequacy Ratio
                  Apr 08

                • CA-A.5.3

                  The contents retained from the previous Module (Capital Adequacy – Conventional Banks) are effective from the date depicted in the above circulars (see Paragraph CA-A.5.2) or from the dates mentioned in the Summary of Changes. The remainder of the updated Module is effective from January 01, 2008.

                  Apr 08

          • CA-1 CA-1 Scope and Coverage of Capital Charges

            • CA-1.1 CA-1.1 Application

              • CA-1.1.1

                All locally incorporated banks are required to measure and apply capital charges with respect to their credit, operational and market risks capital requirements.

                Apr 08

              • CA-1.1.2

                Credit risk is defined as the potential that a bank's borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk exists throughout the activities of a bank in the banking book and in the trading book and includes both on- and off-balance-sheet exposures.

                Apr 08

              • CA-1.1.3

                Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk,2 but excludes strategic and reputational risk.


                2 Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.

                Apr 08

              • CA-1.1.4

                Market risk is defined as the risk of loss in on- or off-balance-sheet positions arising from movements in market prices. The risks subject to the capital requirement of this module are:

                (a) The risks pertaining to interest rate related instruments and equities in the trading book; and
                (b) Foreign exchange and commodities risks throughout the bank.
                Amended: April 2011
                Apr 08

            • CA-1.2 CA-1.2 Monitoring of Risks

              • CA-1.2.1

                Banks are required to manage their risks, especially market risk, in such a way that the capital requirements are being met on a continuous basis, i.e. at the close of each business day and not merely at the end of each calendar quarter. Banks are also required to maintain strict risk management systems to ensure that their intra-day exposures are not excessive.

                Apr 08

              • CA-1.2.2

                Banks' daily compliance with the capital requirements for credit and market risk must be verified by the independent risk management department and the internal auditor. It is expected that the external auditors will perform appropriate tests of the banks' daily compliance with the capital requirements for credit and market risk. Where a bank fails to meet the minimum capital requirements for credit and market risk on any business day, the CBB must be informed in writing by no later than the following business day. The CBB will then seek to ensure that the bank takes immediate measures to rectify the situation.

                Apr 08

            • CA-1.3 CA-1.3 Investments in other Entities and Consolidation

              • CA-1.3.1

                The banks must also apply rules set in the Prudential Consolidation and Deduction Requirements Module where the bank has significant investments (as defined in the aforementioned Module) in other entities.

                Apr 08

              • CA-1.3.2

                These capital adequacy regulations must be applied on a worldwide consolidated basis as well as on a solo basis. Guidance on consolidation and related matters is provided in the Prudential Consolidation and Deduction Requirements Module.

                Apr 08

            • CA-1.4 CA-1.4 Reporting

              • CA-1.4.1

                Formal reporting, to the CBB, of capital adequacy must be made in accordance with the requirements set out under section BR-3.1.

                Apr 08

              • CA-1.4.2

                Where a bank's CAR falls below its individual target ratio either on a solo basis (or on a consolidated basis), the General Manager of the bank must notify the CBB by the following business day, however no formal action plan will be necessary. The General Manager must explain what measures are being implemented to ensure that the bank will remain above its minimum target CAR(s).

                Apr 08

              • CA-1.4.3

                The bank will be required to submit form PIR (and PIRC where applicable) to the CBB on a monthly basis, until the concerned CAR exceeds its target ratio.

                Apr 08

              • CA-1.4.4

                The CBB will notify banks in writing of any action required of them with regard to the corrective and preventive action (as appropriate) proposed by the bank pursuant to the above, as well as of any other requirement of the CBB in any particular case.

                Apr 08

              • CA-1.4.5

                All locally incorporated banks must provide the CBB, with immediate written notification (i.e. by no later than the following business day) of any actual breach of the minimum trigger CAR of 8%. Where such notification is given, the bank must also provide the CBB:

                (a) No later than one calendar week after the notification, with a written action plan setting out how the bank proposes to restore the relevant CAR(s) to the required minimum level(s) set out above and, further, describing how the bank will ensure that a breach of such CAR(s) will not occur again in the future; and
                (b) Report on a weekly basis thereafter on the bank's relevant CAR(s) until such CAR(s) have reached the required target level(s) described above.
                Amended: April 2011
                Apr 08

              • CA-1.4.6

                Banks must note that the CBB considers the breach of CARs to be a very serious matter. Consequently, the CBB may (at its discretion) subject a bank which breaches its CAR(s) to a formal licensing reappraisal. Such reappraisal may be effected either through the CBB's own inspection function or through the use of Reporting Accountants, as appropriate. Following such appraisal, the CBB will notify the bank concerned in writing of its conclusions with regard to the continued licensing of the bank.

                Apr 08

              • CA-1.4.7

                The CBB recommends that the bank's compliance officer support and cooperate with the CBB in the monitoring and reporting of the CARs and other regulatory reporting matters. Compliance officers should ensure that their banks have adequate internal systems and controls to comply with these regulations.

                Apr 08

            • CA-1.5 CA-1.5 Review of Prudential Information Returns by External Auditors

              • CA-1.5.1

                The CBB requires all relevant banks to request their external auditors to conduct a review of the prudential returns on a quarterly basis in accordance with the requirements set out under section BR-3.1. However, if a bank provides prudential returns without any reservation from auditors for two consecutive quarters, it can apply for exemption from such review for a period to be decided by CBB.

                Apr 08

          • CA-2 CA-2 Regulatory Capital

            • CA-2.1 CA-2.1 Regulatory Capital

              • Tier 1: Core Capital

                • CA-2.1.1

                  Tier 1 capital shall consist of the sum of items (a) to (f) below, less the sum of items (g) to (k) below:

                  (a) Issued and fully paid ordinary shares and perpetual non-cumulative preference shares, but excluding cumulative preference shares;
                  (b) Certain innovative capital instruments such as instruments with step-ups, subject to the fulfilment of criteria given in paragraph CA-2.1.2 to CA-2.1.4 and the limit given in paragraph CA-2.2.2.
                  (c) Disclosed reserves, including:
                  •  General reserves
                  •  Legal / statutory reserves
                  •  Share premium
                  •  Capital redemption reserve
                  •  Excluding fair value reserves3
                  (d) Retained profit brought forward;
                  (e) Unrealized net gains arising from fair valuing equities4; and
                  (f) Minority interest in subsidiaries Tier 1 equity. arising on consolidation, in the equity of subsidiaries which are less than wholly owned. Further guidance on minority interests is provided in paragraphs PCD-A.2.11, PCD-1.1.3 and PCD-1.1.4 of the Prudential Consolidation and Deduction Requirements Module.

                  LESS:

                  (g) Goodwill;
                  (h) Current interim cumulative net losses;
                  (i) Unrealized gross losses arising from fair valuing equity securities5;
                  (j) Other deductions made on a pro-rata basis between Tier 1 and Tier 2;
                  (k) Reciprocal cross holdings of other banks' capital.

                  3 This refers to unrealised fair value gains reported directly in equity (such gross gains are included in Tier 2).

                  4 This refers to unrealised net fair value gains taken through P&L (which have been audited). Please note that the unrealised net gains related to unlisted equities taken through P&L arising on or after January 1, 2008 will be subject to 55% discount as stated in CA-2.1.5(c)ii.

                  5 This refers to both 'net losses taken through P&L' and 'gross losses reported directly in equity'.

                  Apr 08

                • CA-2.1.2

                  Certain innovative capital instruments agreed to on a case by case basis by CBB, where the underlying instrument meets the following requirements which must, at a minimum, be fulfilled by all instruments in Tier 1:

                  (a) Issued and fully paid;
                  (b) Non-cumulative;
                  (c) Able to absorb losses within the bank on a going-concern basis;
                  (d) Junior to depositors, general creditors, and subordinated debt of the bank;
                  (e) Permanent;
                  (f) Neither be secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors;
                  (g) Callable at the initiative of the issuer only after a minimum of five years, with CBB approval and under the condition that it will be replaced with capital of same or better quality, unless the CBB determines that the bank has capital that is more than adequate to cover its risks.
                  (h) The main features of such instruments must be easily understood and publicly disclosed;
                  (i) Proceeds must be immediately available without limitation to the issuing bank;
                  (j) The bank must have discretion over the amount and timing of distributions, subject only to prior waiver of distributions on the bank's common stock, and banks must have full access to waived payments; and
                  (k) Distributions can only be paid out of distributable items; where distributions are pre-set they may not be reset based on the credit standing of the issuer.
                  Apr 08

                • CA-2.1.3

                  Moderate step-ups in such instruments meeting the requirements set forth above, are permitted, in conjunction with a call option, only if the moderate step-up occurs at a minimum of ten years after the issue date and if it results in an increase over the initial rate that is no greater than either;

                  (a) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis; or
                  (b) 50% of the initial credit spread, less the swap spread between the initial index basis and the stepped-up index basis.
                  Apr 08

                • CA-2.1.4

                  The terms of the instrument should provide for no more than one rate step-up over the life of the instrument. The swap spread should be fixed as of the pricing date and reflect the differential in pricing on that date between the initial reference security or rate and the stepped-up reference security or rate.

                  Apr 08

              • Tier 2: Supplementary Capital

                • CA-2.1.5

                  Tier 2 capital shall consist of the following items:

                  (a) Current interim profits which have been reviewed as per the ISA by the external auditors;
                  (b) Asset revaluation reserves which arise from the revaluation of fixed assets from time to time in line with the change in market values, and are reflected on the face of the balance sheet as a revaluation reserve. Similarly, gains may also arise from revaluation of Investment Properties (real estate). These reserves (including the net gains on investment properties) may be included in Tier 2 capital, with the concurrence of the external auditors, provided that the assets are prudently valued, fully reflecting the possibility of price fluctuation and forced sale. A discount of 55% must be applied to the difference between the historical cost book value and the market value to reflect the potential volatility of this form of unrealised capital;
                  (c) Unrealized gains arising from fair valuing equities:
                  (i)  For unrealized gross gains reported directly in equity, a discount factor of 55% will be applied before inclusion in Tier 2 capital. Note for gross losses, the whole amount of such loss should be deducted from the Tier 1 capital;
                  (ii)  For unrealized net gains reported in income, a discount factor of 55% will apply on any such unrealized net gains from unlisted equity instruments before inclusion in Tier 1 capital (for audited gains) or Tier 2 capital (for reviewed gains) as appropriate. This discount factor will be applied to the incremental net gains related to unlisted equities arising on or after January 1, 2008;
                  (d) Banks should note that the Central Bank will discuss the applicability of the discount factor under paragraph (c) above with individual banks. This discount factor relating to CA-2.1.5(c)ii may be reassessed by the CBB if the bank arranges an independent review (which has been performed for the bank's systems and controls relating to FV gains on financial instruments) and meets all the requirements of the paper 'Supervisory guidance on the use of the fair value option for financial instruments by banks' issued by Basel Committee on Banking Supervision in June 2006;
                  (e) Banks applying the IRB approach for securitisation exposures or the PD/LGD approach for equity exposures must first deduct the expected loss (EL) amounts subject to the corresponding conditions in paragraphs CA-6.4.4 and CA-5.7.13, respectively. Banks applying the IRB approach for other asset classes must compare (i) the amount of total eligible provisions, as defined in paragraph CA-5.7.7, with (ii) the total expected losses amount as calculated within the IRB approach and defined in paragraph CA-5.7.2. Where the total expected loss amount exceeds total eligible provisions, banks must deduct the difference. Deduction must be on the basis of 50% from Tier 1 and 50% from Tier 2. Where the total expected loss amount is less than total eligible provisions, as explained in paragraphs CA-5.7.7 to CA-5.7.10, banks may recognise the difference in Tier 2 capital up to a maximum of 0.6% of credit risk-weighted assets. The provisions in excess of 0.6% of credit risk-weighted assets will be deducted from the risk-weighted assets of the related portfolio to which these provisions relate;
                  (f) Hybrid instruments, which include a range of instruments that combine characteristics of equity capital and debt, and which meet the following requirements:
                  •   They are unsecured, subordinated and fully paid-up;
                  •   They are not redeemable at the initiative of the holder or without the prior consent of the CBB;
                  •   They are available to participate in losses without the bank being obliged to cease trading (unlike conventional subordinated debt); and
                  •   Although the capital instrument may carry an obligation to pay interest that cannot permanently be reduced or waived (unlike dividends on ordinary shareholders' equity), it should allow service obligations to be deferred (as with cumulative preference shares) where the profitability of the bank would not support payment. Cumulative preference shares, having the above characteristics, would be eligible for inclusion in Tier 2 capital. Debt capital instruments which do not meet the above criteria may be eligible for inclusion in item (g);
                  (g) Subordinated term debt, which comprises all conventional unsecured borrowing subordinated (with respect to both interest and principal) to all other liabilities of the bank except the share capital and limited life redeemable preference shares. To be eligible for inclusion in Tier 2 capital, subordinated debt capital instruments should have a minimum original fixed term to maturity of over five years. During the last five years to maturity, a cumulative discount (or amortisation) factor of 20% per year will be applied to reflect the diminishing value of these instruments as a continuing source of strength. Unlike instruments included in item (f) above, these instruments are not normally available to participate in the losses of a bank which continues trading. For this reason, these instruments will be limited to a maximum of 50% of Tier 1 capital. Subordinated debt instruments must also satisfy the conditions outlined in paragraphs CA-2.1.2 (a), (f), (h), (i), (j), CA-2.1.3 and CA-2.1.4; and
                  (h) Loan loss provisions held against future, presently unidentified losses and are freely available to meet such losses which subsequently materialise. Such general provisions/general loan-loss reserves eligible for inclusion in Tier 2 will be limited to a maximum of 1.25 percentage points of credit risk-weighted risk assets. Provisions ascribed to identified deterioration of particular assets or known liabilities, whether individual or grouped, must be excluded.
                  Amended: October 2013
                  Amended: April 2013
                  Amended: April 2011
                  Apr 08

                • CA-2.1.5A

                  A bank may not exercise a call on a subordinated debt issue, partially or in full, prior to the end of its term, unless it has received the CBB's prior written approval, and there is a clear statement in support of the call in the original documentation.

                  Added: April 2013

                • CA-2.1.5B

                  Where Paragraph CA-2.1.5A applies, the CBB will take into consideration whether the bank has received confirmation from its external auditor that the bank will continue to satisfy the CBB's capital adequacy requirements after such early call and the bank has sufficient liquidity to repay the debt. This can be done by assessing the impact of such redemption on the capital adequacy ratio of the bank.

                  Added: April 2013

              • Tier 3: Market Risk Ancillary Capital

                • CA-2.1.6

                  Tier 3 capital will consist of short-term subordinated debt which, if circumstances demand, must be capable of becoming part of the bank's permanent capital and thus be available to absorb losses in the event of insolvency. It must therefore, at a minimum, meet the following conditions:

                  (a) Be unsecured, subordinated and fully paid up;
                  (b) Have an original maturity of at least two years;
                  (c) Not be repayable before the agreed repayment date; and
                  (d) Be subject to a lock-in clause which stipulates that neither interest nor principal may be paid (even at maturity) if such payment means that the bank falls below or remains below its minimum capital requirement.
                  Apr 08

            • CA-2.2 CA-2.2 Limits on the Use of Different Forms of Capital

              • Tier 1: Core Capital

                • CA-2.2.1

                  Tier 1 capital must represent at least half of the total eligible capital after all adjustments to all elements of capital, have been made. i.e., the sum total of Tier 2 plus Tier 3 eligible capital must not exceed total Tier 1 eligible capital.

                  Apr 08

                • CA-2.2.2

                  The CBB expects banks to meet the minimum CARs without undue reliance on innovative instruments, including instruments that have a step-up. Accordingly, the aggregate of issuances of non-common equity Tier 1 instruments with any explicit feature, (other than a pure call option), which might lead to the instrument being redeemed is limited (at issuance) to 15% of the consolidated bank's Tier 1 capital.

                  Apr 08

                • CA-2.2.3

                  The limits on innovative Tier 1 instruments and Tier 2 subordinated debt are based on the amount of Tier 1 capital after deduction of goodwill pursuant to the Prudential Consolidation and Deduction Requirements Module (see Appendix CA-1 for an example how to calculate the 15% limit for innovative Tier 1 instruments and Appendix PCD-2 of PCD module for an example of the deduction effects and the caps).

                  Apr 08

              • Tier 2: Supplementary Capital

                • CA-2.2.4

                  Tier 2 elements may be substituted for Tier 3 up to the Tier 3 limit of 250% of Tier 1 capital (as below) in so far as eligible Tier 2 capital does not exceed total Tier 1 capital, and long-term subordinated debt does not exceed 50% of Tier 1 capital after deduction of goodwill.

                  Apr 08

              • Tier 3: Ancillary Capital

                • CA-2.2.5

                  Tier 3 capital is limited to 250% of a bank's Tier 1 capital that is required to support market risks. This means that a minimum of about 28.57% of market risks needs to be supported by Tier 1 capital that is not required to support risks in the remainder of the book.

                  Apr 08

                • CA-2.2.6

                  Banks are entitled to use Tier 3 capital solely to support market risks as defined in chapters CA-9 to CA-14. This means that any capital requirement arising in respect of credit and counterparty risk, including the credit counterparty risk in respect of derivatives in both trading and banking books, needs to be met by Tier 1 and Tier 2 capital.

                  Apr 08

        • PART 2: PART 2: Credit Risk

          • CA-3 CA-3 Credit Risk — The Standardized Approach

            • CA-3.1 CA-3.1 Overview

              • CA-3.1.1

                Basel II identifies two methodologies for calculating capital requirements for credit risk. This module sets out the rules relating to the standardized approach. The internal rating-based approach (IRB) and securitization framework are presented in a separate module. The standardized approach makes use of external credit assessments6 as a means of calculating the risk weight for an exposure to a counterparty.


                6 The notations follow the methodology used by one institution, Standard & Poor's. The use of Standard & Poor's credit ratings is an example only; those of some other external credit assessment institutions could equally well be used. The ratings used throughout this document, therefore, do not express any preferences or determinations on external assessment institutions by CBB.

                Apr 08

              • CA-3.1.2

                The credit equivalent amount of Securities Financing Transactions (SFT)7 and OTC derivatives that expose a bank to counterparty credit risk8 is to be calculated under the rules set forth in Appendix CA-2.


                7 Securities Financing Transactions (SFT) are transactions such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions, where the value of the transactions depends on the market valuations and the transactions are often subject to margin agreements.

                8 The counterparty credit risk is defined as the risk that the counterparty to a transaction could default before the final settlement of the transaction's cash flows. An economic loss would occur if the transactions or portfolio of transactions with the counterparty has a positive economic value at the time of default. Unlike a firm's exposure to credit risk through a loan, where the exposure to credit risk is unilateral and only the lending bank faces the risk of loss, the counterparty credit risk creates a bilateral risk of loss: the market value of the transaction can be positive or negative to either counterparty to the transaction. The market value is uncertain and can vary over time with the movement of underlying market factors.

                Apr 08

              • CA-3.1.3

                In determining the risk weights in the standardised approach, banks must use assessments by only those external credit assessment institutions which are recognised as eligible for capital purposes by CBB in accordance with the criteria defined in section CA-3.4.

                Apr 08

              • CA-3.1.4

                Exposures must be risk-weighted net of specific provisions and taking eligible financial collateral. Where a discount is applied on fair value of an asset (as explained in CA-2.1.5), the value of the asset will be adjusted to exclude that discount part. Refer to appendix CA-17.

                Apr 08

            • CA-3.2 CA-3.2 Segregation of Claims

              • Claims on Sovereigns

                • CA-3.2.1

                  Claims on governments of GCC member states (hereinafter referred to as GCC) and their central banks can be risk weighted at 0%. Claims on other sovereigns and their central banks are given a preferential risk weighting of 0% where such claims are denominated and funded in the relevant domestic currency of that sovereign/central bank (e.g. if a Bahraini bank has a claim on government of Australia and the loan is denominated and funded in Australian dollar, it will be risk weighted at 0%). Such preferential risk weight for claims on GCC/other sovereigns and their central banks will be allowed only if the relevant supervisor also allows 0% risk weighting to claims on its sovereign and central bank.

                  Apr 08

                • CA-3.2.2

                  Claims on sovereigns other than those referred to in the previous paragraph must be assigned risk weights as follows:

                  Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated
                  Risk Weight 0% 20% 50% 100% 150% 100%
                  Apr 08

              • Claims on International Organizations

                • CA-3.2.3

                  Claims on the Bank for International Settlements, the International Monetary Fund and the European Central Bank must receive a 0% risk weight.

                  Apr 08

              • Claims on Non-central Government Public Sectors Entities (PSEs)

                • CA-3.2.4

                  Claims on the Bahraini PSEs listed in Appendix CA-18 will be treated as claims on the government of Bahrain.

                  Apr 08

                • CA-3.2.5

                  Where other supervisors also treat claims on named PSEs as claims on their sovereigns, claims to those PSEs are treated as claims on the respective sovereigns as outlined in paragraphs CA-3.2.1 and CA-3.2.2 above. These PSE's must be shown on a list maintained by the concerned central bank or financial regulator. Where PSE's are not on such a list, they must be subject to the treatment outlined in paragraph CA-3.2.6 below.

                  Apr 08

                • CA-3.2.6

                  Claims on all other (foreign) PSEs (i.e. not having sovereign treatment) denominated and funded in the home currency of the sovereign must be risk weighted as allowed by their home country supervisors, provided the sovereign carries rating BBB- or above. Claims on PSEs with no explicit home country weighting or to PSEs in countries of BB+ sovereign rating and below are subject to ECAI ratings as per the following table:

                  Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated
                  Risk Weight 20% 50% 100% 100% 150% 100%
                  Apr 08

                • CA-3.2.7

                  Claims on commercial companies owned by governments must be risk weighted as normal commercial entities unless they are covered by a government guarantee that satisfies the conditions in CA-4.2 and CA-4.5 in which case they may take the risk weight of the concerned government.

                  Apr 08

              • Claims on Multilateral Development Banks (MDB's)

                • CA-3.2.8

                  MDB's currently eligible for a 0% risk weight are: the World Bank Group comprised of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), the Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), the European Investment Bank (EIB), the European Investment Fund (EIF), the Nordic Investment Bank (NIB), the Caribbean Development Bank (CDB), the Islamic Development Bank (IDB), Arab Monetary Fund (AMF), the Council of Europe Development Bank (CEDB), the Arab Bank for Economic Development in Africa (ABEDA), Council of European Resettlement Fund (CERF) and the Kuwait Fund for Arab Economic Development (KFAED).

                  Apr 08

                • CA-3.2.9

                  The claims on MDB's, which do not qualify for the 0% risk weighting, should be assigned risk weights as follows:

                  Banks Credit Quality Grades AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Un-rated
                  Risk weights 20% 50% 50% 100% 150% 50%
                  Apr 08

              • Claims on Banks

                • CA-3.2.10

                  Claims on banks must be risk weighted as given in the following table. No claim on an unrated bank may receive a risk weight lower than that applied to claims on its sovereign of incorporation (see Guidance in Paragraph CA-3.2.11A for self-liquidating letters of credit).

                  Banks Credit Quality Grades AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Un-rated
                  Standard risk weights 20% 50% 50% 100% 150% 50%
                  Preferential risk weight 20% 20% 20% 50% 150% 20%
                  Amended: April 2012
                  April 2008

                • CA-3.2.11

                  Short-term claims on locally incorporated banks may be assigned a risk weighting of 20% where such claims on the banks are of an original maturity of 3 months or less denominated and funded in either BD or US$. A preferential risk weight that is one category more favourable than the standard risk weighting may be assigned to claims on foreign banks licensed in Bahrain of an original maturity of 3 months or less denominated and funded in the relevant domestic currency (other than claims on banks that are rated below B-). Such preferential risk weight for short-term claims on banks licensed in other jurisdictions will be allowed only if the relevant supervisor also allows this preferential risk weighting to short-term claims on its banks.

                  Apr 08

                • CA-3.2.11A

                  Self-liquidating letters of credit issued or confirmed by an unrated bank will be allowed a risk weighting of 50% or 20% without reference to the risk weight of the sovereign of incorporation. All other claims will be subject to the 'sovereign floor' of the country of incorporation of the concerned issuing or confirming bank.

                  Added: April 2012

                • CA-3.2.12

                  Claims with an (contractual) original maturity under 3 months that are expected to be rolled over (i.e. where the effective maturity is longer than 3 months) will not qualify for a preferential treatment for capital adequacy purposes.

                  Apr 08

              • Claims on Investment Firms

                • CA-3.2.13

                  Claims on category one and category two investment firms which are subject to direct supervisory and regulatory provisions from the CBB may be treated as claims on banks for risk weighting purposes but without the use of preferential risk weight for short-term claims. Claims on category three investment firms must be treated as claims on corporates for risk weighting purposes. Claims on investment firms in other jurisdictions will be treated as claims on corporates for risk weighting purposes. However, if the bank can demonstrate that the concerned investment firm is subject to a Basel II equivalent capital adequacy regime and is treated as a bank for risk weighting purposes by its home regulator, then claims on such investment firms may be treated as claims on banks.

                  Apr 08

              • Claims on Corporates, including Insurance Companies

                • CA-3.2.14

                  Risk weighting for corporates including insurance companies is as follows:

                  Credit assessment AAA to AA- A+ to A- BBB+ to BB- Below BB- Unrated
                  Risk weight 20% 50% 100% 150% 100%
                  Apr 08

                • CA-3.2.15

                  Risk weighting for unrated (corporate) claims will be reviewed and where appropriate, may be increased by the CBB. Credit facilities to small/medium enterprises may be placed in the regulatory retail portfolio in limited cases below.

                  Amended January 2009
                  Apr 08

              • Claims included in the Regulatory Retail Portfolios

                • CA-3.2.16

                  No claim on any unrated corporate, where said corporate originates from a foreign jurisdiction, may be given a risk weight lower than that assigned to a corporate within its own jurisdiction, and in no case will it be below 100%.

                  Apr 08

                • CA-3.2.17

                  Retail claims that are included in the regulatory retail portfolio must be risk weighted at 75%, except as provided in CA-3.2.23 for the past due loans.

                  Apr 08

                • CA-3.2.18

                  To be included in the regulatory retail portfolio, claims must meet the following criteria:

                  (a) Orientation — the exposure is to an individual person or persons or to a small business. A small business is a Bahrain-based business with annual turnover below BD 2mn;
                  (b) Product — The exposure takes the form of any of the following: revolving credits and lines of credit (including credit cards and overdrafts), personal term loans and leases (e.g. auto leases, student loans) and small business facilities. Securities (such as bonds and equities), whether listed or not, are specifically excluded from this category. Mortgage loans will be excluded if they qualify for treatment as claims secured by residential property (see below). Loans for purchase of shares are also excluded from the regulatory retail portfolios;
                  (c) Granularity — The regulatory retail portfolio is sufficiently diversified to a degree that reduces the risks in the portfolio, warranting a 75% risk weight. No aggregate exposure to one counterpart9 can exceed 0.2% of the overall regulatory retail portfolio; and
                  (d) The maximum aggregated retail exposure to one counterpart must not exceed an absolute limit of BD 250,000.

                  9 Aggregated exposure means gross amount (i.e. not taking any credit risk mitigation into account) of all forms of debt exposures (e.g. loans or commitments) that individually satisfy the three other criteria. In addition, "to one counterpart" means one or several entities that may be considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the limit would apply to the bank's aggregated exposure on both businesses).

                  Amended: April 2011
                  Amended January 2009
                  Apr 08

              • Claims Secured by Residential Property

                • CA-3.2.19

                  Lending fully secured by first mortgages on residential property that is or will be occupied by the borrower, or that is leased, must carry a risk weighting of 75%. However, if the bank can justify foreclosure or repossession for a claim, the risk weight allowed will be 35%. To get this lower risk weight the bank must obtain a satisfactory legal opinion that foreclosure or repossession is possible without any impediment.

                  Apr 08

              • Claims Secured by Commercial Real Estate

                • CA-3.2.20

                  Claims secured by mortgages on commercial real estate are subject to a minimum of 100% risk weight. If the borrower is rated below BB-, the risk-weight corresponding to the rating of the borrower must be applied.

                  Apr 08

              • Past Due Loans

                • CA-3.2.21

                  The unsecured portion of any loan (other than a qualifying residential mortgage loan) that is past due for more than 90 days, net of specific provisions (including partial write-offs), must be risk-weighted as follows:

                  (a)150% risk weight when specific provisions are less than 20% of the outstanding amount of the loan; and
                  (b)100% risk weight when specific provisions are greater than 20% of the outstanding amount of the loan.
                  Amended: April 2011
                  Apr 08

                • CA-3.2.22

                  For the purposes of defining the secured portion of a past due loan, eligible collateral and guarantees will be the same as for credit risk mitigation purposes.

                  Apr 08

                • CA-3.2.23

                  Past due retail loans are to be excluded from the overall regulatory retail portfolio when assessing the granularity criterion, for risk-weighting purposes.

                  Apr 08

                • CA-3.2.24

                  In the case of qualifying residential mortgage loans, when such loans are past due for more than 90 days, they must be risk weighted at 100% net of specific provisions.

                  Apr 08

              • Higher-risk Categories

                • CA-3.2.25

                  Holdings of securitization tranches that are rated between BB+ and BB- are risk weighted at 350%.

                  Apr 08

              • Investments in Equities and Funds

                • CA-3.2.26

                  Investments in listed equities must be risk weighted at 100% while equities other than listed must be risk weighted at 150%.

                  Apr 08

                • CA-3.2.27

                  Investments in funds (e.g. mutual funds, Collective Investment Undertakings etc.) must be risk weighted as follows:

                  •   If the instrument (e.g. units) is rated, it should be risk-weighted according to its external rating (for risk-weighting, it must be treated as a "claim on corporate");
                  •   If not rated, such investment should be treated as an equity investment and risk weighted accordingly (i.e. 100% for listed and 150% for others);
                  •   The bank can apply to CBB for using the look-through approach for such investments if it can demonstrate that the look-through approach is more appropriate to the circumstances of the bank;
                  •   If there are no voting rights attached to investment in funds, the investment will not be subjected to consolidation and deduction requirements (except large exposure limits);
                  •   For the purpose of determining "large exposure limit" for investment in funds, the look-through approach should be used (even if the look-through approach is not used to risk weight the investment).
                  Apr 08

                • CA-3.2.28

                  CBB may enforce a bank to adopt one of the IRB treatments for equities if the CBB considers that bank's equity portfolio is significant.

                  Apr 08

              • Holdings of Real Estate

                • CA-3.2.29

                  All holdings of real estate by banks (i.e. owned directly or by way of investments in Real Estate Companies, subsidiaries or associate companies or other arrangements such as trusts, funds or REITs) must be risk-weighted at 200%. Premises occupied by the bank may be weighted at 100%. Investments in Real Estate Companies will be subject to the materiality thresholds for commercial companies described in Module PCD and therefore any holdings which amount to 15% or more of regulatory capital will be subject to deduction. The holdings below the 15% threshold will be weighted at 200%.

                  Apr 08

              • Other Assets

                • CA-3.2.30

                  Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities may be treated as cash and therefore risk-weighted at 0%. In addition, cash items in the process of collection must be risk-weighted at 20%. The standard risk weight for all other assets will be 100%. Investments in regulatory capital instruments issued by banks or investment firms must be risk weighted at a minimum of 100%, unless they are deducted from the capital base according to the Prudential Consolidation and Deduction Requirements Module.

                  Apr 08

              • Underwriting of Non-trading Book Items

                • CA-3.2.31

                  Where a bank has acquired assets on its balance sheet in the banking book which it is intending to place with third parties under a formal arrangement and is underwriting the placement, the following risk weightings apply during the underwriting period (which may not last for more than 90 days). Once the underwriting period has expired, the usual risk weights should apply:

                  (a) For holdings of private equity, a risk weighting of 100% will apply instead of the usual 150% (see CA-3.2.26); and
                  (b) For holdings of Real Estate, a risk weight of 100% will apply instead of the usual 200% risk weight (see CA-3.2.29).
                  Amended: April 2011
                  Apr 08

            • CA-3.3 CA-3.3 Off-balance Sheet Items

              • CA-3.3.1

                Off-balance-sheet items must be converted into credit exposure equivalents applying credit conversion factors (CCFs). Counterparty risk weightings for OTC derivative transactions will not be subject to any specific ceiling.

                Apr 08

              • CA-3.3.2

                Commitments with an original maturity of up to one year and commitments with an original maturity of over one year will receive a CCF of 20% and 50%, respectively.

                Apr 08

              • CA-3.3.3

                Any commitments that are unconditionally cancellable at any time by the bank without prior notice, or that are subject to automatic cancellation due to deterioration in a borrowers' creditworthiness, will receive a 0% CCF.

                Apr 08

              • CA-3.3.4

                Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances) must receive a CCF of 100%.

                Apr 08

              • CA-3.3.5

                Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank, must receive a CCF of 100%.

                Apr 08

              • CA-3.3.6

                A CCF of 100% must be applied to the lending of banks' securities or the posting of securities as collateral by banks, including instances where these arise out of repo-style transactions (i.e. repurchase/reverse repurchase and securities lending/securities borrowing transactions). See Section CA-4.3 for the calculation of risk-weighted assets where the credit converted exposure is secured by eligible collateral.

                Apr 08

              • CA-3.3.7

                Forward asset purchases, forward deposits and partly-paid shares and securities, which represent commitments with certain drawdown must receive a CCF of 100%.

                Apr 08

              • CA-3.3.8

                Certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions) must receive CCF of 50%.

                Apr 08

              • CA-3.3.9

                Note issuance facilities and revolving underwriting facilities must receive a CCF of 50%.

                Apr 08

              • CA-3.3.10

                For short-term self-liquidating trade letters of credit arising from the movement of goods, a 20% CCF must be applied to both issuing and confirming banks.

                Apr 08

              • CA-3.3.11

                Where there is an undertaking to provide a commitment on an off-balance sheet item, banks are to apply the lower of the two applicable CCF's.

                Apr 08

              • CA-3.3.12

                Credit equivalent amount of OTC derivatives and SFTs that expose a bank to counterparty credit risk must be calculated as per Appendix CA-2.

                Apr 08

              • CA-3.3.13

                Banks must closely monitor securities, commodities, and foreign exchange transactions that have failed, starting the first day they fail. A capital charge to failed transactions must be calculated in accordance with CBB guidelines set forth in Appendix CA-4.

                Apr 08

              • CA-3.3.14

                With regard to unsettled securities, commodities, and foreign exchange transactions, banks are encouraged to develop, implement and improve systems for tracking and monitoring the credit risk exposure arising from unsettled transactions as appropriate for producing management information that facilitates action on a timely basis.

                Apr 08

              • CA-3.3.15

                Furthermore, when such transactions are not processed through a delivery-versus-payment (DvP) or payment-versus-payment (PvP) mechanism, banks must calculate a capital charge as set forth in Appendix CA-4.

                Apr 08

            • CA-3.4 CA-3.4 External Credit Assessments

              • The Recognition Process and Eligibility Criteria

                • CA-3.4.1

                  CBB will assess all External Credit Assessment Institutions (ECAI) according to the six criteria below. Any failings, in whole or in part, to satisfy these to the fullest extent will result in the respective ECAI's methodology and associated resultant rating not being accepted by the CBB:

                  (a) Objectivity: The methodology for assigning credit assessments must be rigorous, systematic, and subject to some form of validation based on historical experience. Moreover, assessments must be subject to ongoing review and responsive to changes in financial condition. Before being recognized by the CBB, an assessment methodology for each market segment, including rigorous back testing, must have been established for an absolute minimum of one year and with a preference of three years;
                  (b) Independence: An ECAI must show independence and should not be subject to political or economic pressures that may influence the rating. The assessment process should be as free as possible from any constraints that could arise in situations where the composition of the board of directors, political pressure, the shareholder structure of the assessment institution or any other aspect could be seen as creating a conflict of interest;
                  (c) International access/Transparency: The individual assessments should be available to both domestic and foreign institutions with legitimate interests and at equivalent terms. The general methodology used by the ECAI has to be publicly available;
                  (d) Disclosure: An ECAI is required to disclose the following information: its assessment methodologies, including the definition of default, the time horizon, and the meaning of each rating; the actual default rates experienced in each assessment category; and the transitions of the assessments, e.g. the likelihood of a slide in the ratings of an exposure from one class to another over time;
                  (e) Resources: An ECAI must have sufficient resources to carry out high quality credit assessments. These resources should allow for substantial ongoing contact with senior and operational levels within the entities assessed in order to add value to the credit assessments. Such assessments will be based on methodologies combining qualitative and quantitative approaches; and
                  (f) Credibility: Credibility, to a certain extent, can derive from the criteria above. In addition, the reliance on an ECAI's external credit assessments by independent parties (investors, insurers, trading partners) may be evidence of the credibility of the assessments of an ECAI. The credibility of an ECAI will also be based on the existence of internal procedures to prevent the misuse of confidential information. In order to be eligible for recognition, an ECAI does not have to assess firms in more than one country.
                  Amended: April 2011
                  Apr 08

                • CA-3.4.2

                  The CBB recognizes Standard and Poor's, Moody's, Fitch IBCA and Capital Intelligence as eligible ECAIs. With respect to the possible recognition of other rating agencies as eligible ECAIs, CBB will update this paragraph subject to the rating agencies satisfying the eligibility requirements. (See Appendix 16 for mapping of eligible ECAIs).

                  Apr 08

                • CA-3.4.3

                  Banks must use the chosen ECAIs and their ratings consistently for each type of claim, for both risk weighting and risk management purposes. Banks will not be allowed to "cherry-pick" the assessments provided by different eligible ECAIs.

                  Apr 08

                • CA-3.4.4

                  Banks must disclose ECAIs that they use for the risk weighting of their assets by type of claims, the risk weights associated with the particular rating grades as determined by CBB through the mapping process as well as the aggregated risk-weighted assets for each risk weight based on the assessments of each eligible ECAI.

                  Apr 08

              • Multiple Assessments

                • CA-3.4.5

                  If there are two assessments by eligible ECAIs chosen by a bank which map into different risk weights, the higher risk weight must be applied.

                  Apr 08

                • CA-3.4.6

                  If there are three or more assessments by eligible ECAIs chosen by a bank which map into different risk weights, the assessments corresponding to the two lowest risk weights should be referred to and the higher of those two risk weights must be applied.

                  Apr 08

              • Issuer Versus Issues Assessment

                • CA-3.4.7

                  Where a bank invests in a particular issue that has an issue-specific assessment, the risk weight of the claim will be based on this assessment. Where the bank's claim is not an investment in a specific assessed issue, the following general principles apply:

                  (a) In circumstances where the borrower has a specific assessment for an issued debt — but the bank's claim is not an investment in this particular debt — a high quality credit assessment (one which maps into a risk weight lower than that which applies to an unrated claim) on that specific debt may only be applied to the bank's un-assessed claim if this claim ranks pari passu or senior to the claim with an assessment in all respects. If not, the credit assessment cannot be used and the un-assessed claim will receive the risk weight for unrated claims; and
                  (b) In circumstances where the borrower has an issuer assessment, this assessment typically applies to senior unsecured claims on that issuer. Consequently, only senior claims on that issuer will benefit from a high quality issuer assessment. Other un-assessed claims of a highly assessed issuer will be treated as unrated. If either the issuer or a single issue has a low quality assessment (mapping into a risk weight equal to or higher than that which applies to unrated claims), an un-assessed claim on the same counterparty will be assigned the same risk weight as is applicable to the low quality assessment.
                  Amended: April 2011
                  Apr 08

                • CA-3.4.8

                  Whether the bank intends to rely on an issuer- or an issue-specific assessment, the assessment must take into account and reflect the entire amount of credit risk exposure the bank has with regard to all payments owed to it.10


                  10 For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with repayment of both principal and interest.

                  Apr 08

                • CA-3.4.9

                  In order to avoid any double counting of credit enhancement factors, no recognition of credit risk mitigation techniques will be taken into account if the credit enhancement is already reflected in the issue specific rating (see paragraph CA-4.1.5).

                  Apr 08

              • Domestic Currency and Foreign Currency Assessments

                • CA-3.4.10

                  Where unrated exposures are risk weighted based on the rating of an equivalent exposure to that borrower, the general rule is that foreign currency ratings would be used for exposures in foreign currency. Domestic currency ratings, if separate, would only be used to risk weight claims denominated in the domestic currency.

                  Apr 08

                • CA-3.4.11

                  However, when an exposure arises through a bank's participation in a loan that has been extended, or has been guaranteed against convertibility and transfer risk, by certain MDBs, its convertibility and transfer risk can be considered by CBB, on a case by case basis, to be effectively mitigated. To qualify, MDBs must have preferred creditor status recognised in the market and be included in MDB's qualifying for 0% risk rate under CA-3.2.8. In such cases, for risk weighting purposes, the borrower's domestic currency rating may be used instead of its foreign currency rating. In the case of a guarantee against convertibility and transfer risk, the local currency rating can be used only for the portion that has been guaranteed. The portion of the loan not benefiting from such a guarantee will be risk-weighted based on the foreign currency rating.

                  Apr 08

              • Short-term/Long-term Assessments

                • CA-3.4.12

                  For risk-weighting purposes, short-term assessments are deemed to be issue-specific. They can only be used to derive risk weights for claims arising from the rated facility. They cannot be generalised to other short-term claims, except under the conditions of paragraph CA-3.4.14. In no event can a short-term rating be used to support a risk weight for an unrated long-term claim. Short-term assessments may only be used for short-term claims against banks and corporates. The table below provides a framework for banks' exposures to specific short-term facilities, such as a particular issuance of commercial paper:

                  Credit assessment A-1/P-111 A-2/P-2 A-3/P-3 Others12
                  Risk weight 20% 50% 100% 150%

                  11The notations follow the methodology used by Standard & Poor's and by Moody's Investors Service. The A-1 rating of Standard & Poor's includes both A-1+ and A-1-.

                  12This category includes all non-prime and B or C ratings.

                  Apr 08

                • CA-3.4.13

                  If a short-term rated facility attracts a 50% risk-weight, unrated short-term claims cannot attract a risk weight lower than 100%. If an issuer has a short-term facility with an assessment that warrants a risk weight of 150%, all unrated claims, whether long-term or short-term, should also receive a 150% risk weight, unless the bank uses recognised credit risk mitigation techniques for such claims.

                  Apr 08

                • CA-3.4.14

                  For short-tem claims on banks, the interaction with specific short-term assessments is expected to be the following:

                  (a) The general preferential treatment for short-term claims, as defined under paragraphs CA-3.2.11 and CA-3.2.12, applies to all claims on banks of up to three months original maturity when there is no specific short-term claim assessment;
                  (b) When there is a short-term assessment and such an assessment maps into a risk weight that is more favourable (i.e. lower) or identical to that derived from the general preferential treatment, the short-term assessment should be used for the specific claim only. Other short-term claims would benefit from the general preferential treatment; and
                  (c) When a specific short-term assessment for a short term claim on a bank maps into a less favourable (higher) risk weight, the general short-term preferential treatment for inter-bank claims cannot be used. All unrated short-term claims should receive the same risk weighting as that implied by the specific short-term assessment.
                  Amended: April 2011
                  Apr 08

                • CA-3.4.15

                  When a short-term assessment is to be used, the institution making the assessment needs to meet all of the eligibility criteria for recognising ECAIs as presented in paragraph CA-3.4.1 in terms of its short-term assessment.

                  Apr 08

              • Level of Application of the Assessment

                • CA-3.4.16

                  External assessments for one entity within a corporate group must not be used to risk weight other entities within the same group.

                  Apr 08

              • Unsolicited Ratings

                • CA-3.4.17

                  As a general rule, banks should use solicited ratings from eligible ECAIs but they are also allowed to use unsolicited ratings in the same way as solicited ratings. However, there may be the potential for ECAIs to use unsolicited ratings to put pressure on entities to obtain solicited ratings. If such behaviour is identified, CBB may disallow the use of unsolicited ratings.

                  Apr 08

          • CA-4 CA-4 Credit Risk — The Standardized Approach — Credit Risk Mitigation

            • CA-4.1 CA-4.1 Overarching Issues

              • Introduction

                • CA-4.1.1

                  Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralised by first priority claims, in whole or in part with cash or securities, a loan exposure may be guaranteed by a third party, or a bank may buy a credit derivative to offset various forms of credit risk. Additionally banks may agree to net loans owed to them against deposits from the same counterparty. Off-balance sheet items will first be converted into on-balance sheet equivalents prior to the CRM being applied.

                  Apr 08

              • General remarks

                • CA-4.1.2

                  The framework set out in this sub-section of "General remarks" is applicable to all banking book exposures. Certain additional types of collateral are also eligible under the IRB approach (see paragraph CA-5.3.20 and others).

                  Apr 08

                • CA-4.1.3

                  The comprehensive approach for the treatment of collateral (see paragraphs CA-4.2.12 to CA-4.2.20 and CA-4.3.1 to CA-4.3.32) will also be applied to calculate the counterparty risk charges for OTC derivatives and repo-style transactions booked in the trading book.

                  Apr 08

                • CA-4.1.4

                  No transaction in which CRM techniques are used should receive a higher capital requirement than an otherwise identical transaction where such techniques are not used.

                  Apr 08

                • CA-4.1.5

                  The effects of CRM will not be double counted. Therefore, no additional recognition of CRM for regulatory capital purposes will be applicable on claims for which an issue-specific rating is used that already reflects that CRM. As stated in paragraph CA-3.4.8 of the section on the standardised approach, principal-only ratings will also not be allowed within the framework of CRM.

                  Apr 08

                • CA-4.1.6

                  While the use of CRM techniques reduces or transfers credit risk, it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks. Therefore, it is imperative that banks employ robust procedures and processes to control these risks, including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from the bank's use of CRM techniques and its interaction with the bank's overall credit risk profile. Where these risks are not adequately controlled, the CBB may impose additional capital charges or take supervisory actions.

                  Apr 08

                • CA-4.1.7

                  Market Discipline requirements must also be observed for banks to obtain capital relief in respect of any CRM techniques.

                  Apr 08

              • Legal Certainty

                • CA-4.1.8

                  In order for banks to obtain capital relief for any use of CRM techniques, the following minimum standards for legal documentation must be met.

                  Apr 08

                • CA-4.1.9

                  All documentation used in collateralised transactions and for documenting on- balance sheet netting, guarantees and credit derivatives must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.

                  Apr 08

            • CA-4.2 CA-4.2 Overview of Credit Risk Mitigation Techniques13

              • Collateralised Transactions

                • CA-4.2.1

                  A collateralised transaction is one in which:

                  (a) Banks have a credit exposure or potential credit exposure; and
                  (b) That credit exposure or potential credit exposure is hedged in whole or in part by collateral posted by a counterparty14 or by a third party on behalf of the counterparty.

                  13 See Appendix CA-5 for an overview of methodologies for the capital treatment of transactions secured by financial collateral under the standardised and IRB approaches.

                  14 In this section "counterparty" is used to denote a party to whom a bank has an on- or off-balance sheet credit exposure or a potential credit exposure. That exposure may, for example, take the form of a loan of cash or securities (where the counterparty would traditionally be called the borrower), of securities posted as collateral, of a commitment or of exposure under an OTC derivatives contract.

                  Apr 08

                • CA-4.2.2

                  Where banks take eligible financial collateral (e.g. cash or securities, more specifically defined in paragraphs CA-4.3.1 and CA-4.3.2), they are allowed to reduce their credit exposure to a counterparty when calculating their capital requirements to take account of the risk mitigating effect of the collateral.

                  Apr 08

              • Overall Framework and Minimum Conditions

                • CA-4.2.3

                  Banks may opt for either the simple approach, which substitutes the risk weighting of the collateral for the risk weighting of the counterparty for the collateralised portion of the exposure (generally subject to a 20% floor), or for the comprehensive approach, which allows fuller offset of collateral against exposures, by effectively reducing the exposure amount by the value ascribed to the collateral. Banks may operate under either, but not both, approaches in the banking book, but only under the comprehensive approach in the trading book. Partial collateralisation is recognised in both approaches. Mismatches in the maturity of the underlying exposure and the collateral will only be allowed under the comprehensive approach.

                  Apr 08

                • CA-4.2.4

                  However, before capital relief will be granted in respect of any form of collateral, the standards set out below in paragraphs CA-4.2.5 to CA-4.2.8 must be met under either approach.

                  Apr 08

                • CA-4.2.5

                  In addition to the general requirements for legal certainty set out in paragraphs CA-4.1.8 and CA-4.1.9, the legal mechanism by which collateral is pledged or transferred must ensure that the bank has the right to liquidate or take legal possession of it, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the counterparty (and, where applicable, of the custodian holding the collateral). Furthermore banks must take all steps necessary to fulfil those requirements under the law applicable to the bank's interest in the collateral for obtaining and maintaining an enforceable security interest, e.g. by registering it with a registrar, or for exercising a right to net or set off in relation to title transfer collateral.

                  Apr 08

                • CA-4.2.6

                  In order for collateral to provide protection, the credit quality of the counterparty and the value of the collateral must not have a material positive correlation. For example, securities issued by the counterparty — or by any related group entity — would provide little protection and so would be ineligible.

                  Apr 08

                • CA-4.2.7

                  Banks must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed, and that collateral can be liquidated promptly.

                  Apr 08

                • CA-4.2.8

                  Where the collateral is held by a custodian, banks must take reasonable steps to ensure that the custodian segregates the collateral from its own assets.

                  Apr 08

                • CA-4.2.9

                  A capital requirement will be applied to a bank on either side of the collateralised transaction: for example, both repos and reverse repos will be subject to capital requirements. Likewise, both sides of a securities lending and borrowing transaction will be subject to explicit capital charges, as will the posting of securities in connection with a derivative exposure or other borrowing.

                  Apr 08

                • CA-4.2.10

                  Where a bank, acting as agent, arranges a repo-style transaction (i.e. repurchase/reverse repurchase and securities lending/borrowing transactions) between a customer and a third party and provides a guarantee to the customer that the third party will perform on its obligations, then the risk to the bank is the same as if the bank had entered into the transaction as a principal. In such circumstances, a bank will be required to calculate capital requirements as if it were itself the principal.

                  Apr 08

              • The Simple Approach

                • CA-4.2.11

                  In the simple approach the risk weighting of the collateral instrument collateralising or partially collateralising the exposure is substituted for the risk weighting of the counterparty. Details of this framework are provided in paragraphs CA-4.3.26 to CA-4.3.29.

                  Apr 08

              • The Comprehensive Approach

                • CA-4.2.12

                  In the comprehensive approach, when taking collateral, banks must calculate their adjusted exposure to a counterparty for capital adequacy purposes in order to take account of the effects of that collateral. Using haircuts, banks are required to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either15, occasioned by market movements. This will produce volatility adjusted amounts for both exposure and collateral. Unless either side of the transaction is cash, the volatility adjusted amount for the exposure will be higher than the exposure and for the collateral it will be lower.


                  15 Exposure amounts may vary where, for example, securities are being lent.

                  Apr 08

                • CA-4.2.13

                  Additionally where the exposure and collateral are held in different currencies an additional downwards adjustment must be made to the volatility adjusted collateral amount to take account of possible future fluctuations in exchange rates.

                  Apr 08

                • CA-4.2.14

                  Where the volatility-adjusted exposure amount is greater than the volatility-adjusted collateral amount (including any further adjustment for foreign exchange risk), banks shall calculate their risk-weighted assets as the difference between the two multiplied by the risk weight of the counterparty. The framework for performing these calculations is set out in paragraphs CA-4.3.3 to CA-4.3.6.

                  Apr 08

                • CA-4.2.15

                  Banks must use standard haircuts given in paragraph CA-4.3.7 unless allowed to use models under CA-4.3.22.

                  Apr 08

                • CA-4.2.16

                  The size of the individual haircuts will depend on the type of instrument, type of transaction and the frequency of marking-to-market and re-margining. For example, repo- style transactions subject to daily marking-to-market and to daily re-margining will receive a haircut based on a 5-business day holding period and secured lending transactions with daily mark-to-market and no re-margining clauses will receive a haircut based on a 20-business day holding period. These haircut numbers will be scaled up using the square root of time formula depending on the frequency of remargining or marking-to-market.

                  Apr 08

                • CA-4.2.17

                  For certain types of repo-style transactions (broadly speaking government bond repos as defined in paragraphs CA-4.3.14 and CA-4.3.15), the CBB may allow banks using standard haircuts not to apply these haircuts in calculating the exposure amount after risk mitigation.

                  Apr 08

                • CA-4.2.18

                  The effect of master netting agreements covering repo-style transactions can be recognised for the calculation of capital requirements subject to the conditions in paragraph CA-4.3.17.

                  Apr 08

                • CA-4.2.19

                  As an alternative to standard haircuts banks may, subject to approval from CBB, use VaR models for calculating potential price volatility for repo-style transactions and other similar SFTs, as set out in paragraphs CA-4.3.22 to CA-4.3.25 below. Alternatively, subject to approval from the CBB's, they may also calculate, for these transactions, an expected positive exposure, as set forth in Appendix CA-2 of this Module.

                  Apr 08

              • On-balance Sheet Netting

                • CA-4.2.20

                  Where banks have legally enforceable netting arrangements for loans and deposits they may calculate capital requirements on the basis of net credit exposures subject to the conditions in paragraph CA-4.4.1.

                  Apr 08

              • Guarantees and Credit Derivatives

                • CA-4.2.21

                  Where guarantees or credit derivatives are direct, explicit, irrevocable and unconditional, and the CBB is satisfied that banks fulfil certain minimum operational conditions relating to risk management processes they may allow banks to take account of such credit protection in calculating capital requirements.

                  Apr 08

                • CA-4.2.22

                  A range of guarantors and protection providers are recognised, as shown in paragraph CA-4.5.7. A substitution approach will be applied. Thus only guarantees issued by or protection provided by entities with a lower risk weight than the counterparty will lead to reduced capital charges since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor or protection provider, whereas the uncovered portion retains the risk weight of the underlying counterparty.

                  Apr 08

                • CA-4.2.23

                  Detailed operational requirements are given below in paragraphs CA-4.5.1 to CA-4.5.5.

                  Apr 08

              • Maturity Mismatch

                • CA-4.2.24

                  Where the residual maturity of the CRM is less than that of the underlying credit exposure a maturity mismatch occurs. Where there is a maturity mismatch and the CRM has an original maturity of less than one year, the CRM is not recognised for capital purposes. In other cases where there is a maturity mismatch, partial recognition is given to the CRM for regulatory capital purposes as detailed below in paragraphs CA-4.6.1 to CA-4.6.4. Under the simple approach for collateral maturity mismatches will not be allowed.

                  Apr 08

              • Miscellaneous

                • CA-4.2.25

                  Treatments for pools of credit risk mitigants and first- and second-to-default credit derivatives are given in paragraphs CA-4.7.1 to CA-4.7.5.

                  Apr 08

            • CA-4.3 CA-4.3 Collateral

              • Eligible Financial Collateral

                • CA-4.3.1

                  The following collateral instruments are eligible for recognition in the simple approach:

                  (a) Cash (as well as certificates of deposit or comparable instruments issued by the lending bank) on deposit with the bank which is incurring the counterparty exposure;16,17
                  (b) Gold;
                  (c) Debt securities rated by a recognised external credit assessment institution where these are either:
                  (i) At least BB- when issued by sovereigns or PSEs that are treated as sovereigns by the CBB; or
                  (ii) At least BBB- when issued by other entities (including banks and securities firms); or
                  (iii) At least A-3/P-3 for short-term debt instruments.
                  (d) Debt securities not rated by a recognised external credit assessment institution where these are:
                  (i) Issued by a bank; and
                  (ii) Listed on a recognised exchange; and
                  (iii) Classified as senior debt; and
                  (iv) All rated issues of the same seniority by the issuing bank must be rated at least BBB- or A-3/P-3 by a recognised external credit assessment institution; and
                  (v) The bank holding the securities as collateral has no information to suggest that the issue justifies a rating below BBB- or A-3/P-3 (as applicable); and
                  (vi) The CBB is sufficiently confident about the market liquidity of the security.
                  (e) Equities (including convertible bonds) that are included in a main index; and
                  (f) Undertakings for Collective Investments in Transferable Securities (UCITS) and mutual funds where:
                  (i) A price for the units is publicly quoted daily; and
                  (ii) The UCITS/mutual fund is limited to investing in the instruments listed in this paragraph18.

                  16 Cash funded credit linked notes issued by the bank against exposures in the banking book which fulfil the criteria for credit derivatives will be treated as cash collateralised transactions.

                  17When cash on deposit, certificates of deposit or comparable instruments issued by the lending bank are held as collateral at a third-party bank in a non-custodial arrangement, if they are openly pledged/assigned to the lending bank and if the pledge /assignment is unconditional and irrevocable, the exposure amount covered by the collateral (after any necessary haircuts for currency risk) will receive the risk weight of the third-party bank.

                  18 However, the use or potential use by a UCITS/mutual fund of derivative instruments solely to hedge investments listed in this paragraph and paragraph CA-4.3.2 shall not prevent units in that UCITS /mutual fund from being eligible financial collateral.

                  Amended: April 2011
                  Apr 08

                • CA-4.3.2

                  The following collateral instruments are eligible for recognition in the comprehensive approach:

                  (a) All of the instruments in paragraph CA-4.3.1;
                  (b) Equities (including convertible bonds) which are not included in a main index but which are listed on a recognised exchange;
                  (c) UCITS/mutual funds which include such equities.
                  Apr 08

              • The Comprehensive Approach

                • Calculation of Capital Requirement

                  • CA-4.3.3

                    For a collateralised transaction, the exposure amount after risk mitigation is calculated as follows:

                    E* = Max {0, [E × (1 + He) - C × (1 - Hc - Hfx)]}

                    where:

                    E* = The exposure value after risk mitigation

                    E = Current value of the exposure

                    He = Haircut appropriate to the exposure

                    C = The current value of the collateral received

                    Hc = Haircut appropriate to the collateral

                    Hfx = Haircut appropriate for currency mismatch between the collateral and exposure

                    Amended: April 2011
                    Apr 08

                  • CA-4.3.4

                    The exposure amount after risk mitigation will be multiplied by the risk weight of the counterparty to obtain the risk-weighted asset amount for the collateralised transaction.

                    Apr 08

                  • CA-4.3.5

                    The treatment for transactions where there is a mismatch between the maturity of the counterparty exposure and the collateral is given in paragraphs CA-4.6.1 to CA-4.6.4.

                    Apr 08

                  • CA-4.3.6

                    Where the collateral is a basket of assets, the haircut on the basket will be

                    H = Σi ai Hi , where ai is the weight of the asset (as measured by units of currency) in the i basket and Hi the haircut applicable to that asset.

                    Apr 08

                • Standard Haircuts

                  • CA-4.3.7

                    These are the standard haircuts (assuming daily mark-to-market, daily re-margining and a 10-business day holding period), expressed as percentages:

                    Issue rating for debt securities Residual Maturity Sovereigns19,20 Other issuers21
                    AAA to AA-/A-1 ≤1 year 0.5 1
                    >1 year, ≤5 years 2 4
                    > 5 years 4 8
                    A+ to BBB-/ A-2/A-3/P-3 and unrated bank securities per para. CA-4.3.1(d) ≤1 year 1 2
                    >1 year, ≤5 years 3 6
                    > 5 years 6 12
                    BB+ to BB- All 15  
                    Main index equities (including convertible bonds) and Gold 15
                    Other equities (including convertible bonds) listed on a recognised exchange 25
                    UCITS/Mutual funds Highest haircut applicable to any security in which the fund can invest
                    Cash in the same currency22 0

                    19 Includes PSEs which are treated as sovereigns by the CBB.

                    20 Multilateral development banks receiving a 0% risk weight will be treated as sovereigns.

                    21 Includes PSEs which are not treated as sovereigns by CBB.

                    22 Eligible cash collateral specified in paragraph CA-4.3.1 (a).

                    Apr 08

                  • CA-4.3.8

                    The standard haircut for currency risk where exposure and collateral are denominated in different currencies is 8% (also based on a 10-business day holding period and daily mark-to-market).

                    Apr 08

                  • CA-4.3.9

                    For transactions in which the bank lends non-eligible instruments (e.g. non-investment grade corporate debt securities), the haircut to be applied on the exposure should be the same as the one for equity traded on a recognised exchange that is not part of a main index.

                    Apr 08

                • Adjustment for Different Holding Periods and Non Daily Mark-to-market or re-Margining

                  • CA-4.3.10

                    For some transactions, depending on the nature and frequency of the revaluation and re-margining provisions, different holding periods are appropriate. The framework for collateral haircuts distinguishes between repo-style transactions (i.e. repo/reverse repos and securities lending/borrowing), "other capital-market-driven transactions" (i.e. OTC derivatives transactions and margin lending) and secured lending. In capital-market-driven transactions and repo-style transactions, the documentation contains remargining clauses; in secured lending transactions, it generally does not.

                    Apr 08

                  • CA-4.3.11

                    The minimum holding period for various products is summarised in the following table.

                    Transaction type Minimum holding period Condition
                    Repo-style transaction five business days daily re-margining
                    Other capital market transactions ten business days daily re-margining
                    Secured lending twenty business days daily revaluation
                    Apr 08

                  • CA-4.3.12

                    When the frequency of remargining or revaluation is longer than the minimum, the minimum haircut numbers will be scaled up depending on the actual number of business days between remargining or revaluation using the square root of time formula below:

                    where:

                    H = Haircut

                    HM = Haircut under the minimum holding period

                    TM = Minimum holding period for the type of transaction

                    NR = Actual number of business days between remargining for capital market transactions or revaluation for secured transactions.

                    When a bank calculates the volatility on a TN day holding period which is different from the specified minimum holding period TM, the HM will be calculated using the square root of time formula:

                    TN = Holding period used by the bank for deriving HN

                    HN = Haircut based on the holding period TN

                    Amended: April 2011
                    Apr 08

                  • CA-4.3.13

                    For example, for banks using the standard CBB haircuts, the 10-business day haircuts provided in paragraph CA-4.3.7 will be the basis and this haircut will be scaled up or down depending on the type of transaction and the frequency of re-margining or revaluation using the formula below:

                    where:

                    H = Haircut

                    H10 = 10-business day standard CBB haircut for instrument

                    NR = Actual number of business days between re-margining for capital

                          = Market transactions or revaluation for secured transactions.

                    TM = Minimum holding period for the type of transaction

                    Amended: April 2011
                    Apr 08

                • Conditions for Zero H

                  • CA-4.3.14

                    For repo-style transactions where the following conditions are satisfied, and the counterparty is a core market participant, banks are not required to apply the haircuts specified in the comprehensive approach and may instead apply a haircut of zero. This carve-out will not be available for banks using the modelling approaches as described in paragraphs CA-4.3.22 to CA-4.3.25:

                    (a) Both the exposure and the collateral are cash or a sovereign security or PSE security qualifying for a 0% risk weight in the standardised approach;
                    (b) Both the exposure and the collateral are denominated in the same currency;
                    (c) Either the transaction is overnight or both the exposure and the collateral are marked-to-market daily and are subject to daily re margining;
                    (d) Following a counterparty's failure to re-margin, the time that is required between the last mark-to-market before the failure to re-margin and the liquidation23 of the collateral is considered to be no more than four business days;
                    (e) The transaction is settled across a settlement system proven for that type of transaction;
                    (f) The documentation covering the agreement is standard market documentation for repo-style transactions in the securities concerned;
                    (g) The transaction is governed by documentation specifying that if the counterparty fails to satisfy an obligation to deliver cash or securities or to deliver margin or otherwise defaults, then the transaction is immediately terminable; and
                    (h) Upon any default event, regardless of whether the counterparty is insolvent or bankrupt, the bank has the unfettered, legally enforceable right to immediately seize and liquidate the collateral for its benefit.

                    23 This does not require the bank to always liquidate the collateral but rather to have the capability to do so within the given time frame.

                    Amended: April 2011
                    Apr 08

                  • CA-4.3.15

                    Core market participants include the following entities:

                    (a) Sovereigns, central banks and PSEs;
                    (b) Banks and securities firms;
                    (c) Other financial companies (including insurance companies) eligible for a 20% risk weight in the standardised approach;
                    (d) Regulated mutual funds that are subject to capital or leverage requirements;
                    (e) Regulated pension funds; and
                    (f) Recognised clearing organisations.
                    Apr 08

                  • CA-4.3.16

                    Where a supervisor has applied a specific carve-out to repo-style transactions in securities issued by its domestic government, then banks incorporated in Bahrain are allowed to adopt the same approach to the same transactions.

                    Apr 08

                • Treatment of Repo-style Transactions Covered under Master Netting Agreements

                  • CA-4.3.17

                    The effects of bilateral netting agreements covering repo-style transactions will be recognised on a counterparty-by-counterparty basis if the agreements are legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of whether the counterparty is insolvent or bankrupt. In addition, netting agreements must:

                    (a) Provide the non-defaulting party the right to terminate and close-out in a timely manner all transactions under the agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;
                    (b) Provide for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it so that a single net amount is owed by one party to the other;
                    (c) Allow for the prompt liquidation or setoff of collateral upon the event of default; and
                    (d) Be, together with the rights arising from the provisions required in (a) to (c) above, legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of the counterparty's insolvency or bankruptcy.
                    Amended: April 2011
                    Apr 08

                  • CA-4.3.18

                    Netting across positions in the banking and trading book will only be recognised when the netted transactions fulfill the following conditions:

                    (a) All transactions are marked to market daily24; and
                    (b) The collateral instruments used in the transactions are recognised as eligible financial collateral in the banking book.

                    24The holding period for the haircuts will depend as in other repo-style transactions on the frequency of margining.

                    Apr 08

                  • CA-4.3.19

                    The formula in paragraph CA-4.3.3 will be adapted to calculate the capital requirements for transactions with netting agreements.

                    Apr 08

                  • CA-4.3.20

                    For banks using the standard haircuts, the framework below will apply to take into account the impact of master netting agreements.

                    E* = Max {0, [(Σ(E) - Σ(C)) + Σ (ES × HS) +Σ (EFX × HFX)]}25

                    Where:

                    E* = The exposure value after risk mitigation

                    E = Current value of the exposure

                    C = The value of the collateral received

                    ES = Absolute value of the net position in a given security

                    HS = Haircut appropriate to ES

                    EFX = Absolute value of the net position in a currency different from the settlement currency

                    HFX = Haircut appropriate for currency mismatch


                    25The starting point for this formula is the formula in paragraph CA-4.3.3 which can also be presented as the following: E* = max {0, [(E - C) + (E x He) + (C x Hc) + (C x Hfx)]}

                    Amended: April 2011
                    Apr 08

                  • CA-4.3.21

                    The intention here is to obtain a net exposure amount after netting of the exposures and collateral and have an add-on amount reflecting possible price changes for the securities involved in the transactions and for foreign exchange risk if any. The net long or short position of each security included in the netting agreement will be multiplied by the appropriate haircut. All other rules regarding the calculation of haircuts stated in paragraphs CA-4.3.3 to CA-4.3.16 equivalently apply for banks using bilateral netting agreements for repo-style transactions.

                    Apr 08

                • Use of Models

                  • CA-4.3.22

                    As an alternative to the use of standard haircuts, CBB may allow banks to use a VaR models approach to reflect the price volatility of the exposure and collateral for repo-style transactions, taking into account correlation effects between security positions. This approach would apply to repo-style transactions covered by bilateral netting agreements on a counterparty-by-counterparty basis. At the discretion of CBB, firms are also eligible to use the VaR model approach for margin lending transactions, if the transactions are covered under a bilateral master netting agreement that meets the requirements of paragraphs CA-4.3.17 and CA-4.3.18. The VaR models approach is available to banks that have received CBB's recognition for an internal market risk model under the chapter CA-14. Banks which have not received CBB's recognition for use of models under the chapter CA-14 can separately apply for CBB's recognition to use their internal VaR models for calculation of potential price volatility for repo-style transactions. Internal models will only be accepted when a bank can prove the quality of its model to CBB through the backtesting of its output using one year of historical data. Banks must meet the model validation requirement of paragraph 43 of Appendix CA-2 to use VaR for repo-style and other SFTs. In addition, other transactions similar to repo-style transactions (like prime brokerage) and that meet the requirements for repo-style transactions, are also eligible to use the VaR models approach provided the model used meets the operational requirements set forth in Section I.F of Appendix CA-2.

                    Apr 08

                  • CA-4.3.23

                    The quantitative and qualitative criteria for recognition of internal market risk models for repo-style transactions and other similar transactions are in principle the same as under Chapter CA-14. With regard to the holding period, the minimum will be 5- business days for repo-style transactions, rather than the 10-business days under the Market Risk Amendment. For other transactions eligible for the VaR models approach, the 10- business day holding period will be retained. The minimum holding period should be adjusted upwards for market instruments where such a holding period would be inappropriate given the liquidity of the instrument concerned.

                    Apr 08

                  • CA-4.3.24

                    The calculation of the exposure E* for banks using their internal model will be the following:

                    E* = Max {0, [(ΣE - ΣC) + VaR output from internal model]}

                    In calculating capital requirements banks will use the previous business day's VaR number.

                    Amended: April 2011
                    Apr 08

                  • CA-4.3.25

                    Subject to CBB's approval, instead of using the VaR approach, banks may also calculate an expected positive exposure for repo-style and other similar SFTs, in accordance with the Internal Model Method set out in Appendix CA-2 of this Module.

                    Apr 08

              • The Simple Approach

                • Minimum Conditions

                  • CA-4.3.26

                    For collateral to be recognised in the simple approach, the collateral must be pledged for at least the life of the exposure and it must be marked to market and revalued with a minimum frequency of six months. Those portions of claims collateralised by the market value of recognised collateral receive the risk weight applicable to the collateral instrument. The risk weight on the collateralised portion will be subject to a floor of 20% except under the conditions specified in paragraphs CA-4.3.27 to CA-4.3.29. The remainder of the claim should be assigned to the risk weight appropriate to the counterparty. A capital requirement will be applied to banks on either side of the collateralised transaction: for example, both repos and reverse repos will be subject to capital requirements.

                    Apr 08

                • Exceptions to the Risk Weight Floor

                  • CA-4.3.27

                    Transactions which fulfil the criteria outlined in paragraph CA-4.3.14 and are with a core market participant, as defined in paragraph CA-4.3.15, receive a risk weight of 0%. If the counterparty to the transactions is not a core market participant the transaction should receive a risk weight of 10%.

                    Apr 08

                  • CA-4.3.28

                    OTC derivative transactions subject to daily mark-to-market, collateralised by cash and where there is no currency mismatch receive a 0% risk weight. Such transactions collateralised by sovereign or PSE securities qualifying for a 0% risk weight in the standardised approach will receive a 10% risk weight.

                    Apr 08

                  • CA-4.3.29

                    The 20% floor for the risk weight on a collateralised transaction will not be applied and a 0% risk weight can be applied where the exposure and the collateral are denominated in the same currency, and either:

                    (a) The collateral is cash on deposit as defined in paragraph CA-4.3.1(a); or
                    (b) The collateral is in the form of sovereign/PSE securities eligible for a 0% risk weight, and its market value has been discounted by 20%.
                    Amended: April 2011
                    Apr 08

              • Collateralised OTC Derivatives Transactions

                • CA-4.3.30

                  Under the Current Exposure Method, the calculation of the counterparty credit risk charge for an individual contract will be as follows:

                  Counterparty charge = [(RC + add-on) - CA] × r × 8%

                  Where:

                  RC = The replacement cost,

                  Add-on = The amount for potential future exposure calculated in CBB's 2004 Rule Book.

                  CA = The volatility adjusted collateral amount under the comprehensive approach prescribed in paragraphs CA-4.3.3 to CA-4.3.16, or zero if no eligible collateral is applied to the transaction, and

                  r = The risk weight of the counterparty.

                  Amended: April 2011
                  Apr 08

                • CA-4.3.31

                  When effective bilateral netting contracts are in place, RC will be the net replacement cost and the add-on will be ANet as calculated according to paragraph 96 (i) to 96 (vi) of Appendix 2. The haircut for currency risk (Hfx) should be applied when there is a mismatch between the collateral currency and the settlement currency. Even in the case where there are more than two currencies involved in the exposure, collateral and settlement currency, a single haircut assuming a 10-business day holding period scaled up as necessary depending on the frequency of mark-to-market will be applied.

                  Apr 08

                • CA-4.3.32

                  As an alternative to the Current Exposure Method for the calculation of the counterparty credit risk charge, banks may also use the Standardised Method and, subject to CBB's approval, the Internal Model Method as set out in Appendix CA-2 of this Module.

                  Apr 08

            • CA-4.4 CA-4.4 On-balance Sheet Netting

              • CA-4.4.1

                Where a bank:

                (a) Has a well-founded legal basis for concluding that the netting or offsetting agreement is enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt;
                (b) Is able at any time to determine those assets and liabilities with the same counterparty that are subject to the netting agreement;
                (c) Monitors and controls its roll-off risks; and
                (d) Monitors and controls the relevant exposures on a net basis,

                it may use the net exposure of loans and deposits as the basis for its capital adequacy calculation in accordance with the formula in paragraph CA-4.3.3. Assets (loans) are treated as exposure and liabilities (deposits) as collateral. The haircuts will be zero except when a currency mismatch exists. A 10-business day holding period will apply when daily mark-to- market is conducted and all the requirements contained in paragraphs CA-4.3.7, CA-4.3.13, and CA-4.6.1 to CA-4.6.4 will apply.

                Amended: April 2011
                Apr 08

            • CA-4.5 CA-4.5 Guarantees and Credit Derivatives

              • Operational Requirements

                • Operational Requirements Common to Guarantees and Credit Derivatives

                  • CA-4.5.1

                    A guarantee (counter-guarantee) or credit derivative must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible. Other than non-payment by a protection purchaser of money due in respect of the credit protection contract it must be irrevocable; there must be no clause in the contract that would allow the protection provider unilaterally to cancel the credit cover or that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure26. It must also be unconditional; there should be no clause in the protection contract outside the direct control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due.


                    26 Note that the irrevocability condition does not require that the credit protection and the exposure be maturity matched; rather that the maturity agreed ex ante may not be reduced ex post by the protection provider. Paragraph CA-4.6.2 sets forth the treatment of call options in determining remaining maturity for credit protection.

                    Apr 08

                • Additional Operational Requirements for Guarantees

                  • CA-4.5.2

                    In addition to the legal certainty requirements in paragraphs CA-4.1.8 and CA-4.1.9 above, in order for a guarantee to be recognised, the following conditions must be satisfied:

                    (a) On the qualifying default/non-payment of the counterparty, the bank may in a timely manner pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterparty for payment;
                    (b) The guarantee is an explicitly documented obligation assumed by the guarantor; and
                    (c) Except as noted in the following sentence, the guarantee covers all types of payments the underlying obligor is expected to make under the documentation governing the transaction, for example notional amount, margin payments etc. Where a guarantee covers payment of principal only, interests and other uncovered payments should be treated as an unsecured amount in accordance with paragraph CA-4.5.10.
                    Amended: April 2011
                    Apr 08

                • Additional Operational Requirements for Credit Derivatives

                  • CA-4.5.3

                    In order for a credit derivative contract to be recognised, the following conditions must be satisfied:

                    (a) The credit events specified by the contracting parties must at a minimum cover:
                    •   failure to pay the amounts due under terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with the grace period in the underlying obligation);
                    •   bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
                    •   restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account). When restructuring is not specified as a credit event, refer to paragraph CA-4.5.4.
                    (b) If the credit derivative covers obligations that do not include the underlying obligation, section (g) below governs whether the asset mismatch is permissible;
                    (c) The credit derivative shall not terminate prior to expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay, subject to the provisions of paragraph CA-4.6.2;
                    (d) Credit derivatives allowing for cash settlement are recognised for capital purposes insofar as a robust valuation process is in place in order to estimate loss reliably. There must be a clearly specified period for obtaining post-credit- event valuations of the underlying obligation. If the reference obligation specified in the credit derivative for purposes of cash settlement is different than the underlying obligation, section (g) below governs whether the asset mismatch is permissible;
                    (e) If the protection purchaser's right/ability to transfer the underlying obligation to the protection provider is required for settlement, the terms of the underlying obligation must provide that any required consent to such transfer may not be unreasonably withheld;
                    (f) The identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the protection seller. The protection buyer must have the right/ability to inform the protection provider of the occurrence of a credit event;
                    (g) A mismatch between the underlying obligation and the reference obligation under the credit derivative (i.e. the obligation used for purposes of determining cash settlement value or the deliverable obligation) is permissible if (1) the reference obligation ranks pari passu with or is junior to the underlying obligation, and (2) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place; and
                    (h) A mismatch between the underlying obligation and the obligation used for purposes of determining whether a credit event has occurred is permissible if (1) the latter obligation ranks pari passu with or is junior to the underlying obligation, and (2) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross- acceleration clauses are in place.
                    Amended: April 2011
                    Apr 08

                  • CA-4.5.4

                    When the restructuring of the underlying obligation is not covered by the credit derivative, but the other requirements in paragraph CA-4.5.3 are met, partial recognition of the credit derivative will be allowed. If the amount of the credit derivative is less than or equal to the amount of the underlying obligation, 60% of the amount of the hedge can be recognised as covered. If the amount of the credit derivative is larger than that of the underlying obligation, then the amount of eligible hedge is capped at 60% of the amount of the underlying obligation27.


                    27 The 60% recognition factor is provided as an interim treatment, which the CBB may refine in the future.

                    Apr 08

                  • CA-4.5.5

                    Only credit default swaps and total return swaps that provide credit protection equivalent to guarantees will be eligible for recognition. The following exception applies. Where a bank buys credit protection through a total return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection will not be recognised. The treatment of first-to-default and second-to-default products is covered separately in paragraphs CA-4.7.2 to CA-4.7.5.

                    Apr 08

                  • CA-4.5.6

                    Other types of credit derivatives will not be eligible for recognition at this time28.


                    28Cash funded credit linked notes issued by the bank against exposures in the banking book which fulfill the criteria for credit derivatives will be treated as cash collateralised transactions.

                    Apr 08

              • Range of Eligible Guarantors (counter-guarantors)/Protection Providers

                • CA-4.5.7

                  Credit protection given by the following entities will be recognised:

                  (a) Sovereign entities29, PSEs, banks30 and securities firms with a lower risk weight than the counterparty;
                  (b) Other entities rated A- or better. This would include credit protection provided by parent, subsidiary and affiliate companies when they have a lower risk weight than the obligor.

                  29 This includes the Bank for International Settlements, the International Monetary Fund, the European Central Bank and the European Community, as well as those MDBs referred to in footnote 24.

                  30 This includes other MDBs.

                  Amended: April 2011
                  Apr 08

              • Risk Weights

                • CA-4.5.8

                  The protected portion is assigned the risk weight of the protection provider. The uncovered portion of the exposure is assigned the risk weight of the underlying counterparty.

                  Apr 08

                • CA-4.5.9

                  Materiality thresholds on payments below which no payment is made in the event of loss are equivalent to retained first loss positions and must be deducted in full from the capital of the bank purchasing the credit protection.

                  Apr 08

                • Proportional Cover

                  • CA-4.5.10

                    Where the amount guaranteed, or against which credit protection is held, is less than the amount of the exposure, and the secured and unsecured portions are of equal seniority, i.e. the bank and the guarantor share losses on a pro-rata basis capital relief will be afforded on a proportional basis: i.e. the protected portion of the exposure will receive the treatment applicable to eligible guarantees/credit derivatives, with the remainder treated as unsecured.

                    Apr 08

                • Tranched Cover

                  • CA-4.5.11

                    Where the bank transfers a portion of the risk of an exposure in one or more tranches to a protection seller or sellers and retains some level of risk of the loan and the risk transferred and the risk retained are of different seniority, banks may obtain credit protection for either the senior tranches (e.g. second loss portion) or the junior tranche (e.g. first loss portion). In this case the rules as set out in CA-6 (Credit risk — securitisation framework) will apply.

                    Apr 08

              • Currency Mismatches

                • CA-4.5.12

                  Where the credit protection is denominated in a currency different from that in which the exposure is denominated — i.e. there is a currency mismatch — the amount of the exposure deemed to be protected will be reduced by the application of a haircut HFX, i.e.

                  GA = G × (1 - HFX)

                  Where:

                  G = Nominal amount of the credit protection

                  HFX = Haircut appropriate for currency mismatch between the credit protection and underlying obligation.

                  The appropriate haircut based on a 10-business day holding period (assuming daily marking-to-market) will be applied. If a bank uses the standard haircuts it will be 8%. The haircuts must be scaled up using the square root of time formula, depending on the frequency of revaluation of the credit protection as described in paragraph CA-4.3.12.

                  Amended: April 2011
                  Apr 08

              • Sovereign Guarantees and Counter-guarantees

                • CA-4.5.13

                  Portions of claims guaranteed by the entities detailed in paragraph CA-3.2.1 above, where the guarantee is denominated in the domestic currency (and US$ in case of a guarantee provided by the Government of Bahrain and CBB) may get a 0% risk-weighting. A claim may be covered by a guarantee that is indirectly counter-guaranteed by such entities. Such a claim may be treated as covered by a sovereign guarantee provided that:

                  (a) The sovereign counter-guarantee covers all credit risk elements of the claim;
                  (b) Both the original guarantee and the counter-guarantee meet all operational requirements for guarantees, except that the counter-guarantee need not be direct and explicit to the original claim; and
                  (c) CBB is satisfied that the cover is robust and that no historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct sovereign guarantee.
                  Amended: April 2011
                  Apr 08

            • CA-4.6 CA-4.6 Maturity Mismatches

              • CA-4.6.1

                For the purposes of calculating risk-weighted assets, a maturity mismatch occurs when the residual maturity of a hedge is less than that of the underlying exposure.

                Apr 08

              • Definition of Maturity

                • CA-4.6.2

                  The maturity of the underlying exposure and the maturity of the hedge should both be defined conservatively. The effective maturity of the underlying should be gauged as the longest possible remaining time before the counterparty is scheduled to fulfill its obligation, taking into account any applicable grace period. For the hedge, embedded options which may reduce the term of the hedge should be taken into account so that the shortest possible effective maturity is used. Where a call is at the discretion of the protection seller, the maturity will always be at the first call date. If the call is at the discretion of the protection buying bank but the terms of the arrangement at origination of the hedge contain a positive incentive for the bank to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the effective maturity. For example, where there is a step-up in cost in conjunction with a call feature or where the effective cost of cover increases over time even if credit quality remains the same or increases, the effective maturity will be the remaining time to the first call.

                  Apr 08

              • Risk Weights for Maturity Mismatches

                • CA-4.6.3

                  As outlined in paragraph CA-4.2.24, hedges with maturity mismatches are only recognised when their original maturities are greater than or equal to one year. As a result, the maturity of hedges for exposures with original maturities of less than one year must be matched to be recognised. In all cases, hedges with maturity mismatches will no longer be recognised when they have a residual maturity of three months or less.

                  Apr 08

                • CA-4.6.4

                  When there is a maturity mismatch with recognised credit risk mitigants (collateral, on-balance sheet netting, guarantees and credit derivatives) the following adjustment will be applied.

                  Pa = P × (t - 0.25) / (T - 0.25)

                  Where:

                  Pa = Value of the credit protection adjusted for maturity mismatch.

                  P = Credit protection (e.g. collateral amount, guarantee amount) adjusted for any haircuts.

                  t = Min (T, residual maturity of the credit protection arrangement) expressed in years.

                  T = Min (5, residual maturity of the exposure) expressed in years.

                  Amended: April 2011
                  Apr 08

            • CA-4.7 CA-4.7 Other Items Related to the Treatment of CRM Techniques

              • Treatment of Pools of CRM Techniques

                • CA-4.7.1

                  In the case where a bank has multiple CRM techniques covering a single exposure (e.g. a bank has both collateral and guarantee partially covering an exposure), the bank will be required to subdivide the exposure into portions covered by each type of CRM technique (e.g. portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately. When credit protection provided by a single protection provider has differing maturities, they must be subdivided into separate protection as well.

                  Apr 08

              • First-to-default Credit Derivatives

                • CA-4.7.2

                  There are cases where a bank obtains credit protection for a basket of reference names and where the first default among the reference names triggers the credit protection and the credit event also terminates the contract. In this case, the bank may recognise regulatory capital relief for the asset within the basket with the lowest risk-weighted amount, but only if the notional amount is less than or equal to the notional amount of the credit derivative.

                  Apr 08

                • CA-4.7.3

                  With regard to the bank providing credit protection through such an instrument, if the product has an external credit assessment from an eligible credit assessment institution, the risk weight in paragraph CA-6.4.8 applied to securitisation tranches will be applied. If the product is not rated by an eligible external credit assessment institution, the risk weights of the assets included in the basket will be aggregated up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted asset amount.

                  Apr 08

              • Second-to-default Credit Derivatives

                • CA-4.7.4

                  In the case where the second default among the assets within the basket triggers the credit protection, the bank obtaining credit protection through such a product will only be able to recognise any capital relief if first-default-protection has also be obtained or when one of the assets within the basket has already defaulted.

                  Apr 08

                • CA-4.7.5

                  For banks providing credit protection through such a product, the capital treatment is the same as in paragraph CA-4.7.3 above with one exception. The exception is that, in aggregating the risk weights, the asset with the lowest risk weighted amount can be excluded from the calculation.

                  Apr 08

          • CA-5 CA-5 Credit Risk — The Internal Ratings-Based Approach

            • CA-5.1 CA-5.1 Overview

              • CA-5.1.1

                This chapter of the Capital Adequacy Module describes the IRB approach to credit risk. Subject to certain minimum conditions and disclosure requirements, banks that have received CBB's approval to use the IRB approach may rely on their own internal estimates of risk components in determining the capital requirement for a given exposure. The risk components include measures of the probability of default (PD), loss given default (LGD), the exposure at default (EAD), and effective maturity (M). In most cases, banks are required to use a value given by the CBB as opposed to an internal estimate for one or more of the risk components.

                Apr 08

              • CA-5.1.2

                The IRB approach is based on measures of unexpected losses (UL) and expected losses (EL). The risk-weight functions produce capital requirements for the UL portion. Expected losses are treated separately, as outlined in paragraph CA-2.1.5 and section CA-5.7.

                Apr 08

              • CA-5.1.3

                In this chapter, the asset classes are defined first. Adoption of the IRB approach across all asset classes is also discussed early in this section, as are transitional arrangements. The risk components, each of which is defined later in this section, serve as inputs to the risk-weight functions that have been developed for separate asset classes. For example, there is a risk-weight function for corporate exposures and another one for qualifying revolving retail exposures. The treatment of each asset class begins with a presentation of the relevant risk-weight function(s) followed by the risk components and other relevant factors, such as the treatment of credit risk mitigants. The legal certainty standards for recognising CRM as set out in Section CA-4.1 apply for both the foundation and advanced IRB approaches. The minimum requirements that banks must satisfy to use the IRB approach are presented at the end of this chapter starting at section CA-5.8, paragraph CA-5.8.1.

                Apr 08

              • CA-5.1.4

                A scaling factor of 1.06 must be applied to the risk-weighted assets for credit risk assessed under the IRB approach.

                Apr 08

            • CA-5.2 CA-5.2 Mechanics of the IRB Approach

              • CA-5.2.1

                In sub-section 1, the risk components (e.g. PD and LGD) and asset classes (e.g. corporate exposures and retail exposures) of the IRB approach are defined. Sub-section 2 provides a description of the risk components to be used by banks by asset class. Sub-sections 3 and 4 discuss a bank's adoption of the IRB approach and transitional arrangements, respectively. In cases where an IRB treatment is not specified, the risk weight for those other exposures is 100%, except when a 0% risk weight applies under the standardised approach, and the resulting risk-weighted assets are assumed to represent UL only.

                Apr 08

              • 1. Categorisation of Exposures

                • CA-5.2.2

                  Under the IRB approach, banks must categorise banking-book exposures into broad classes of assets with different underlying risk characteristics, subject to the definitions set out below. The classes of assets are (a) corporate, (b) sovereign, (c) bank, (d) retail, and (e) equity. Within the corporate asset class, five sub-classes of specialised lending are separately identified. Within the retail asset class, three sub-classes are separately identified. Within the corporate and retail asset classes, a distinct treatment for purchased receivables may also apply provided certain conditions are met.

                  Apr 08

                • CA-5.2.3

                  Some banks may use different classifications to those listed above in their internal risk management and measurement systems. While it is not the intention of the CBB to require banks to change the way in which they manage their business and risks, banks are required to apply the appropriate treatment to each exposure for the purposes of deriving their minimum capital requirement. Banks must demonstrate to CBB that their methodology for assigning exposures to different classes is appropriate and consistent over time.

                  Apr 08

                • CA-5.2.4

                  For a discussion of the IRB treatment of securitisation exposures, see chapter CA-6.

                  Apr 08

                • (i) Definition of Corporate Exposures

                  • CA-5.2.5

                    In general, a corporate exposure is defined as a debt obligation of a corporation, partnership, or proprietorship. Banks are permitted to distinguish separately exposures to small- and medium-sized entities (SME), as defined in paragraph CA-5.3.4.

                    Apr 08

                  • CA-5.2.6

                    Within the corporate asset class, five sub-classes of specialised lending (SL) are identified. Such lending possesses all the following characteristics, either in legal form or economic substance:

                    (a) The exposure is typically to an entity (often a special purpose entity (SPE)) which was created specifically to finance and/or operate physical assets;
                    (b) The borrowing entity has little or no other material assets or activities, and therefore little or no independent capacity to repay the obligation, apart from the income that it receives from the asset(s) being financed;
                    (c) The terms of the obligation give the lender a substantial degree of control over the asset(s) and the income that it generates; and
                    (d) As a result of the preceding factors, the primary source of repayment of the obligation is the income generated by the asset(s), rather than the independent capacity of a broader commercial enterprise.
                    Apr 08

                  • CA-5.2.7

                    The five sub-classes of specialised lending are project finance, object finance, commodities finance, income-producing real estate, and high-volatility commercial real estate. Each of these sub-classes is defined below.

                    Apr 08

                  • Project Finance

                    • CA-5.2.8

                      Project finance (PF) is a method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, environment, and telecommunications infrastructure. Project finance may take the form of financing of the construction of a new capital installation, or refinancing of an existing installation, with or without improvements.

                      Apr 08

                    • CA-5.2.9

                      In such transactions, the lender is usually paid solely or almost exclusively out of the money generated by the contracts for the facility's output, such as the electricity sold by a power plant. The borrower is usually an SPE that is not permitted to perform any function other than developing, owning, and operating the installation. The consequence is that repayment depends primarily on the project's cash flow and on the collateral value of the project's assets. In contrast, if repayment of the exposure depends primarily on a well established, diversified, credit-worthy, contractually obligated end user for repayment, it is considered a secured exposure to that end-user.

                      Apr 08

                  • Object Finance

                    • CA-5.2.10

                      Object finance (OF) refers to a method of funding the acquisition of physical assets (e.g. ships, aircraft, satellites, railcars, and fleets) where the repayment of the exposure is dependent on the cash flows generated by the specific assets that have been financed and pledged or assigned to the lender. A primary source of these cash flows might be rental or lease contracts with one or several third parties. In contrast, if the exposure is to a borrower whose financial condition and debt-servicing capacity enables it to repay the debt without undue reliance on the specifically pledged assets, the exposure should be treated as a collateralised corporate exposure.

                      Apr 08

                  • Commodities Finance

                    • CA-5.2.11

                      Commodities finance (CF) refers to structured short-term lending to finance reserves, inventories, or receivables of exchange-traded commodities (e.g. crude oil, metals, or crops), where the exposure will be repaid from the proceeds of the sale of the commodity and the borrower has no independent capacity to repay the exposure. This is the case when the borrower has no other activities and no other material assets on its balance sheet. The structured nature of the financing is designed to compensate for the weak credit quality of the borrower. The exposure's rating reflects its self-liquidating nature and the lender's skill in structuring the transaction rather than the credit quality of the borrower.

                      Apr 08

                    • CA-5.2.12

                      The CBB believes that such lending can be distinguished from exposures financing the reserves, inventories, or receivables of other more diversified corporate borrowers. Banks are able to rate the credit quality of the latter type of borrowers based on their broader ongoing operations. In such cases, the value of the commodity serves as a risk mitigant rather than as the primary source of repayment.

                      Apr 08

                  • Income-producing Real Estate

                    • CA-5.2.13

                      Income-producing real estate (IPRE) refers to a method of providing funding to real estate (such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, and hotels) where the prospects for repayment and recovery on the exposure depend primarily on the cash flows generated by the asset. The primary source of these cash flows would generally be lease or rental payments or the sale of the asset. The borrower may be, but is not required to be, an SPE, an operating company focused on real estate construction or holdings, or an operating company with sources of revenue other than real estate. The distinguishing characteristic of IPRE versus other corporate exposures that are collateralised by real estate is the strong positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property.

                      Apr 08

                  • High-volatility Commercial Real Estate

                    • CA-5.2.14

                      High-volatility commercial real estate (HVCRE) lending is the financing of commercial real estate that exhibits higher loss rate volatility (i.e. higher asset correlation) compared to other types of SL. HVCRE includes:

                      (a) Commercial real estate exposures secured by properties of types that are categorised by the CBB periodically as sharing higher volatilities in portfolio default rates;
                      (b) Loans financing any of the land acquisition, development and construction (ADC) phases for properties of those types in such jurisdictions; and
                      (c) Loans financing ADC of any other properties where the source of repayment at origination of the exposure is either the future uncertain sale of the property or cash flows whose source of repayment is substantially uncertain (e.g. the property has not yet been leased to the occupancy rate prevailing in that geographic market for that type of commercial real estate), unless the borrower has substantial equity at risk.
                      Apr 08

                    • CA-5.2.15

                      Where other supervisors categorise certain types of commercial real estate exposures as HVCRE in their jurisdictions, Bahraini banks are also required to classify such exposures in those jurisdictions as HVCRE.

                      Apr 08

                • (ii) Definition of Sovereign Exposures

                  • CA-5.2.16

                    This asset class covers all exposures to counterparties treated as sovereigns under the standardised approach. This includes sovereigns (and their central banks), certain PSEs identified as sovereigns in the standardised approach, MDBs that are given a 0% risk weight under the standardised approach, and the entities referred to in paragraph CA-3.2.3.

                    Apr 08

                • (iii) Definition of Bank Exposures

                  • CA-5.2.17

                    This asset class covers exposures to banks and those investment firms outlined in paragraph CA-3.2.13. Bank exposures also include claims on domestic PSEs that are treated like claims on banks under the standardised approach, and MDBs that are not assigned a 0% risk weight under the standardised approach.

                    Apr 08

                • (iv) Definition of Retail Exposures

                  • CA-5.2.18

                    An exposure is categorised as a retail exposure if it meets all of the following criteria:

                    Nature of Borrower or Low Value of Individual Exposures

                    (a) Exposures to individuals — such as revolving credits and lines of credit (e.g. credit cards, overdrafts, and retail facilities secured by financial instruments) as well as personal term loans and leases (e.g. installment loans, auto loans and leases, student and educational loans, personal finance, and other exposures with similar characteristics). There will be an exposure threshold of BD250,000 to distinguish between retail and corporate exposures;
                    (b) Residential mortgage loans (including first and subsequent liens, term loans and revolving home equity lines of credit) are eligible for retail treatment regardless of exposure size so long as the credit is extended to an individual that is an owner- occupier of the property (with buildings containing only a few rental units — otherwise they are treated as corporate). Loans secured by a single or small number of condominium or co-operative residential housing units in a single building or complex also fall within the scope of the residential mortgage category. CBB may set limits on the maximum number of housing units per exposure, on a case by case basis;
                    (c) Loans extended to small businesses and managed as retail exposures are eligible for retail treatment provided the total exposure of the banking group to a small business borrower (on a consolidated basis where applicable) is less than BD 250,000 . Small business loans extended through or guaranteed by an individual are subject to the same exposure threshold; and
                    (d) CBB will provide flexibility in the practical application of such thresholds such that banks are not forced to develop extensive new information systems simply for the purpose of ensuring perfect compliance. CBB will however, check on regular basis to ensure that such flexibility (and the implied acceptance of exposure amounts in excess of the thresholds that are not treated as violations) is not being abused.
                    Amended: April 2011
                    Apr 08

                  • Large Number of Exposures

                    • CA-5.2.19

                      The exposure must be one of a large pool of exposures, which are managed by the bank on a pooled basis. CBB may, on a case by case basis, set a minimum number of exposures within a pool for exposures in that pool to be treated as retail:

                      (a) Small business exposures below BD 250,000 may be treated as retail exposures if the bank treats such exposures in its internal risk management systems consistently over time and in the same manner as other retail exposures. This requires that such an exposure be originated in a similar manner to other retail exposures. Furthermore, it must not be managed individually in a way comparable to corporate exposures, but rather as part of a portfolio segment or pool of exposures with similar risk characteristics for purposes of risk assessment and quantification. However, this does not preclude retail exposures from being treated individually at some stages of the risk management process. The fact that an exposure is rated individually does not by itself deny the eligibility as a retail exposure.
                      Amended: April 2011
                      Apr 08

                    • CA-5.2.20

                      Within the retail asset class category, banks are required to identify separately three sub-classes of exposures: (a) exposures secured by residential properties as defined above, (b) qualifying revolving retail exposures, as defined in the following paragraph, and (c) all other retail exposures.

                      Apr 08

                • (v) Definition of Qualifying Revolving Retail Exposures

                  • CA-5.2.21

                    All of the following criteria must be satisfied for a sub-portfolio to be treated as a qualifying revolving retail exposure (QRRE). These criteria must be applied at a sub-portfolio level consistent with the bank's segmentation of its retail activities generally. Segmentation at the national or country level (or below) should be the general rule:

                    (a) The exposures are revolving, unsecured, and uncommitted (both contractually and in practice). In this context, revolving exposures are defined as those where customers' outstanding balances are permitted to fluctuate based on their decisions to borrow and repay, up to a limit established by the bank;
                    (b) The exposures are to individuals;
                    (c) The maximum exposure to a single individual in the sub-portfolio is BD 25,000 or less;
                    (d) Because the asset correlation assumptions for the QRRE risk-weight function are markedly below those for the other retail risk-weight function at low PD values, banks must demonstrate that the use of the QRRE risk-weight function is constrained to portfolios that have exhibited low volatility of loss rates, relative to their average level of loss rates, especially within the low PD bands. CBB will review the relative volatility of loss rates across the QRRE subportfolios, as well as the aggregate QRRE portfolio;
                    (e) Data on loss rates for the sub-portfolio must be retained in order to allow analysis of the volatility of loss rates; and
                    (f) CBB must concur that treatment as a qualifying revolving retail exposure is consistent with the underlying risk characteristics of the sub-portfolio.
                    Amended: April 2011
                    Apr 08

                • (vi) Definition of Equity Exposures

                  • CA-5.2.22

                    In general, equity exposures are defined on the basis of the economic substance of the instrument. They include both direct and indirect ownership interests,31 whether voting or non-voting, in the assets and income of a commercial enterprise or of a financial institution that is not consolidated or deducted pursuant to Prudential Consolidation and Deduction Requirements Module. An instrument is considered to be an equity exposure if it meets all of the following requirements:

                    (a) It is irredeemable in the sense that the return of invested funds can be achieved only by the sale of the investment or sale of the rights to the investment or by the liquidation of the issuer;
                    (b) It does not embody an obligation on the part of the issuer; and
                    (c) It conveys a residual claim on the assets or income of the issuer.

                    31 Indirect equity interests include holdings of derivative instruments tied to equity interests, and holdings in corporations, partnerships, limited liability companies or other types of enterprises that issue ownership interests and are engaged principally in the business of investing in equity instruments.

                    Apr 08

                  • CA-5.2.23

                    Additionally any of the following instruments must be categorised as an equity exposure:

                    (a) An instrument with the same structure as those permitted as Tier 1 capital for banking organisations;
                    (b) An instrument that embodies an obligation on the part of the issuer and meets any of the following conditions:
                    •   The issuer may defer indefinitely the settlement of the obligation;
                    •   The obligation requires (or permits at the issuer's discretion) settlement by issuance of a fixed number of the issuer's equity shares;
                    •   The obligation requires (or permits at the issuer's discretion) settlement by issuance of a variable number of the issuer's equity shares and (ceteris paribus) any change in the value of the obligation is attributable to, comparable to, and in the same direction as, the change in the value of a fixed number of the issuer's equity shares;32 or,
                    •   The holder has the option to require that the obligation be settled in equity shares, unless either (i) in the case of a traded instrument, the CBB is content that the bank has demonstrated that the instrument trades more like the debt of the issuer than like its equity, or (ii) in the case of non- traded instruments, the CBB is content that the bank has demonstrated that the instrument should be treated as a debt position. In cases (i) and (ii), the bank may decompose the risks for regulatory purposes, with the consent of the CBB.

                    32For certain obligations that require or permit settlement by issuance of a variable number of the issuer's equity shares, the change in the monetary value of the obligation is equal to the change in the fair value of a fixed number of equity shares multiplied by a specified factor. Those obligations meet the conditions of this bullet if both the factor and the referenced number of shares are fixed. For example, an issuer may be required to settle an obligation by issuing shares with a value equal to three times the appreciation in the fair value of 1,000 equity shares. That obligation is considered to be the same as an obligation that requires settlement by issuance of shares equal to the appreciation in the fair value of 3,000 equity shares.

                    Amended: April 2011
                    Apr 08

                  • CA-5.2.24

                    Debt obligations and other securities, partnerships, derivatives or other vehicles structured with the intent of conveying the economic substance of equity ownership are considered an equity holding.33 This includes liabilities from which the return is linked to that of equities.34 Conversely, equity investments that are structured with the intent of conveying the economic substance of debt holdings or securitisation exposures would not be considered an equity holding.


                    33Equities that are recorded as a loan but arise from a debt/equity swap made as part of the orderly realisation or restructuring of the debt are included in the definition of equity holdings. However, these instruments may not attract a lower capital charge than would apply if the holdings remained in the debt portfolio.

                    34Such liabilities are not required to be included where they are directly hedged by an equity holding, such that the net position does not involve material risk.

                    Apr 08

                  • CA-5.2.25

                    The CBB may, on a case by case basis, re-characterise debt holdings as equities for regulatory purposes or otherwise ensure the proper treatment of holdings.

                    Apr 08

                • (vii) Definition of Eligible Purchased Receivables

                  • CA-5.2.26

                    Eligible purchased receivables are divided into retail and corporate receivables as defined below.

                    Apr 08

                  • Retail Receivables

                    • CA-5.2.27

                      Purchased retail receivables, provided the purchasing bank complies with the IRB rules for retail exposures, are eligible for the top-down approach as permitted within the existing standards for retail exposures. The bank must also apply the minimum operational requirements as set forth in sections CA-5.6 and CA-5.8.

                      Apr 08

                  • Corporate Receivables

                    • CA-5.2.28

                      For purchased corporate receivables, banks are required to assess the default risk of individual obligors as specified in section CA-5.3 (starting with paragraph CA-5.3.2) consistent with the treatment of other corporate exposures.

                      Apr 08

              • 2. Foundation and Advanced Approaches

                • CA-5.2.29

                  For each of the asset classes covered under the IRB framework, there are three key elements:

                  (a) Risk components — estimates of risk parameters provided by banks some of which are CBB's estimates;
                  (b) Risk-weight functions — the means by which risk components are transformed into risk-weighted assets and therefore capital requirements; and
                  (c) Minimum requirements — the minimum standards that must be met in order for a bank to use the IRB approach for a given asset class.
                  Amended: April 2011
                  Apr 08

                • CA-5.2.30

                  The CBB has decided to allow only the foundation approach for corporate, sovereign and bank asset classes. However, banks are required to adopt the advanced approach for retail asset class. Under the foundation approach, as a general rule, banks provide their own estimates of PD and rely on CBB's estimates for other risk components. Under the advanced approach, banks provide more of their own estimates of PD, LGD and EAD, and their own calculation of M, subject to meeting minimum standards. For both the foundation and advanced approaches, banks must always use the risk-weight functions provided in this chapter for the purpose of deriving capital requirements. The full suite of approaches is described below.

                  Apr 08

                • (i) Corporate, Sovereign, and Bank Exposures

                  • CA-5.2.31

                    For corporate, sovereign and bank exposures only the foundation approach is allowed under which banks must provide their own estimates of PD associated with each of their borrower grades, but must use CBB's estimates for the other relevant risk components. The other risk components are LGD, EAD and M.35


                    35 As noted in section CA-5.3.45, CBB may require/allow banks using the foundation approach to calculate M using the definition provided in section CA-5.3.46 to CA-5.3.50.

                    Apr 08

                  • CA-5.2.32

                    There is an exception to this general rule for the five sub-classes of assets identified as SL.

                    Apr 08

                  • The SL Categories: PF, OF, CF, IPRE, and HVCRE

                    • CA-5.2.33

                      Banks that do not meet the requirements for the estimation of PD under the corporate foundation approach for their SL assets are required to map their internal risk grades to five supervisory categories, each of which is associated with a specific risk weight. This version is termed the 'supervisory slotting criteria approach'.

                      Apr 08

                    • CA-5.2.34

                      Banks that meet the requirements for the estimation of PD are able to use the foundation approach to corporate exposures to derive risk weights for all classes of SL exposures except HVCRE. Subject to CBB's discretion, on a case by case basis, banks meeting the requirements for HVCRE exposure are able to use a foundation approach that is similar in all respects to the corporate approach, with the exception of a separate risk-weight function as described in paragraph CA-5.3.11.

                      Apr 08

                • (ii) Retail Exposures

                  • CA-5.2.35

                    For retail exposures, banks must provide their own estimates of PD, LGD and EAD. There is no distinction between a foundation and advanced approach for this asset class.

                    Apr 08

                • (iii) Equity Exposures

                  • CA-5.2.36

                    There are two broad approaches to calculate risk-weighted assets for equity exposures not held in the trading book: a market-based approach and a PD/LGD approach. These are set out in full in paragraphs CA-5.5.1 to CA-5.5.23.

                    Apr 08

                • (iv) Eligible Purchased Receivables

                  • CA-5.2.37

                    The treatment potentially straddles two asset classes. For eligible corporate receivables, only the foundation approach is available subject to certain operational requirements being met. For eligible retail receivables, as with the retail asset class, there is no distinction between a foundation and advanced approach.

                    Apr 08

              • 3. Adoption of the IRB Approach Across Asset Classes

                • CA-5.2.38

                  Once a bank adopts an IRB approach for part of its holdings, it is expected to extend it across the entire banking group. The CBB recognises however, that, for many banks, it may not be practicable for various reasons to implement the IRB approach across all material asset classes and business units at the same time. Furthermore, once on IRB, data limitations may mean that banks can meet the standards for the use of own estimates of LGD and EAD for some but not all of their business units at the same time. CBB will expect banks to define their business units in line with asset classes given in this chapter, however banks can apply to CBB for exemption from this rule.

                  Apr 08

                • CA-5.2.39

                  As such, CBB allows banks to adopt a phased rollout of the IRB approach across the banking group. The phased rollout includes (i) adoption of IRB across asset classes within the same business unit (or in the case of retail exposures across individual sub-classes); and (ii) adoption of IRB across business units in the same banking group. However, when a bank adopts an IRB approach for an asset class within a particular business unit (or in the case of retail exposures for an individual sub-class), it must apply the IRB approach to all exposures within that asset class (or sub-class) in that unit.

                  Apr 08

                • CA-5.2.40

                  A bank must produce an implementation plan, specifying to what extent and when it intends to roll out IRB approaches across significant asset classes (or sub-classes in the case of retail) and business units over time. The plan should be exacting, yet realistic, and must be agreed with the CBB. It should be driven by the practicality and feasibility of moving to the more advanced approaches, and not motivated by a desire to adopt an approach that minimises its capital charge. During the roll-out period, CBB will ensure that no capital relief is granted for intra-group transactions which are designed to reduce a banking group's aggregate capital charge by transferring credit risk among entities on the standardised approach, foundation and advanced IRB approaches. This includes, but is not limited to, asset sales or cross guarantees.

                  Apr 08

                • CA-5.2.41

                  Some exposures in non-significant business units as well as asset classes (or sub-classes in the case of retail) that are immaterial in terms of size and perceived risk profile may be exempt from the requirements in the previous two paragraphs, subject to CBB's approval. Capital requirements for such operations will be determined according to the standardised approach, with the CBB determining whether a bank should hold more capital for such positions.

                  Apr 08

                • CA-5.2.42

                  Notwithstanding the above, once a bank has adopted the IRB approach for all or part of any of the corporate, bank, sovereign, or retail asset classes, it will be required to adopt the IRB approach for its equity exposures at the same time, subject to materiality. Further, once a bank has adopted the general IRB approach for corporate exposures, it will be required to adopt the IRB approach for the SL sub-classes within the corporate exposure class.

                  Apr 08

                • CA-5.2.43

                  Banks adopting an IRB approach are expected to continue to employ an IRB approach. A voluntary return to the standardised approach is permitted only in extraordinary circumstances, such as divestiture of a large fraction of the bank's credit- related business, and approval must be obtained from the CBB.

                  Apr 08

                • CA-5.2.44

                  Given the data limitations associated with SL exposures, a bank may remain on the supervisory slotting criteria approach for one or more of the PF, OF, CF, IPRE or HVCRE sub-classes, and move to the foundation approach for other sub-classes within the corporate asset class.

                  Apr 08

              • 4. Transition Arrangements

                • (i) Parallel Calculation

                  • CA-5.2.45

                    Banks adopting the foundation IRB (advanced IRB for retail class) approach are required to calculate their capital requirement using these approaches, as well as the capital adequacy regulations issued by CBB dated July 2004 for the time period specified in section CA-A.4. The transition period for adoption of IRB will begin from the publication of this Module. Parallel calculation for banks adopting the foundation IRB approach to credit risk will start in the year beginning year-end 2007.

                    Apr 08

                • (ii) Corporate, Sovereign, Bank, and Retail Exposures

                  • CA-5.2.46

                    The transition period starts on the date of implementation of this Module and will last for 3 years from that date. During the transition period, the following minimum requirements can be relaxed:

                    (a) For corporate, sovereign, and bank exposures under the foundation approach, paragraph CA-5.8.74, the requirement that, regardless of the data source, banks must use at least five years of data to estimate the PD; and
                    (b) For retail exposures, paragraph CA-5.8.77, the requirement that regardless of the data source banks must use at least five years of data to estimate loss characteristics (EAD, and either expected loss (EL) or PD and LGD).
                    (c) For corporate, sovereign, bank, and retail exposures, paragraph CA-5.8.56, the requirement that a bank must demonstrate it has been using a rating system that was broadly in line with the minimum requirements articulated in this document for at least three years prior to qualification.
                    (d) The applicable aforementioned transitional arrangements also apply to the PD/LGD approach to equity. There are no transitional arrangements for the market-based approach to equity.
                    Apr 08

                  • CA-5.2.47

                    Under these transitional arrangements for IRB, banks must have a minimum of two years of data at the implementation of this Module. This requirement will increase by one year for each of three years of transition.

                    Apr 08

                  • CA-5.2.48

                    Owing to the potential for very long-run cycles in house prices which short-term data may not adequately capture, during this transition period, LGDs for retail exposures secured by residential properties cannot be set below 10% for any sub-segment of exposures to which the formula in paragraph CA-5.4.3 is applied.36 During the transition period the CBB will review the potential need for continuation of this floor.


                    36 The 10% LGD floor shall not apply, however, to sub-segments that are subject to/benefit from sovereign guarantees. Further, the existence of the floor does not imply any waiver of the requirements of LGD estimation as laid out in the minimum requirements starting with section CA-5.8.79.

                    Apr 08

                • (iii) Equity Exposures

                  • CA-5.2.49

                    For a maximum of ten years, CBB may, on a case by case basis, exempt from the IRB treatment particular equity investments held at the time of the publication of this Module. This exemption period will begin from the publication of this Module. The exempted position is measured as the number of shares as of that date and any additional arising directly as a result of owning those holdings, as long as they do not increase the proportional share of ownership in a portfolio company.

                    Apr 08

                  • CA-5.2.50

                    If an acquisition increases the proportional share of ownership in a specific holding (e.g. due to a change of ownership initiated by the investing company subsequent to the publication of this Module) the exceeding part of the holding is not subject to the exemption. Nor will the exemption apply to holdings that were originally subject to the exemption, but have been sold and then bought back.

                    Apr 08

                  • CA-5.2.51

                    Equity holdings covered by these transitional provisions will be subject to the capital requirements of the standardised approach.

                    Apr 08

            • CA-5.3 CA-5.3 Rules for Corporate, Sovereign, and Bank Exposures

              • CA-5.3.1

                This section presents the method of calculating the unexpected loss (UL) capital requirements for corporate, sovereign and bank exposures. As discussed in proceeding paragraphs, one risk-weight function is provided for determining the capital requirement for all three asset classes with one exception. Supervisory risk weights are provided for each of the specialised lending sub-classes of corporates, and a separate risk-weight function is also provided for HVCRE. Then the risk components are discussed. The method of calculating expected losses, and for determining the difference between that measure and provisions is described in section CA-5.7.

                Apr 08

              • 1. Risk-weighted Assets for Corporate, Sovereign, and Bank Exposures

                • (i) Formula for Derivation of Risk-weighted Assets

                  • CA-5.3.2

                    The derivation of risk-weighted assets is dependent on estimates of the PD, LGD, EAD and, in some cases, effective maturity (M), for a given exposure. Paragraphs CA-5.3.45 to CA-5.3.50 discuss the circumstances in which the maturity adjustment applies.

                    Apr 08

                  • CA-5.3.3

                    Throughout this section, PD and LGD are measured as decimals, and EAD is measured as currency (e.g. euros), except where explicitly noted otherwise. For exposures not in default, the formula for calculating risk-weighted assets is:37, 38

                    Correlation (R) = 0.12 × (1 - EXP(-50 × PD)) / (1 - EXP(-50)) + 0.24 × [1 - (1 - EXP(-50 × PD)) / (1 - EXP(-50))]

                    Maturity adjustment (b) = (0.11852 - 0.05478 × ln(PD))^2

                    Capital requirement39 (K) = [LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD] x (1 - 1.5 x b)^-1 × (1 + (M - 2.5) × b)

                    Risk-weighted assets (RWA) = K × 12.5 × EAD

                    The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.

                    Illustrative risk weights are shown in Appendix CA-6.


                    37Ln denotes the natural logarithm.

                    38N(x) denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x). G(z) denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value of x such that N(x) = z). The normal cumulative distribution function and the inverse of the normal cumulative distribution function are, for example, available in Excel as the functions NORMSDIST and NORMSINV.

                    39If this calculation results in a negative capital charge for any individual sovereign exposure, banks must apply a zero capital charge for that exposure.

                    Apr 08

                • (ii) Firm-size Adjustment for Small- and Medium-sized Entities (SME)

                  • CA-5.3.4

                    Under the IRB approach for corporate credits, banks will be permitted to separately distinguish exposures to SME borrowers (defined as corporate exposures, being an unlisted or unincorporated enterprise where the reported annual sales for the consolidated group of which the firm is a part is less than BD 2 million) from those to large firms. A firm-size adjustment (i.e. 0.04 x (1 - (S - 0.2)/1.8)) is made to the corporate risk weight formula for exposures to SME borrowers. S is expressed as total annual sales in millions of BD with values of S falling in the range of equal to or less than BD 2 million or greater than or equal to BD 0.2 million. Reported sales of less than 0.2 million BD will be treated as if they were equivalent to 0.2 million BD for the purposes of the firm-size adjustment for SME borrowers.

                    Correlation (R) = 0.12 × (1 - EXP(-50 × PD)) / (1 - EXP(-50)) + 0.24 × [1 - (1 - EXP(-50 × PD)) / (1 - EXP(-50))] - 0.04 × (1 - (S-0.2) / 1.8)

                    Apr 08

                  • CA-5.3.5

                    Banks are allowed, as a failsafe, to substitute total assets of the consolidated group for total sales in calculating the SME threshold and the firm-size adjustment. However, total assets should be used only when total sales are not a meaningful indicator of firm size. The criteria for definition of SME will be assessed by CBB on a regular basis. The external auditors are required to assess the reasonableness of identification criteria.

                    Apr 08

                • (iii) Risk Weights for Specialised Lending

                  • Risk Weights for PF, OF, CF, and IPRE

                    • CA-5.3.6

                      Banks that do not meet the requirements for the estimation of PD under the corporate IRB approach will be required to map their internal grades to five supervisory categories, each of which is associated with a specific risk weight. The slotting criteria on which this mapping must be based are provided in Appendix CA-7. The risk weights for unexpected losses associated with each supervisory category are:

                      Supervisory Categories and UL Risk Weights for other SL Exposures

                      Strong Good Satisfactory Weak Default
                      70% 90% 115% 250% 0%
                      Amended: April 2011
                      Apr 08

                    • CA-5.3.7

                      Although banks are expected to map their internal ratings to the supervisory categories for specialised lending using the slotting criteria provided in Appendix CA-7, each supervisory category broadly corresponds to a range of external credit assessments as outlined below.

                      Strong Good Satisfactory Weak Default
                      BBB- or better BB+ or BB BB- or B+ B to C- Not applicable
                      Apr 08

                    • CA-5.3.8

                      Banks that meet the requirements for the estimation of PD will be able to use the general foundation approach for the corporate asset class to derive risk weights for SL sub- classes.

                      Apr 08

                  • Risk Weights for HVCRE

                    • CA-5.3.9

                      Banks that do not meet the requirements for estimation of PD, must map their internal grades to five supervisory categories, each of which is associated with a specific risk weight. The slotting criteria on which this mapping must be based are the same as those for IPRE, as provided in Appendix CA-7. The risk weights associated with each category are:

                      Supervisory Categories and UL Risk Weights for High-volatility Commercial Real Estate

                      Strong Good Satisfactory Weak Default
                      95% 120% 140% 250% 0%
                      Amended: April 2011
                      Apr 08

                    • CA-5.3.10

                      As indicated in paragraph CA-5.3.7, each supervisory category broadly corresponds to a range of external credit assessments.

                      Apr 08

                    • CA-5.3.11

                      Banks that meet the requirements for the estimation of PD will use the same formula for the derivation of risk weights that is used for other SL exposures, except that they will apply the following asset correlation formula:

                      Correlation (R) = 0.12 x (1 - EXP(-50 × PD)) / (1 - EXP(-50)) + 0.30 x [1 - (1 - EXP(-50 × PD)) / (1 - EXP(-50))]

                      Apr 08

                • (iv) Calculation of Risk-weighted Assets for Exposures Subject to the Double Default Framework

                  • CA-5.3.12

                    For hedged exposures to be treated within the scope of the double default framework, capital requirements may be calculated according to paragraphs CA-5.3.13 to CA-5.3.16.

                    Apr 08

                  • CA-5.3.13

                    The capital requirement for a hedged exposure subject to the double default treatment (KDD) is calculated by multiplying K0 as defined below by a multiplier depending on the PD of the protection provider (PDg):

                    KDD = K0 . ( 0.15 + 160 . PDg)

                    Apr 08

                  • CA-5.3.14

                    K0 is calculated in the same way as a capital requirement for an unhedged corporate exposure (as defined in paragraphs CA-5.3.3 and CA-5.3.4), but using different parameters for LGD and the maturity adjustment.

                    Apr 08

                  • CA-5.3.15

                    PDo and PDg are the probabilities of default of the obligor and guarantor, respectively, both subject to the PD floor set out in paragraph CA-5.3.17. The correlation Pos is calculated according to the formula for correlation (R) in paragraph CA-5.3.3 (or, if applicable, paragraph CA-5.3.4), with PD being equal to PDo, and LGDg is the LGD of a comparable direct exposure to the guarantor (i.e. consistent with paragraph CA-5.3.29, the LGD associated with an unhedged facility to the guarantor or the unhedged facility to the obligor, depending upon whether in the event both the guarantor and the obligor default during the life of the hedged transaction available evidence and the structure of the guarantee indicate that the amount recovered would depend on the financial condition of the guarantor or obligor, respectively; in estimating either of these LGDs, a bank may recognise collateral posted exclusively against the exposure or credit protection, respectively, in a manner consistent with paragraphs CA-5.3.31 or CA-5.3.8 and CA-5.8.79 to CA-5.8.83, as applicable). There may be no consideration of double recovery in the LGD estimate. The maturity adjustment coefficient b is calculated according to the formula for maturity adjustment (b) in paragraph CA-5.3.3, with PD being the minimum of PDo and PDg M is the effective maturity of the credit protection, which may under no circumstances be below the one-year floor if the double default framework is to be applied.

                    Apr 08

                  • CA-5.3.16

                    The risk-weighted asset amount is calculated in the same way as for unhedged exposures, i.e

                    RWADD = KDD × 12.5 × EADg

                    Apr 08

              • 2. Risk Components

                • (i) Probability of Default (PD)

                  • CA-5.3.17

                    For corporate and bank exposures, the PD is the greater of the one-year PD associated with the internal borrower grade to which that exposure is assigned, or 0.03%. For sovereign exposures, the PD is the one-year PD associated with the internal borrower grade to which that exposure is assigned. The PD of borrowers assigned to a default grade(s), consistent with the reference definition of default, is 100%. The minimum requirements for the derivation of the PD estimates associated with each internal borrower grade are outlined in paragraphs CA-5.8.72 to CA-5.8.74.

                    Apr 08

                • (ii) Loss Given Default (LGD)

                  • — Treatment of Unsecured Claims and Non-recognised Collateral

                    • CA-5.3.18

                      Under the foundation approach, senior claims on corporates, sovereigns and banks not secured by recognised collateral will be assigned a 45% LGD.

                      Apr 08

                    • CA-5.3.19

                      All subordinated claims on corporates, sovereigns and banks must be assigned a 75% LGD. A subordinated loan is a facility that is expressly subordinated to another facility. This also includes economic subordination, such as cases where the facility is unsecured and the bulk of the borrower's assets are used to secure other exposures. CBB will review subordinated claims on a case by case basis. In case the subordinated claim (i) is on a banking, securities or other financial entity and (ii) exceeds (when combined with other investments in regulatory capital instruments of the investee) 20% of the concerned investee's eligible regulatory capital, such holding must be treated as described in Prudential Consolidation and Deduction Requirements Module.

                      Apr 08

                  • — Collateral under the Foundation Approach

                    • CA-5.3.20

                      In addition to the eligible financial collateral recognised in the standardised approach, under the foundation IRB approach some other forms of collateral, known as eligible IRB collateral, are also recognised. These include receivables, specified commercial and residential real estate (CRE/RRE), and other collateral, where they meet the minimum requirements set out in paragraphs CA-5.8.119 to CA-5.8.134.40 For eligible financial collateral, the requirements are identical to the operational standards as set out in chapter CA-4.


                      40 The LGD applied to the collateralised portion of such exposures, subject to the limitations set out in paragraphs CA-4.2.1 to CA-4.3.25 of the standardised approach, will be set at 35%. The LGD applied to the remaining portion of this exposure will be set at 45%.

                      Apr 08

                  • — Methodology for Recognition of Eligible Financial Collateral under the Foundation Approach

                    • CA-5.3.21

                      The methodology for the recognition of eligible financial collateral closely follows that outlined in the comprehensive approach to collateral in the standardised approach in paragraphs CA-4.3.3 to CA-4.3.25. The simple approach to collateral presented in the standardised approach will not be available to banks applying the IRB approach.

                      Apr 08

                    • CA-5.3.22

                      Following the comprehensive approach, the effective loss given default (LGD*) applicable to a collateralised transaction can be expressed as follows, where:

                      (a) LGD is that of the senior unsecured exposure before recognition of collateral (45%);
                      (b) E is the current value of the exposure (i.e. cash lent or securities lent or posted);
                      (c) E* is the exposure value after risk mitigation as determined in paragraphs CA-4.3.3 to CA-4.3.6 of the standardised approach. This concept is only used to calculate LGD*. Banks must continue to calculate EAD without taking into account the presence of any collateral, unless otherwise specified.

                      LGD* = LGD × (E* / E)

                      Apr 08

                    • CA-5.3.23

                      Banks that qualify for the foundation IRB approach may calculate E* using any of the ways specified under the comprehensive approach for collateralised transactions under the standardised approach.

                      Apr 08

                    • CA-5.3.24

                      Where repo-style transactions are subject to a master netting agreement, a bank may choose not to recognise the netting effects in calculating capital. Banks that want to recognise the effect of master netting agreements on such transactions for capital purposes must satisfy the criteria provided in paragraph CA-4.3.17 and CA-4.3.18 of the standardised approach. The bank must calculate E* in accordance with paragraphs CA-4.3.20 and 4.3.21 or CA-4.3.22 to 4.3.25 and equate this to EAD. The impact of collateral on these transactions may not be reflected through an adjustment to LGD.

                      Apr 08

                  • — Carve Out from the Comprehensive Approach

                    • CA-5.3.25

                      As in the standardised approach, for transactions where the conditions in paragraph CA-4.3.14 are met, and in addition, the counterparty is a core market participant as specified in paragraph CA-4.3.15, banks can apply a zero H.

                      Apr 08

                  • — Methodology for Recognition of Eligible IRB Collateral

                    • CA-5.3.26

                      The methodology for determining the effective LGD under the foundation approach for cases where banks have taken eligible IRB collateral to secure a corporate exposure is as follows:

                      (a) Exposures where the minimum eligibility requirements are met, but the ratio of the current value of the collateral received (C) to the current value of the exposure (E) is below a threshold level of C* (i.e. the required minimum collateralisation level for the exposure) would receive the appropriate LGD for unsecured exposures or those secured by collateral which is not eligible financial collateral or eligible IRB collateral;
                      (b) Exposures where the ratio of C to E exceeds a second, higher threshold level of C** (i.e. the required level of over-collateralisation for full LGD recognition) would be assigned an LGD according to the following table.

                      The following table displays the applicable LGD and required over-collateralisation levels for the secured parts of senior exposures:

                      Minimum LGD for Secured Portion of Senior Exposures

                        Minimum LGD Required minimum collateralisation level of the exposure (C*) Required level of over-collateralisation for full LGD recognition (C**)
                      Eligible Financial collateral 0% 0% n.a.
                      Receivables 35% 0% 125%
                      CRE/RRE 35% 30% 140%
                      Other collateral41 40% 30% 140%
                      (a) Senior exposures are to be divided into fully collateralised and un-collateralised portions;
                      (b) The part of the exposure considered to be fully collateralised, C/C**, receives the LGD associated with the type of collateral;
                      (c) The remaining part of the exposure is regarded as unsecured and receives an LGD of 45%.

                      41 Other collateral excludes physical assets acquired by the bank as a result of a loan default.

                      Amended: April 2011
                      Apr 08

                  • — Methodology for the Treatment of Pools of Collateral

                    • CA-5.3.27

                      The methodology for determining the effective LGD of a transaction under the foundation approach where banks have taken both financial collateral and other eligible IRB collateral is aligned to the treatment in the standardised approach and based on the following guidance:

                      (a) In the case where a bank has obtained multiple forms of CRM, it will be required to subdivide the adjusted value of the exposure (after the haircut for eligible financial collateral) into portions each covered by only one CRM type. That is, the bank must divide the exposure into the portion covered by eligible financial collateral, the portion covered by receivables, the portion covered by CRE/RRE collateral, a portion covered by other collateral, and an unsecured portion, where relevant;
                      (b) Where the ratio of the sum of the value of CRE/RRE and other collateral to the reduced exposure (after recognising the effect of eligible financial collateral and receivables collateral) is below the associated threshold level (i.e. the minimum degree of collateralisation of the exposure), the exposure would receive the appropriate unsecured LGD value of 45%; and
                      (c) The risk-weighted assets for each fully secured portion of exposure must be calculated separately.
                      Amended: April 2011
                      Apr 08

                  • — Treatment of Certain Repo-style Transactions

                    • CA-5.3.28

                      Banks that want to recognise the effects of master netting agreements on repo-style transactions for capital purposes must apply the methodology outlined in paragraph CA-5.3.24 for determining E* for use as the EAD.

                      Apr 08

                  • — Treatment of Guarantees and Credit Derivatives

                    • CA-5.3.29

                      CRM in the form of guarantees and credit derivatives must not reflect the effect of double default (see paragraph CA-5.8.93). As such, to the extent that the CRM is recognised by the bank, the adjusted risk weight will not be less than that of a comparable direct exposure to the protection provider. Consistent with the standardised approach, banks may choose not to recognise credit protection if doing so would result in a higher capital requirement.

                      Apr 08

                    • CA-5.3.30

                      The approach to guarantees and credit derivatives closely follows the treatment under the standardised approach as specified in paragraphs CA-4.5.1 to CA-4.5.13. The range of eligible guarantors is the same as under the standardised approach except that companies that are internally rated and associated with a PD equivalent to A- or better may also be recognised. To receive recognition, the requirements outlined in paragraphs CA-4.5.1 to CA-4.5.6 must be met.

                      Apr 08

                    • CA-5.3.31

                      Eligible guarantees from eligible guarantors will be recognised as follows:

                      (a) For the covered portion of the exposure, a risk weight is derived by taking:
                      •   the risk-weight function appropriate to the type of guarantor, and
                      •   the PD appropriate to the guarantor's borrower grade, or some grade between the underlying obligor and the guarantor's borrower grade if the bank deems a full substitution treatment not to be warranted.
                      (b) The bank may replace the LGD of the underlying transaction with the LGD applicable to the guarantee taking into account seniority and any collateralisation of a guaranteed commitment.
                      Apr 08

                    • CA-5.3.32

                      The uncovered portion of the exposure is assigned the risk weight associated with the underlying obligor.

                      Apr 08

                    • CA-5.3.33

                      Where partial coverage exists, or where there is a currency mismatch between the underlying obligation and the credit protection, it is necessary to split the exposure into a covered and an uncovered amount. The treatment in this approach follows that outlined in the standardised approach in paragraphs CA-4.5.10 to CA-4.5.12, and depends upon whether the cover is proportional or tranched.

                      Apr 08

                    • CA-5.3.34

                      A bank using an IRB approach has the option of using the substitution approach in determining the appropriate capital requirement for an exposure. However, for exposures hedged by one of the following instruments the double default framework according to paragraphs CA-5.3.12 to CA-5.3.16 may be applied subject to the additional operational requirements set out in paragraph CA-5.3.39. A bank may decide separately for each eligible exposure to apply either the double default framework or the substitution approach:

                      (a) Single-name, unfunded credit derivatives (e.g. credit default swaps) or single-name guarantees;
                      (b) First-to-default basket products — the double default treatment will be applied to the asset within the basket with the lowest risk-weighted amount; and
                      (c) nth-to-default basket products — the protection obtained is only eligible for consideration under the double default framework if eligible (n-1)th default protection has also been obtained or where (n-1) of the assets within the basket have already defaulted.
                      Amended: April 2011
                      Apr 08

                  • — Operational Requirements for Recognition of Double Default

                    • CA-5.3.35

                      The double default framework is only applicable where the following conditions are met:

                      (a) The risk weight that is associated with the exposure prior to the application of the framework does not already factor in any aspect of the credit protection;
                      (b) The entity selling credit protection is a bank42, investment firm or insurance company (but only those that are in the business of providing credit protection, including mono-lines, re-insurers, and non-sovereign credit export agencies43), referred to as a financial firm, that:
                      •   It is regulated in a manner broadly equivalent to that in this Module (where there is appropriate supervisory oversight and transparency/market discipline), or externally rated as at least investment grade by a credit rating agency deemed suitable for this purpose by CBB;
                      •   Had an internal rating with a PD equivalent to or lower than that associated with an external A- rating at the time the credit protection for an exposure was first provided or for any period of time thereafter; and
                      •   Has an internal rating with a PD equivalent to or lower than that associated with an external investment-grade rating.
                      (c) The underlying obligation is:
                      •   A corporate exposure as defined in paragraphs CA-5.2.5 to CA-5.2.15 (excluding specialised lending exposures for which the supervisory slotting criteria approach described in paragraphs CA-5.3.6 to CA-5.3.11 is being used); or
                      •   A claim on a PSE that is not a sovereign exposure as defined in paragraph CA-5.2.16; or
                      •   A loan extended to a small business and classified as a retail exposure as defined in paragraph CA-5.2.18.
                      (d) The underlying obligor is not:
                      •   A financial firm as defined in (b); or
                      •   A member of the same group as the protection provider.
                      (e) The credit protection meets the minimum operational requirements for such instruments as outlined in paragraphs CA-4.5.1 to CA-4.5.5;
                      (f) In keeping with paragraph CA-4.5.2 for guarantees, for any recognition of double default effects for both guarantees and credit derivatives a bank must have the right and expectation to receive payment from the credit protection provider without having to take legal action in order to pursue the counterparty for payment. To the extent possible, a bank must take steps to satisfy itself that the protection provider is willing to pay promptly if a credit event should occur;
                      (g) The purchased credit protection absorbs all credit losses incurred on the hedged portion of an exposure that arise due to the credit events outlined in the contract;
                      (h) If the payout structure provides for physical settlement, then there must be legal certainty with respect to the deliverability of a loan, bond, or contingent liability. If a bank intends to deliver an obligation other than the underlying exposure, it must ensure that the deliverable obligation is sufficiently liquid so that the bank would have the ability to purchase it for delivery in accordance with the contract;
                      (i) The terms and conditions of credit protection arrangements must be legally confirmed in writing by both the credit protection provider and the bank;
                      (j) In the case of protection against dilution risk, the seller of purchased receivables must not be a member of the same group as the protection provider; and
                      (k) There is no excessive correlation between the creditworthiness of a protection provider and the obligor of the underlying exposure due to their performance being dependent on common factors beyond the systematic risk factor. The bank has a process to detect such excessive correlation. An example of a situation in which such excessive correlation would arise is when a protection provider guarantees the debt of a supplier of goods or services and the supplier derives a high proportion of its income or revenue from the protection provider.

                      42 This does not include PSEs and MDBs, even though claims on these may be treated as claims on banks according to paragraph CA-5.2.17.

                      43By non-sovereign it is meant that credit protection in question does not benefit from any explicit sovereign counter-guarantee.

                      Amended: April 2011
                      Apr 08

                • (iii) Exposure at Default (EAD)

                  • CA-5.3.36

                    The following sections apply to both on and off-balance sheet positions. All exposures are measured gross of specific provisions or partial write-offs. The EAD on drawn amounts should not be less than the sum of (i) the amount by which a bank's regulatory capital would be reduced if the exposure were written-off fully, and (ii) any specific provisions and partial write-offs. When the difference between the instrument's EAD and the sum of (i) and (ii) is positive, this amount is termed a discount. The calculation of risk-weighted assets is independent of any discounts. Under the limited circumstances described in paragraph CA-5.7.7, discounts may be included in the measurement of total eligible provisions for purposes of the EL-provision calculation set out in section CA-5.7.

                    Apr 08

                  • Exposure Measurement for On-balance Sheet Items

                    • CA-5.3.37

                      On-balance sheet netting of loans and deposits will be recognised subject to the same conditions as under the standardised approach (see paragraph CA-4.4.1). Where currency or maturity mismatched on-balance sheet netting exists, the treatment follows the standardised approach, as set out in paragraphs CA-4.5.12 and CA-4.6.1 to CA-4.6.4.

                      Apr 08

                  • Exposure Measurement for Off-balance Sheet Items (with the Exception of FX and Interest-rate, Equity, and Commodity-related Derivatives)

                    • CA-5.3.38

                      For off-balance sheet items, exposure is calculated as the committed but undrawn amount multiplied by a CCF.

                      Apr 08

                    • CA-5.3.39

                      The types of instruments and the CCFs applied to them are the same as those in the standardised approach, as outlined in paragraphs CA-3.3.1 to CA-3.3.15 with the exception of commitments, Note Issuance Facilities (NIFs) and Revolving Underwriting Facilities (RUFs).

                      Apr 08

                    • CA-5.3.40

                      A CCF of 75% will be applied to commitments, NIFs and RUFs regardless of the maturity of the underlying facility. This does not apply to those facilities which are uncommitted, that are unconditionally cancellable, or that effectively provide for automatic cancellation, for example due to deterioration in a borrower's creditworthiness, at any time by the bank without prior notice. A CCF of 0% will be applied to these facilities.

                      Apr 08

                    • CA-5.3.41

                      The amount to which the CCF is applied is the lower of the value of the unused committed credit line, and the value that reflects any possible constraining availability of the facility, such as the existence of a ceiling on the potential lending amount which is related to a borrower's reported cash flow. If the facility is constrained in this way, the bank must have sufficient line monitoring and management procedures to support this contention.

                      Apr 08

                    • CA-5.3.42

                      In order to apply a 0% CCF for unconditionally and immediately cancellable corporate overdrafts and other facilities, banks must demonstrate that they actively monitor the financial condition of the borrower, and that their internal control systems are such that they could cancel the facility upon evidence of a deterioration in the credit quality of the borrower.

                      Apr 08

                    • CA-5.3.43

                      Where a commitment is obtained on another off-balance sheet exposure, banks under the foundation approach are to apply the lower of the applicable CCFs.

                      Apr 08

                  • Exposure Measurement for Transactions that Expose Banks to Counterparty Credit risk

                    • CA-5.3.44

                      Measures of exposure for SFTs and OTC derivatives that expose banks to counterparty credit risk under the IRB approach will be calculated as per the rules set forth in Appendix CA-2 of this Module.

                      Apr 08

                • (iv) Effective Maturity (M)

                  • CA-5.3.45

                    Effective maturity (M) will be 2.5 years except for repo-style transactions where the effective maturity will be 6 months. However, banks can apply to CBB for approval to measure M for each facility using the definition provided below.

                    Apr 08

                  • CA-5.3.46

                    Except as noted in proceeding paragraph, M is defined as the greater of one year and the remaining effective maturity in years as defined below. In all cases, M will be no greater than 5 years:

                    (a) For an instrument subject to a determined cash flow schedule, effective maturity M is defined as:



                    where CFt denotes the cash flows (principal, interest payments and fees) contractually payable by the borrower in period t.
                    (b) If a bank is not in a position to calculate the effective maturity of the contracted payments as noted above, it is allowed to use a more conservative measure of M such as that it equals the maximum remaining time (in years) that the borrower is permitted to take to fully discharge its contractual obligation (principal, interest, and fees) under the terms of loan agreement. Normally, this will correspond to the nominal maturity of the instrument; and
                    (c) For derivatives subject to a master netting agreement, the weighted average maturity of the transactions should be used when applying the explicit maturity adjustment. Further, the notional amount of each transaction should be used for weighting the maturity.
                    Amended: April 2011
                    Apr 08

                  • CA-5.3.47

                    The one-year floor does not apply to certain short-term exposures, comprising fully or nearly-fully collateralised44 capital market-driven transactions (i.e. OTC derivatives transactions and margin lending) and repo-style transactions (i.e. repos/reverse repos and securities lending/borrowing) with an original maturity of less then one year, where the documentation contains daily remargining clauses. For all eligible transactions the documentation must require daily revaluation, and must include provisions that must allow for the prompt liquidation or setoff of the collateral in the event of default or failure to re-margin. The maturity of such transactions must be calculated as the greater of one-day, and the effective maturity (M, consistent with the definition above).


                    44 The intention is to include both parties of a transaction meeting these conditions where neither of the parties is systematically under-collateralised.

                    Apr 08

                  • CA-5.3.48

                    In addition to the transactions considered in the preceding paragraph above, other short-term exposures with an original maturity of less than one year that are not part of a bank's ongoing financing of an obligor are eligible for exemption from the one-year floor. Such transactions include:

                    (a) Some capital market-driven transactions and repo-style transactions that might not fall within the scope of the preceding paragraph;
                    (b) Some short-term self-liquidating trade transactions. Import and export letters of credit and similar transactions could be accounted for at their actual remaining maturity;
                    (c) Some exposures arising from settling securities purchases and sales. This could also include overdrafts arising from failed securities settlements provided that such overdrafts do not continue more than a short, fixed number of business days;
                    (d) Some exposures arising from cash settlements by wire transfer, including overdrafts arising from failed transfers provided that such overdrafts do not continue more than a short, fixed number of business days;
                    (e) Some exposures to banks arising from foreign exchange settlements; and
                    (f) Some short-term loans and deposits.
                    Apr 08

                  • CA-5.3.49

                    For transactions falling within the scope of paragraph CA-5.3.47 subject to a master netting agreement, the weighted average maturity of the transactions should be used when applying the explicit maturity adjustment. A floor equal to the minimum holding period for the transaction type set out in paragraph CA-4.3.11 will apply to the average. Where more than one transaction type is contained in the master netting agreement a floor equal to the highest holding period will apply to the average. Further, the notional amount of each transaction should be used for weighting maturity.

                    Apr 08

                  • CA-5.3.50

                    Where there is no explicit adjustment, the effective maturity (M) assigned to all exposures is set at 2.5 years unless otherwise specified in paragraph CA-5.3.45.

                    Apr 08

                  • Treatment of Maturity Mismatches

                    • CA-5.3.51

                      The treatment of maturity mismatches under IRB is identical to that in the standardised approach — see paragraphs CA-4.6.1 to CA-4.6.4.

                      Apr 08

            • CA-5.4 CA-5.4 Rules for Retail Exposures

              • CA-5.4.1

                This section presents in detail the method of calculating the UL capital requirements for retail exposures. The first sub-section provides three risk-weight functions, one for residential mortgage exposures, a second for qualifying revolving retail exposures, and a third for other retail exposures. Second sub-section presents the risk components to serve as inputs to the risk- weight functions. The method of calculating expected losses, and for determining the difference between that measure and provisions is described in section CA-5.7.

                Apr 08

              • 1. Risk-weighted Assets for Retail Exposures

                • CA-5.4.2

                  There are three separate risk-weight functions for retail exposures, as defined in paragraphs CA-5.4.3 to CA-5.4.5. Risk weights for retail exposures are based on separate assessments of PD and LGD as inputs to the risk-weight functions. None of the three retail risk-weight functions contains an explicit maturity adjustment. Throughout this section, PD and LGD are measured as decimals, and EAD is measured as currency.

                  Apr 08

                • (i) Residential Mortgage Exposures

                  • CA-5.4.3

                    For exposures defined in paragraph CA-5.2.18 that are not in default and are secured or partly secured45 by residential mortgages, risk weights will be assigned based on the following formula:

                    Correlation (R) = 0.15

                    Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD

                    Risk-weighted assets = K x 12.5 x EAD

                    The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.


                    45 This means that risk weights for residential mortgages also apply to the unsecured portion of such residential mortgages.

                    Apr 08

                • (ii) Qualifying Revolving Retail Exposures

                  • CA-5.4.4

                    For qualifying revolving retail exposures as defined in paragraph CA-5.2.21 that are not in default, risk weights are defined based on the following formula:

                    Correlation (R) = 0.04

                    Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD

                    Risk-weighted assets = K x 12.5 x EAD

                    The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.

                    Apr 08

                • (iii) Other Retail Exposures

                  • CA-5.4.5

                    For all other retail exposures that are not in default, risk weights are assigned based on the following function, which allows correlation to vary with PD:

                    Correlation (R) = 0.03 × (1 - EXP(-35 × PD)) / (1 - EXP(-35)) + 0.16 × [1 - (1 - EXP(-35 × PD))/(1 - EXP(-35))]

                    Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD

                    Risk-weighted assets = K × 12.5 × EAD

                    The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.

                    Illustrative risk weights are shown in Appendix CA-6.

                    Apr 08

              • 2. Risk Components

                • (i) Probability of Default (PD) and Loss Given Default (LGD)

                  • CA-5.4.6

                    For each identified pool of retail exposures, banks are expected to provide an estimate of the PD and LGD associated with the pool, subject to the minimum requirements as set out in section CA-5.8. Additionally, the PD for retail exposures is the greater of the one- year PD associated with the internal borrower grade to which the pool of retail exposures is assigned or 0.03%.

                    Apr 08

                • (ii) Recognition of Guarantees and Credit Derivatives

                  • CA-5.4.7

                    Banks may reflect the risk-reducing effects of guarantees and credit derivatives, either in support of an individual obligation or a pool of exposures, through an adjustment of either the PD or LGD estimate, subject to the minimum requirements in paragraphs CA-5.8.91 to CA-5.8.100. Whether adjustments are done through PD or LGD, they must be done in a consistent manner for a given guarantee or credit derivative type.

                    Apr 08

                  • CA-5.4.8

                    Consistent with the requirements outlined above for corporate, sovereign, and bank exposures, banks must not include the effect of double default in such adjustments. The adjusted risk weight must not be less than that of a comparable direct exposure to the protection provider. Consistent with the standardised approach, banks may choose not to recognise credit protection if doing so would result in a higher capital requirement.

                    Apr 08

                • (iii) Exposure at Default (EAD)

                  • CA-5.4.9

                    Both on and off-balance sheet retail exposures are measured gross of specific provisions or partial write-offs. The EAD on drawn amounts should not be less than the sum of (i) the amount by which a bank's regulatory capital would be reduced if the exposure were written-off fully, and (ii) any specific provisions and partial write-offs. When the difference between the instrument's EAD and the sum of (i) and (ii) is positive, this amount is termed a discount. The calculation of risk-weighted assets is independent of any discounts. Under the limited circumstances described in paragraph CA-5.7.7, discounts may be included in the measurement of total eligible provisions for purposes of the EL-provision calculation set out in Section CA-5.7.

                    Apr 08

                  • CA-5.4.10

                    On-balance sheet netting of loans and deposits of a bank to or from a retail customer will be permitted subject to the same conditions outlined in paragraph CA-4.4.1 of the standardised approach. For retail off-balance sheet items, banks must use their own estimates of CCFs provided the minimum requirements in paragraphs CA-5.8.84 to CA-5.8.87 and CA-5.8.90 are satisfied.

                    Apr 08

                  • CA-5.4.11

                    For retail exposures with uncertain future drawdown such as credit cards, banks must take into account their history and/or expectation of additional drawings prior to default in their overall calibration of loss estimates. In particular, where a bank does not reflect conversion factors for undrawn lines in its EAD estimates, it must reflect in its LGD estimates the likelihood of additional drawings prior to default. Conversely, if the bank does not incorporate the possibility of additional drawings in its LGD estimates, it must do so in its EAD estimates.

                    Apr 08

                  • CA-5.4.12

                    When only the drawn balances of retail facilities have been securitised, banks must ensure that they continue to hold required capital against their share (i.e. seller's interest) of undrawn balances related to the securitised exposures using the IRB approach to credit risk. This means that for such facilities, banks must reflect the impact of CCFs in their EAD estimates rather than in the LGD estimates. For determining the EAD associated with the seller's interest in the undrawn lines, the undrawn balances of securitised exposures would be allocated between the seller's and investors' interests on a pro rata basis, based on the proportions of the seller's and investors' shares of the securitised drawn balances. The investors' share of undrawn balances related to the securitised exposures is subject to the treatment in paragraph CA-6.4.32.

                    Apr 08

                  • CA-5.4.13

                    To the extent that foreign exchange and interest rate commitments exist within a bank's retail portfolio for IRB purposes, banks are not permitted to provide their internal assessments of credit equivalent amounts. Instead, the rules for the standardised approach continue to apply.

                    Apr 08

            • CA-5.5 CA-5.5 Rules for Equity Exposures

              • CA-5.5.1

                This section presents the method of calculating the UL capital requirements for equity exposures. The first sub-section discusses (a) the market-based approach (which is further sub- divided into a simple risk weight method and an internal models method), and (b) the PD/LGD approach. The risk components are provided in the second sub-section. The method of calculating expected losses, and for determining the difference between that measure and provisions is described in section CA-5.7.

                Apr 08

              • 1. Risk-weighted Assets for Equity Exposures

                • CA-5.5.2

                  Risk-weighted assets for equity exposures in the trading book are subject to the market risk capital rules detailed in chapter CA-10.

                  Apr 08

                • CA-5.5.3

                  There are two approaches to calculate risk-weighted assets for equity exposures not held in the trading book: a market-based approach and a PD/LGD approach. Banks are permitted to select the approach subject to approval of CBB. Certain equity holdings are excluded as defined in paragraphs CA-5.5.18 to CA-5.5.20 and are subject to the capital charges required under the standardised approach.

                  Apr 08

                • CA-5.5.4

                  Banks' choices must be made consistently, and in particular not determined by regulatory arbitrage considerations.

                  Apr 08

                • (i) Market-based Approach

                  • CA-5.5.5

                    Under the market-based approach, institutions are permitted to calculate the minimum capital requirements for their banking book equity holdings using one or both of two separate and distinct methods: a simple risk weight method or an internal models method. The method used should be consistent with the amount and complexity of the institution's equity holdings and commensurate with the overall size and sophistication of the institution. CBB may require the use of either method based on the individual circumstances of a bank.

                    Apr 08

                  • — Simple Risk Weight Method

                    • CA-5.5.6

                      Under the simple risk weight method, a 300% risk weight is to be applied to equity holdings that are publicly traded and a 400% risk weight is to be applied to all other equity holdings. A publicly traded holding is defined as any equity security traded on a recognised security exchange.

                      Apr 08

                    • CA-5.5.7

                      Short cash positions and derivative instruments held in the banking book are permitted to offset long positions in the same individual stocks provided that these instruments have been explicitly designated as hedges of specific equity holdings and that they have remaining maturities of at least one year. Other short positions are to be treated as if they are long positions with the relevant risk weight applied to the absolute value of each position. In the context of maturity mismatched positions, the methodology is that for corporate exposures.

                      Apr 08

                  • Internal Models Method

                    • CA-5.5.8

                      IRB banks may use, or may be required by CBB to use, internal risk measurement models to calculate the risk-based capital requirement. Under this alternative, banks must hold capital equal to the potential loss on the institution's equity holdings as derived using internal value-at-risk models subject to the 99th percentile, one-tailed confidence interval of the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period. The capital charge would be incorporated into an institution's risk-based CAR through the calculation of risk-weighted equivalent assets.

                      Apr 08

                    • CA-5.5.9

                      The risk weight used to convert holdings into risk-weighted equivalent assets would be calculated by multiplying the derived capital charge by 12.5 (i.e. the inverse of the minimum 8% risk-based capital requirement). Capital charges calculated under the internal models method may be no less than the capital charges that would be calculated under the simple risk weight method using a 200% risk weight for publicly traded equity holdings and a 300% risk weight for all other equity holdings. These minimum capital charges would be calculated separately using the methodology of the simple risk weight approach. Further, these minimum risk weights are to apply at the individual exposure level rather than at the portfolio level.

                      Apr 08

                    • CA-5.5.10

                      A bank may be permitted by CBB to employ different market-based approaches to different portfolios based on appropriate considerations and where the bank itself uses different approaches internally.

                      Apr 08

                    • CA-5.5.11

                      Banks are permitted to recognise guarantees but not collateral obtained on an equity position wherein the capital requirement is determined through use of the market-based approach.

                      Apr 08

                • (ii) PD/LGD Approach

                  • CA-5.5.12

                    The minimum requirements and methodology for the PD/LGD approach for equity exposures (including equity of companies that are included in the retail asset class) are the same as those for the IRB foundation approach for corporate exposures subject to the following specifications:

                    (a) The bank's estimate of the PD of a corporate entity in which it holds an equity position must satisfy the same requirements as the bank's estimate of the PD of a corporate entity where the bank holds debt.46 If a bank does not hold debt of the company in whose equity it has invested, and does not have sufficient information on the position of that company to be able to use the applicable definition of default in practice but meets the other standards, a 1.5 scaling factor will be applied to the risk weights derived from the corporate risk-weight function, given the PD set by the bank. If, however, the bank's equity holdings are material and it is permitted to use a PD/LGD approach for regulatory purposes but the bank has not yet met the relevant standards, the simple risk-weight method under the market-based approach will apply;
                    (b) An LGD of 90% would be assumed in deriving the risk weight for equity exposures; and
                    (c) For these purposes, the risk weight is subject to a five-year maturity adjustment whether or not the bank is using the explicit approach to maturity elsewhere in its IRB portfolio.

                    46 In practice, if there is both an equity exposure and an IRB credit exposure to the same counterparty, a default on the credit exposure would thus trigger a simultaneous default for regulatory purposes on the equity exposure.

                    Amended: April 2011
                    Apr 08

                  • CA-5.5.13

                    Under the PD/LGD approach, minimum risk weights as set out in section CA-5.5.14 and CA-5.5.15 apply. When the sum of UL and EL associated with the equity exposure results in less capital than would be required from application of one of the minimum risk weights, the minimum risk weights must be used. In other words, the minimum risk weights must be applied, if the risk weights calculated according to the preceding paragraph plus the EL associated with the equity exposure multiplied by 12.5 are smaller than the applicable minimum risk weights.

                    Apr 08

                  • CA-5.5.14

                    A minimum risk weight of 100% applies for the following types of equities for as long as the portfolio is managed in the manner outlined below:

                    (a) Public equities where the investment is part of a long-term customer relationship, any capital gains are not expected to be realised in the short term and there is no anticipation of (above trend) capital gains in the long term. It is expected that in almost all cases, the institution will have lending and/or general banking relationships with the portfolio company so that the estimated probability of default is readily available. Given their long-term nature, specification of an appropriate holding period for such investments merits careful consideration. In general, it is expected that the bank will hold the equity over the long term (at least five years); and
                    (b) Private equities where the returns on the investment are based on regular and periodic cash flows not derived from capital gains and there is no expectation of future (above trend) capital gain or of realising any existing gain.
                    Amended: April 2011
                    Apr 08

                  • CA-5.5.15

                    For all other equity positions, including net short positions (as defined in section CA-5.5.7), capital charges calculated under the PD/LGD approach may be no less than the capital charges that would be calculated under a simple risk weight method using a 200% risk weight for publicly traded equity holdings and a 300% risk weight for all other equity holdings.

                    Apr 08

                  • CA-5.5.16

                    The maximum risk weight for the PD/LGD approach for equity exposures is 1250%. This maximum risk weight can be applied, if risk weights calculated according to section CA-5.5.12 plus the EL associated with the equity exposure multiplied by 12.5 exceed the 1250% risk weight. Alternatively, banks may deduct the entire equity exposure amount, assuming it represents the EL amount, 50% from Tier 1 capital and 50% from Tier 2 capital.

                    Apr 08

                  • CA-5.5.17

                    Hedging for PD/LGD equity exposures is, as for corporate exposures, subject to an LGD of 90% on the exposure to the provider of the hedge. For these purposes equity positions will be treated as having a five-year maturity.

                    Apr 08

                • (iii) Exclusions to the Market-based and PD/LGD Approaches

                  • CA-5.5.18

                    Banks are allowed to exclude equity holdings in entities whose debt obligations qualify for a zero risk weight under the standardised approach to credit risk from the IRB approaches to equity (including those publicly sponsored entities where a zero risk weight can be applied).

                    Apr 08

                  • CA-5.5.19

                    Equity exposures of a bank can be excluded from the IRB treatment based on materiality as defined in the following paragraph.

                    Apr 08

                  • CA-5.5.20

                    The equity exposures of a bank are considered material if their aggregate value exceeds, on average over the prior year, 10% of bank's Tier 1 plus Tier 2 capital. This materiality threshold is lowered to 5% of a bank's Tier 1 plus Tier 2 capital if the equity portfolio consists of less than 10 individual holdings. CBB may use lower materiality thresholds in future.

                    Apr 08

              • 2. Risk Components

                • CA-5.5.21

                  In general, the measure of an equity exposure on which capital requirements is based is the value presented in the financial statements, which may include unrealised revaluation gains. Thus, for example, equity exposure measures will be:

                  (a) For investments held at fair value with changes in value flowing directly through income and into regulatory capital and where a discount is applied on fair value (as explained in CA-2.1.5), the exposure is equal to the fair value adjusted to exclude that discount part. Refer to appendix CA-17;
                  (b) For investments held at fair value with changes in value not flowing through income but into a tax-adjusted separate component of equity and where a discount is applied on fair value (as explained in CA-2.1.5), the exposure is equal to the fair value adjusted to exclude that discount part. Refer to appendix CA-17; and
                  (c) For investments held at cost or at the lower of cost or market, exposure is equal to the cost or market value presented in the balance sheet.47

                  47 If "latent gain" is allowed on such investment (as explained in CA-2.1.5), the cost will be adjusted to include that allowed gain.

                  Amended: April 2011
                  Apr 08

                • CA-5.5.22

                  Holdings in funds containing both equity investments and other non-equity types of investments can be either treated, in a consistent manner, as a single investment based on the majority of the fund's holdings or, where possible, as separate and distinct investments in the fund's component holdings based on a look-through approach.

                  Apr 08

                • CA-5.5.23

                  Where only the investment mandate of the fund is known, the fund can still be treated as a single investment. For this purpose, it is assumed that the fund first invests, to the maximum extent allowed under its mandate, in the asset classes attracting the highest capital requirement, and then continues making investments in descending order until the maximum total investment level is reached. The same approach can also be used for the look-through approach, but only where the bank has rated all the potential constituents of such a fund.

                  Apr 08

            • CA-5.6 CA-5.6 Rules for Purchased Receivables

              • CA-5.6.1

                This section presents the method of calculating the UL capital requirements for purchased receivables. For such assets, there are IRB capital charges for both default risk and dilution risk. The first sub-section discusses the calculation of risk-weighted assets for default risk. The calculation of risk-weighted assets for dilution risk is provided in the second sub-section. The method of calculating expected losses, and for determining the difference between that measure and provisions, is described in section CA-5.7.

                Apr 08

              • 1. Risk-weighted Assets for Default Risk

                • CA-5.6.2

                  For receivables belonging unambiguously to one asset class, the IRB risk weight for default risk is based on the risk-weight function applicable to that particular exposure type, as long as the bank meets the qualification standards for this particular risk-weight function. For example, if banks cannot comply with the standards for qualifying revolving retail exposures (defined in paragraph CA-5.2.21), they should use the risk-weight function for other retail exposures. For hybrid pools containing mixtures of exposure types, if the purchasing bank cannot separate the exposures by type, the risk-weight function producing the highest capital requirements for the exposure types in the receivable pool applies.

                  Apr 08

                • (i) Purchased Retail Receivables

                  • CA-5.6.3

                    For purchased retail receivables, a bank must meet the risk quantification standards for retail exposures but can utilise external and internal reference data to estimate the PDs and LGDs. The estimates for PD and LGD (or EL) must be calculated for the receivables on a stand-alone basis; that is, without regard to any assumption of recourse or guarantees from the seller or other parties.

                    Apr 08

                • (ii) Purchased Corporate Receivables

                  • CA-5.6.4

                    For purchased corporate receivables, the purchasing bank is required to apply the existing IRB risk quantification standards for the bottom-up approach.

                    Apr 08

              • 2. Risk-weighted Assets for Dilution Risk

                • CA-5.6.5

                  Dilution refers to the possibility that the receivable amount is reduced through cash or non-cash credits to the receivable's obligor.48 For both corporate and retail receivables, unless the bank demonstrates to the CBB that the dilution risk for the purchasing bank is immaterial, the treatment of dilution risk must be the following: at the level of either the pool as a whole (top-down approach) or the individual receivables making up the pool (bottom-up approach), the purchasing bank will estimate the one-year EL for dilution risk, also expressed in percentage of the receivables amount. Banks can utilise external and internal data to estimate EL. As with the treatments of default risk, this estimate must be computed on a stand-alone basis; that is, under the assumption of no recourse or other support from the seller or third-party guarantors. For the purpose of calculating risk weights for dilution risk, the corporate risk-weight function must be used with the following settings: the PD must be set equal to the estimated EL, and the LGD must be set at 100%. An appropriate maturity treatment applies when determining the capital requirement for dilution risk.


                  48 Examples include offsets or allowances arising from returns of goods sold, disputes regarding product quality, possible debts of the borrower to a receivables obligor, and any payment or promotional discounts offered by the borrower (e.g. a credit for cash payments within 30 days).

                  Apr 08

                • CA-5.6.6

                  This treatment will be applied regardless of whether the underlying receivables are corporate or retail exposures.

                  Apr 08

              • 3. Treatment of Purchase Price Discounts for Receivables

                • CA-5.6.7

                  In many cases, the purchase price of receivables will reflect a discount (not to be confused with the discount concept defined in paragraphs CA-5.3.40 and CA-5.4.9) that provides first loss protection for default losses, dilution losses or both (see paragraph CA-6.4.73). To the extent a portion of such a purchase price discount will be refunded to the seller, this refundable amount may be treated as first loss protection under the IRB securitisation framework. Non- refundable purchase price discounts for receivables do not affect either the EL-provision calculation in section CA-5.7 or the calculation of risk-weighted assets.

                  Apr 08

                • CA-5.6.8

                  When collateral or partial guarantees obtained on receivables provide first loss protection (collectively referred to as mitigants in this paragraph), and these mitigants cover default losses, dilution losses, or both, they may also be treated as first loss protection under the IRB securitisation framework (see paragraph CA-6.4.73). When the same mitigant covers both default and dilution risk, banks using the Supervisory Formula that are able to calculate an exposure-weighted LGD must do so as defined in paragraph CA-6.4.79.

                  Apr 08

              • 4. Recognition of Credit Risk Mitigants

                • CA-5.6.9

                  Credit risk mitigants will be recognised generally using the same type of framework as set forth in paragraphs CA-5.3.33 to CA-5.3.37. In particular, a guarantee provided by the seller or a third party will be treated using the existing IRB rules for guarantees, regardless of whether the guarantee covers default risk, dilution risk, or both:

                  (a) If the guarantee covers both the pool's default risk and dilution risk, the bank will substitute the risk weight for an exposure to the guarantor in place of the pool's total risk weight for default and dilution risk;
                  (b) If the guarantee covers only default risk or dilution risk, but not both, the bank will substitute the risk weight for an exposure to the guarantor in place of the pool's risk weight for the corresponding risk component (default or dilution). The capital requirement for the other component will then be added; and
                  (c) If a guarantee covers only a portion of the default and/or dilution risk, the uncovered portion of the default and/or dilution risk will be treated as per the existing CRM rules for proportional or tranched coverage (i.e. the risk weights of the uncovered risk components will be added to the risk weights of the covered risk components).
                  Amended: April 2011
                  Apr 08

                • CA-5.6.10

                  If protection against dilution risk has been purchased, and the conditions of paragraphs CA-5.3.38 and CA-5.3.39 are met, the double default framework may be used for the calculation of the risk-weighted asset amount for dilution risk. In this case, paragraphs CA-5.3.12 to CA-5.3.16 apply with PDo being equal to the estimated EL, LGDg being equal to 100 percent, and effective maturity being set according to paragraph CA-5.6.6.

                  Apr 08

            • CA-5.7 CA-5.7 Treatment of Expected Losses and Recognition of Provisions

              • CA-5.7.1

                This section discusses the method by which the difference between provisions (specific provisions and collective impairment provisions) and expected losses may be included in or must be deducted from regulatory capital, as outlined in paragraph CA-2.1.5 (e). However any excess provision representing impairment loss will not be allowed to be included in regulatory capital.

                Apr 08

              • 1. Calculation of Expected Losses

                • CA-5.7.2

                  A bank must sum the EL amount (defined as EL multiplied by EAD) associated with its exposures (excluding the EL amount associated with equity exposures under the PD/LGD approach and securitisation exposures) to obtain a total EL amount. While the EL amount associated with equity exposures subject to the PD/LGD approach is excluded from the total EL amount, paragraphs CA-5.7.3 and CA-5.7.13 apply to such exposures. The treatment of EL for securitisation exposures is described in paragraph CA-6.4.4.

                  Apr 08

                • (i) Expected Loss for Exposures other than SL Subject to the Supervisory Slotting Criteria

                  • CA-5.7.3

                    Banks must calculate an EL as PD x LGD for corporate, sovereign, bank, and retail exposures both not in default and not treated as hedged exposures under the double default treatment. For corporate, sovereign, bank, and retail exposures that are in default, banks must use their best estimate of expected loss as defined in paragraph CA-5.8.82 and banks on the foundation approach must use the CBB's LGD. For SL exposures subject to the supervisory slotting criteria EL is calculated as described in paragraphs CA-5.7.4 and CA-5.7.5. For equity exposures subject to the PD/LGD approach, the EL is calculated as PD x LGD unless paragraphs CA-5.5.13 to CA-5.5.16 apply. Securitisation exposures do not contribute to the EL amount, as set out in paragraph CA-6.4.4. For all other exposures, including hedged exposures under the double default treatment, the EL is zero.

                    Apr 08

                • (ii) Expected Loss for SL Exposures Subject to the Supervisory Slotting Criteria

                  • CA-5.7.4

                    For SL exposures subject to the supervisory slotting criteria, the EL amount is determined by multiplying 8% by the risk-weighted assets produced from the appropriate risk weights, as specified below, multiplied by EAD.

                    Apr 08

                  • Supervisory Categories and EL Risk Weights for other SL Exposures

                    • CA-5.7.5

                      The risk weights for SL, other than HVCRE, are as follows:

                      Strong Good Satisfactory Weak Default
                      5% 10% 35% 100% 625%
                      Apr 08

                  • Supervisory Categories and EL Risk Weights for HVCRE

                    • CA-5.7.6

                      The risk weights for HVCRE are as follows:

                      Strong Good Satisfactory Weak Default
                      5% 5% 35% 100% 625%
                      Apr 08

              • 2. Calculation of Provisions

                • (i) Exposures subject to IRB Approach

                  • CA-5.7.7

                    Total eligible provisions are defined as the sum of all provisions (specific provisions and collective impairment provisions) that are attributed to exposures treated under the IRB approach. In addition, total eligible provisions may include any discounts on defaulted assets. Specific provisions set aside against equity and securitisation exposures must not be included in total eligible provisions.

                    Apr 08

                • (ii) Portion of Exposures Subject to the Standardised Approach to Credit Risk

                  • CA-5.7.8

                    Banks using the standardised approach for a portion of their credit risk exposures, either on a transitional basis (as defined in paragraphs CA-5.2.44 and CA-5.2.45), or on a permanent basis if the exposures subject to the standardised approach are immaterial (paragraph CA-5.2.46), must determine the portion of collective impairment provisions attributed to the standardised or IRB treatment of provisions (see section CA-2.1 (d) according to the methods outlined in paragraphs CA-5.7.9 and CA-5.7.10.)

                    Apr 08

                  • CA-5.7.9

                    Banks should generally attribute total provisions on a pro rata basis according to the proportion of credit risk-weighted assets subject to the standardised and IRB approaches. However, when one approach to determining credit risk-weighted assets (i.e. standardised or IRB approach) is used exclusively within an entity, provisions booked within the entity may be attributed to that approach.

                    Apr 08

                  • CA-5.7.10

                    Subject to CBB's discretion, banks using both the standardised and IRB approaches may rely on their internal methods for allocating provisions for recognition in capital under either the standardised or IRB approach, subject to the following conditions. Where the internal allocation method is made available, the CBB will establish the standards surrounding their use. Banks will need to obtain prior approval from CBB to use an internal allocation method for this purpose.

                    Apr 08

              • 3. Treatment of EL and Provisions

                • CA-5.7.11

                  As specified in paragraph CA-2.1.5 (e), banks using the IRB approach must compare the total amount of total eligible provisions (as defined in paragraph CA-5.7.7) with the total EL amount as calculated within the IRB approach (as defined in paragraph CA-5.7.2).

                  Apr 08

                • CA-5.7.12

                  Where the calculated EL amount is lower than the provisions of the bank, CBB will consider whether the EL fully reflects the conditions in the market in which it operates before allowing the difference to be included in Tier 2 capital. If specific provisions exceed the EL amount on defaulted assets this assessment also needs to be made before using the difference to offset the EL amount on non-defaulted assets.

                  Apr 08

                • CA-5.7.13

                  The EL amount for equity exposures under the PD/LGD approach is deducted 50% from Tier 1 and 50% from Tier 2. Provisions or write-offs for equity exposures under the PD/LGD approach will not be used in the EL-provision calculation. The treatment of EL and provisions related to securitisation exposures is outlined in paragraph CA-6.4.4.

                  Apr 08

            • CA-5.8 CA-5.8 Minimum Requirements for IRB Approach

              • CA-5.8.1

                This section presents the minimum requirements for entry and on-going use of the IRB approach. The minimum requirements are set out in 12 separate sections concerning: (a) composition of minimum requirements, (b) compliance with minimum requirements, (c) rating system design, (d) risk rating system operations, (e) corporate governance and oversight, (f) use of internal ratings, (g) risk quantification, (h) validation of internal estimates, (i) CBB's LGD and EAD estimates, (j) requirements for recognition of leasing, (k) calculation of capital charges for equity exposures, and (l) disclosure requirements. It may be helpful to note that the minimum requirements cut across asset classes. Therefore, more than one asset class may be discussed within the context of a given minimum requirement.

                Apr 08

              • 1. Composition of Minimum Requirements

                • CA-5.8.2

                  To be eligible for the IRB approach a bank must demonstrate to CBB that it meets certain minimum requirements at the outset and on an ongoing basis. Many of these requirements are in the form of objectives that a qualifying bank's risk rating systems must fulfill. The focus is on banks' abilities to rank order and quantify risk in a consistent, reliable and valid fashion.

                  Apr 08

                • CA-5.8.3

                  The overarching principle behind these requirements is that rating and risk estimation systems and processes provide for a meaningful assessment of borrower and transaction characteristics; a meaningful differentiation of risk; and reasonably accurate and consistent quantitative estimates of risk. Furthermore, the systems and processes must be consistent with internal use of these estimates. CBB will periodically develop detailed review procedures to ensure that banks' systems and controls are adequate to serve as the basis for the IRB approach.

                  Apr 08

                • CA-5.8.4

                  The minimum requirements set out in this section apply to all asset classes unless noted otherwise. The standards related to the process of assigning exposures to borrower or facility grades (and the related oversight, validation, etc.) apply equally to the process of assigning retail exposures to pools of homogenous exposures, unless noted otherwise.

                  Apr 08

                • CA-5.8.5

                  The minimum requirements set out in this section apply to both foundation and advanced approaches unless noted otherwise. Generally, all IRB banks must produce their own estimates of PD49 and must adhere to the overall requirements for rating system design, operations, controls, and corporate governance, as well as the requisite requirements for estimation and validation of PD measures. Banks using their own estimates of LGD and EAD for retail exposures must also meet the incremental minimum requirements for these risk factors included in paragraphs CA-5.8.79 to CA-5.8.100.


                  49 Banks are not required to produce their own estimates of PD for certain equity exposures and certain exposures that fall within the SL sub-class.

                  Apr 08

              • 2. Compliance with Minimum Requirements

                • CA-5.8.6

                  To be eligible for an IRB approach, a bank must demonstrate to CBB that it meets the IRB requirements in this sub-section, at the outset and on an ongoing basis. Banks' overall credit risk management practices must also be consistent with the evolving sound practice guidelines issued by the Basel Committee (See www.bis.org for guidance) and CBB periodically.

                  Apr 08

                • CA-5.8.7

                  There may be circumstances when a bank is not in complete compliance with all the minimum requirements. Where this is the case, the bank must produce a plan for a timely return to compliance, and seek approval from CBB, or the bank must demonstrate that the effect of such non-compliance is immaterial in terms of the risk posed to the institution. Failure to produce an acceptable plan or satisfactorily implement the plan or to demonstrate immateriality will lead CBB to reconsider the bank's eligibility for the IRB approach. Furthermore, for the duration of any non-compliance, CBB will consider the need for the bank to hold additional capital or take other appropriate supervisory action.

                  Apr 08

              • 3. Rating System Design

                • CA-5.8.8

                  The term "rating system" comprises all of the methods, processes, controls, and data collection and IT systems that support the assessment of credit risk, the assignment of internal risk ratings, and the quantification of default and loss estimates.

                  Apr 08

                • CA-5.8.9

                  Within each asset class, a bank may utilise multiple rating methodologies/systems. For example, a bank may have customised rating systems for specific industries or market segments (e.g. middle market, and large corporate). If a bank chooses to use multiple systems, the rationale for assigning a borrower to a rating system must be documented and applied in a manner that best reflects the level of risk of the borrower. Banks must not allocate borrowers across rating systems inappropriately to minimise regulatory capital requirements (i.e. cherry-picking by choice of rating system). Banks must demonstrate that each system used for IRB purposes is in compliance with the minimum requirements at the outset and on an ongoing basis.

                  Apr 08

                • (i) Rating Dimensions

                  • — Standards for Corporate, Sovereign, and Bank Exposures

                    • CA-5.8.10

                      A qualifying IRB rating system must have two separate and distinct dimensions: (i) the risk of borrower default, and (ii) transaction-specific factors.

                      Apr 08

                    • CA-5.8.11

                      The first dimension must be oriented to the risk of borrower default. Separate exposures to the same borrower must be assigned to the same borrower grade, irrespective of any differences in the nature of each specific transaction. There are two exceptions to this. Firstly, in the case of country transfer risk, where a bank may assign different borrower grades depending on whether the facility is denominated in local or foreign currency. Secondly, when the treatment of associated guarantees to a facility may be reflected in an adjusted borrower grade. In either case, separate exposures may result in multiple grades for the same borrower. A bank must articulate in its credit policy the relationship between borrower grades in terms of the level of risk each grade implies. Perceived and measured risk must increase as credit quality declines from one grade to the next. The policy must articulate the risk of each grade in terms of both a description of the probability of default risk typical for borrowers assigned the grade and the criteria used to distinguish that level of credit risk.

                      Apr 08

                    • CA-5.8.12

                      The second dimension must reflect transaction-specific factors, such as collateral, seniority, product type, etc. This requirement can be fulfilled by the existence of a facility dimension, which reflects both borrower and transaction-specific factors. For example, a rating dimension that reflects EL by incorporating both borrower strength (PD) and CBB's loss severity (LGD) considerations would qualify.

                      Apr 08

                    • CA-5.8.13

                      Banks using the supervisory slotting criteria for the SL sub-class are exempt from this two-dimensional requirement for these exposures. Given the interdependence between borrower/transaction characteristics in SL, banks may satisfy the requirements under this heading through a single rating dimension that reflects EL by incorporating both borrower strength (PD) and CBB's loss severity (LGD) considerations. This exemption does not apply to banks using the general corporate foundation approach for the SL sub- class.

                      Apr 08

                  • — Standards for Retail Exposures

                    • CA-5.8.14

                      Rating systems for retail exposures must be oriented to both borrower and transaction risk, and must capture all relevant borrower and transaction characteristics. Banks must assign each exposure that falls within the definition of retail for IRB purposes into a particular pool. Banks must demonstrate that this process provides for a meaningful differentiation of risk, provides for a grouping of sufficiently homogenous exposures, and allows for accurate and consistent estimation of loss characteristics at pool level.

                      Apr 08

                    • CA-5.8.15

                      For each pool, banks must estimate PD, LGD, and EAD. Multiple pools may share identical PD, LGD and EAD estimates. At a minimum, banks must consider the following risk drivers when assigning exposures to a pool:

                      (a) Borrower risk characteristics (e.g. borrower type, demographics such as age/occupation);
                      (b) Transaction risk characteristics, including product and/or collateral types (e.g. loan to value measures, seasoning, guarantees; and seniority (first vs. second lien)). Banks must explicitly address cross-collateral provisions where present.
                      (c) Delinquency of exposure: Banks are expected to separately identify exposures that are delinquent and those that are not.
                      Apr 08

                • (ii) Rating Structure

                  • — Standards for Corporate, Sovereign, and Bank Exposures

                    • CA-5.8.16

                      A bank must have a meaningful distribution of exposures across grades with no excessive concentrations, on both its borrower-rating and its facility-rating scales.

                      Apr 08

                    • CA-5.8.17

                      To meet this objective, a bank must have a minimum of seven borrower grades for non-defaulted borrowers and one for those that have defaulted. Banks with lending activities focused on a particular market segment may satisfy this requirement with the minimum number of grades; CBB may require banks, which lend to borrowers of diverse credit quality, to have a greater number of borrower grades.

                      Apr 08

                    • CA-5.8.18

                      A borrower grade is defined as an assessment of borrower risk on the basis of a specified and distinct set of rating criteria, from which estimates of PD are derived. The grade definition must include both a description of the degree of default risk typical for borrowers assigned the grade and the criteria used to distinguish that level of credit risk. Furthermore, "+" or "-" modifiers to alpha or numeric grades will only qualify as distinct grades if the bank has developed complete rating descriptions and criteria for their assignment, and separately quantifies PDs for these modified grades.

                      Apr 08

                    • CA-5.8.19

                      Banks with loan portfolios concentrated in a particular market segment and range of default risk must have enough grades within that range to avoid undue concentrations of borrowers in particular grades. Significant concentrations within a single grade or grades must be supported by convincing empirical evidence that the grade or grades cover reasonably narrow PD bands and that the default risk posed by all borrowers in a grade fall within that band.

                      Apr 08

                    • CA-5.8.20

                      Banks using the supervisory slotting criteria for the SL asset classes must have at least four grades for non-defaulted borrowers, and one for defaulted borrowers. The requirements for SL exposures that qualify for the corporate foundation approach are the same as those for general corporate exposures.

                      Apr 08

                  • — Standards for Retail Exposures

                    • CA-5.8.21

                      For each pool identified, the bank must be able to provide quantitative measures of loss characteristics (PD, LGD, and EAD) for that pool. The level of differentiation for IRB purposes must ensure that the number of exposures in a given pool is sufficient so as to allow for meaningful quantification and validation of the loss characteristics at the pool level. There must be a meaningful distribution of borrowers and exposures across pools. A single pool must not include an undue concentration of the bank's total retail exposure.

                      Apr 08

                • (iii) Rating Criteria

                  • CA-5.8.22

                    A bank must have specific rating definitions, processes and criteria for assigning exposures to grades within a rating system. The rating definitions and criteria must be both plausible and intuitive and must result in a meaningful differentiation of risk:

                    (a) The grade descriptions and criteria must be sufficiently detailed to allow those charged with assigning ratings to consistently assign the same grade to borrowers or facilities posing similar risk. This consistency should exist across lines of business, departments and geographic locations. If rating criteria and procedures differ for different types of borrowers or facilities, the bank must monitor for possible inconsistency, and must alter rating criteria to improve consistency when appropriate;
                    (b) Written rating definitions must be clear and detailed enough to allow third parties to understand the assignment of ratings, such as internal audit or an equally independent function and supervisors, to replicate rating assignments and evaluate the appropriateness of the grade/pool assignments; and
                    (c) The criteria must also be consistent with the bank's internal lending standards and its policies for handling troubled borrowers and facilities.
                    Amended: April 2011
                    Apr 08

                  • CA-5.8.23

                    To ensure that banks are consistently taking into account available information, they must use all relevant and material information in assigning ratings to borrowers and facilities. Information must be current. The less information a bank has, the more conservative must be its assignments of exposures to borrower and facility grades or pools. An external rating can be the primary factor determining an internal rating assignment; however, the bank must ensure that it considers other relevant information.

                    Apr 08

                  • — SL Product Lines within the Corporate Asset Class

                    • CA-5.8.24

                      Banks using the supervisory slotting criteria for SL exposures must assign exposures to their internal rating grades based on their own criteria, systems and processes, subject to compliance with the requisite minimum requirements. Banks must then map these internal rating grades into the five supervisory rating categories. Tables 1 to 4 in Appendix CA-7 provide, for each sub-class of SL exposures, the general assessment factors and characteristics exhibited by the exposures that fall under each of the supervisory categories. Each lending activity has a unique table describing the assessment factors and characteristics.

                      Apr 08

                    • CA-5.8.25

                      The CBB recognises that the criteria that banks use to assign exposures to internal grades will not perfectly align with criteria that define the supervisory categories; however, banks must demonstrate that their mapping process has resulted in an alignment of grades which is consistent with the preponderance of the characteristics in the respective supervisory category. Banks must take special care to ensure that any overrides of their internal criteria do not render the mapping process ineffective.

                      Apr 08

                • (iv) Rating Assignment Horizon

                  • CA-5.8.26

                    Although the time horizon used in PD estimation is one year (as described in paragraph CA-5.8.59), banks are expected to use a longer time horizon in assigning ratings.

                    Apr 08

                  • CA-5.8.27

                    A borrower rating must represent the bank's assessment of the borrower's ability and willingness to contractually perform despite adverse economic conditions or the occurrence of unexpected events. For example, a bank may base rating assignments on specific, appropriate stress scenarios. Alternatively, a bank may take into account borrower characteristics that are reflective of the borrower's vulnerability to adverse economic conditions or unexpected events, without explicitly specifying a stress scenario. The range of economic conditions that are considered when making assessments must be consistent with current conditions and those that are likely to occur over a business cycle within the respective industry/geographic region.

                    Apr 08

                  • CA-5.8.28

                    Given the difficulties in forecasting future events and the influence they will have on a particular borrower's financial condition, a bank must take a conservative view of projected information. Furthermore, where limited data are available, a bank must adopt a conservative bias to its analysis.

                    Apr 08

                • (v) Use of Models

                  • CA-5.8.29

                    The requirements in this sub-section apply to statistical models and other mechanical methods used to assign borrower or facility ratings or in estimation of PDs, LGDs, or EADs. Credit scoring models and other mechanical rating procedures generally use only a subset of available information. Although mechanical rating procedures may sometimes avoid some of the idiosyncratic errors made by rating systems in which human judgement plays a large role, mechanical use of limited information also is a source of rating errors. Credit scoring models and other mechanical procedures are permissible as the primary or partial basis of rating assignments, and may play a role in the estimation of loss characteristics. Sufficient human judgement and human oversight is necessary to ensure that all relevant and material information, including that which is outside the scope of the model, is also taken into consideration, and that the model is used appropriately:

                    (a) The burden is on the bank to satisfy CBB that a model or procedure has good predictive power and that regulatory capital requirements will not be distorted as a result of its use. The variables that are input to the model must form a reasonable set of predictors. The model must be accurate on average across the range of borrowers or facilities to which the bank is exposed and there must be no known material biases;
                    (b) The bank must have in place a process for vetting data inputs into a statistical default or loss prediction model which includes an assessment of the accuracy, completeness and appropriateness of the data specific to the assignment of an approved rating;
                    (c) The bank must demonstrate that the data used to build the model are representative of the population of the bank's actual borrowers or facilities;
                    (d) When combining model results with human judgement, the judgement must take into account all relevant and material information not considered by the model. The bank must have written guidance describing how human judgement and model results are to be combined;
                    (e) The bank must have procedures for human review of model-based rating assignments. Such procedures should focus on finding and limiting errors associated with known model weaknesses and must also include credible ongoing efforts to improve the model's performance; and
                    (f) The bank must have a regular cycle of model validation that includes monitoring of model performance and stability; review of model relationships; and testing of model outputs against outcomes.
                    Amended: April 2011
                    Apr 08

                • (vi) Documentation of Rating System Design

                  • CA-5.8.30

                    Banks must document in writing their rating systems' design and operational details. The documentation must evidence banks' compliance with the minimum standards, and must address topics such as portfolio differentiation, rating criteria, responsibilities of parties that rate borrowers and facilities, definition of what constitutes a rating exception, parties that have authority to approve exceptions, frequency of rating reviews, and management oversight of the rating process. A bank must document the rationale for its choice of internal rating criteria and must be able to provide analyses demonstrating that rating criteria and procedures are likely to result in ratings that meaningfully differentiate risk. Rating criteria and procedures must be periodically reviewed to determine whether they remain fully applicable to the current portfolio and to external conditions. In addition, a bank must document a history of major changes in the risk rating process, and such documentation must support identification of changes made to the risk rating process subsequent to the last CBB's review. The organisation of rating assignment, including the internal control structure, must also be documented.

                    Apr 08

                  • CA-5.8.31

                    Banks must document the specific definitions of default and loss used internally and demonstrate consistency with the reference definitions set out in paragraphs CA-5.8.63 to CA-5.8.71.

                    Apr 08

                  • CA-5.8.32

                    If the bank employs statistical models in the rating process, the bank must document their methodologies. This material must:

                    (a) Provide a detailed outline of the theory, assumptions and/or mathematical and empirical basis of the assignment of estimates to grades, individual obligors, exposures, or pools, and the data source(s) used to estimate the model;
                    (b) Establish a rigorous statistical process (including out-of-time and out-of-sample performance tests) for validating the model; and
                    (c) Indicate any circumstances under which the model does not work effectively.
                    Apr 08

                  • CA-5.8.33

                    Use of a model obtained from a third-party vendor that claims proprietary technology is not a justification for exemption from documentation or any other of the requirements for internal rating systems. The burden is on the model's vendor and the bank to satisfy CBB.

                    Apr 08

              • 4. Risk Rating System Operations

                • (i) Coverage of Ratings

                  • CA-5.8.34

                    For corporate, sovereign, and bank exposures, each borrower and all recognised guarantors must be assigned a rating and each exposure must be associated with a facility rating as part of the loan approval process. Similarly, for retail, each exposure must be assigned to a pool as part of the loan approval process.

                    Apr 08

                  • CA-5.8.35

                    Each separate legal entity to which the bank is exposed must be separately rated. A bank must have policies acceptable to CBB regarding the treatment of individual entities in a connected group including circumstances under which the same rating may or may not be assigned to some or all related entities.

                    Apr 08

                • (ii) Integrity of Rating Process

                  • — Standards for Corporate, Sovereign, and Bank Exposures

                    • CA-5.8.36

                      Rating assignments and periodic rating reviews must be completed or approved by a party that does not directly stand to benefit from the extension of credit. Independence of the rating assignment process can be achieved by the bank through a range of practices that will be carefully reviewed by CBB. These operational processes must be documented in the bank's procedures and incorporated into bank policies. Credit policies and underwriting procedures must reinforce and foster the independence of the rating process.

                      Apr 08

                    • CA-5.8.37

                      Borrowers and facilities must have their ratings refreshed at least on an annual basis. Certain credits, especially higher risk borrowers or problem exposures, must be subject to more frequent review. In addition, banks must initiate a new rating if material information on the borrower or facility comes to light.

                      Apr 08

                  • — Standards for Retail Exposures

                    • CA-5.8.38

                      A bank must review the loss characteristics and delinquency status of each identified risk pool on at least an annual basis. It must also review the status of individual borrowers within each pool as a means of ensuring that exposures continue to be assigned to the correct pool. This requirement may be satisfied by review of a representative sample of exposures in the pool.

                      Apr 08

                • (iii) Overrides

                  • CA-5.8.39

                    For rating assignments based on expert judgement, banks must clearly articulate the situations in which bank officers may override the outputs of the rating process, including how and to what extent such overrides can be used and by whom. For model-based ratings, the bank must have guidelines and processes for monitoring cases where human judgement has overridden the model's rating, variables were excluded or inputs were altered. These guidelines must include identifying personnel that are responsible for approving these overrides. Banks must identify overrides and separately track their performance.

                    Apr 08

                • (iv) Data Maintenance

                  • CA-5.8.40

                    A bank must collect and store data on key borrower and facility characteristics to provide effective support to its internal credit risk measurement and management process, to enable the bank to meet the other requirements in this section, and to serve as a basis for CBB reporting. These data should be sufficiently detailed to allow retrospective re-allocation of obligors and facilities to grades, for example if increasing sophistication of the internal rating system suggests that finer segregation of portfolios can be achieved.

                    Furthermore, banks must collect and retain data on aspects of their internal ratings as may be required under disclosure requirements specified by CBB periodically.

                    Apr 08

                  • — For Corporate, Sovereign, and Bank Exposures

                    • CA-5.8.41

                      Banks must maintain rating histories on borrowers and recognised guarantors, including the rating since the borrower/guarantor was assigned an internal grade, the dates the ratings were assigned, the methodology and key data used to derive the rating and the person/model responsible. The identity of borrowers and facilities that default, and the timing and circumstances of such defaults, must be retained. Banks must also retain data on the PDs and realised default rates associated with rating grades and ratings migration in order to track the predictive power of the borrower rating system.

                      Apr 08

                    • CA-5.8.42

                      Banks under the foundation approach which utilise CBB's estimates are encouraged to retain the relevant data (i.e. data on loss and recovery experience for corporate exposures under the foundation approach, data on realised losses for banks using the supervisory slotting criteria for SL).

                      Apr 08

                  • — For Retail Exposures

                    • CA-5.8.43

                      Banks must retain data used in the process of allocating exposures to pools, including data on borrower and transaction risk characteristics used either directly or through use of a model, as well as data on delinquency. Banks must also retain data on the estimated PDs, LGDs and EADs, associated with pools of exposures. For defaulted exposures, banks must retain the data on the pools to which the exposure was assigned over the year prior to default and the realised outcomes on LGD and EAD.

                      Apr 08

                • (v) Stress Tests used in Assessment of Capital Adequacy

                  • CA-5.8.44

                    An IRB bank must have in place sound stress testing processes for use in the assessment of capital adequacy. Stress testing must involve identifying possible events or future changes in economic conditions that could have unfavourable effects on a bank's credit exposures and assessment of the bank's ability to withstand such changes. Examples of scenarios that could be used are (i) economic or industry downturns; (ii) market-risk events; and (iii) liquidity conditions.

                    Apr 08

                  • CA-5.8.45

                    In addition to the more general tests described above, the bank must perform a credit risk stress test to assess the effect of certain specific conditions on its IRB regulatory capital requirements. The test to be employed would be one chosen by the bank, subject to CBB's review. The test to be employed must be meaningful and reasonably conservative. Individual banks may develop different approaches to undertaking this stress test requirement, depending on their circumstances. For this purpose, the objective is not to require banks to consider worst-case scenarios. The bank's stress test in this context should, however, consider at least the effect of mild recession scenarios. In this case, one example might be to use two consecutive quarters of zero growth to assess the effect on the bank's PDs, LGDs and EADs, taking account — on a conservative basis — of the bank's international diversification.

                    Apr 08

                  • CA-5.8.46

                    Banks using the double default framework must consider as part of their stress testing framework the impact of a deterioration in the credit quality of protection providers, in particular the impact of protection providers falling outside the eligibility criteria due to rating changes. Banks should also consider the impact of the default of one but not both of the obligor and protection provider, and the consequent increase in risk and capital requirements at the time of that default.

                    Apr 08

                  • CA-5.8.47

                    Whatever method is used, the bank must include a consideration of the following sources of information. First, a bank's own data should allow estimation of the ratings migration of at least some of its exposures. Second, banks should consider information about the impact of smaller deterioration in the credit environment on a bank's ratings, giving some information on the likely effect of bigger, stress circumstances. Third, banks should evaluate evidence of ratings migration in external ratings. This would include the bank broadly matching its buckets to rating categories.

                    Apr 08

                  • CA-5.8.48

                    CBB may issue guidance to banks on how the tests to be used for this purpose should be designed, bearing in mind conditions in the Kingdom of Bahrain. The results of the stress test may indicate no difference in the capital calculated under the IRB rules described in this section of this chapter if the bank already uses such an approach for its internal rating purposes. Where a bank operates in several markets, it does not need to test for such conditions in all of those markets, but a bank must stress portfolios containing the vast majority of its total exposures.

                    Apr 08

              • 5. Corporate Governance and Oversight

                • (i) Corporate Governance

                  • CA-5.8.49

                    All material aspects of the rating and estimation processes must be approved by the bank's board of directors or a designated committee thereof and senior management. These parties must possess a general understanding of the bank's risk rating system and detailed comprehension of its associated management reports. Senior management must provide notice to the board of directors or a designated committee thereof of material changes or exceptions from established policies that will materially impact the operations of the bank's rating system.

                    Apr 08

                  • CA-5.8.50

                    Senior management also must have a good understanding of the rating system's design and operation, and must approve material differences between established procedure and actual practice. Management must also ensure, on an ongoing basis, that the rating system is operating properly. Management and staff in the credit control function must meet regularly to discuss the performance of the rating process, areas needing improvement, and the status of efforts to improve previously identified deficiencies.

                    Apr 08

                  • CA-5.8.51

                    Internal ratings must be an essential part of the reporting to these parties. Reporting must include risk profile by grade, migration across grades, estimation of the relevant parameters per grade, and comparison of realised default rates (and LGDs and EADs for retail asset class) against expectations. Reporting frequencies may vary with the significance and type of information and the level of the recipient.

                    Apr 08

                • (ii) Credit Risk Control

                  • CA-5.8.52

                    Banks must have independent credit risk control units that are responsible for the design or selection, implementation and performance of their internal rating systems. The unit(s) must be functionally independent from the personnel and management functions responsible for originating exposures. Areas of responsibility must include:

                    (a) Testing and monitoring internal grades;
                    (b) Production and analysis of summary reports from the bank's rating system, to include historical default data sorted by rating at the time of default and one year prior to default, grade migration analyses, and monitoring of trends in key rating criteria;
                    (c) Implementing procedures to verify that rating definitions are consistently applied across departments and geographic areas;
                    (d) Reviewing and documenting any changes to the rating process, including the reasons for the changes; and
                    (e) Reviewing the rating criteria to evaluate if they remain predictive of risk. Changes to the rating process, criteria or individual rating parameters must be documented and retained for CBB to review.
                    Apr 08

                  • CA-5.8.53

                    A credit risk control unit must actively participate in the development, selection, implementation and validation of rating models. It must assume oversight and supervision responsibilities for any models used in the rating process, and ultimate responsibility for the ongoing review and alterations to rating models.

                    Apr 08

                • (iii) Internal and External Audit

                  • CA-5.8.54

                    Internal audit or an equally independent function must review at least bi-annually the bank's rating system and its operations, including the operations of the credit function and the estimation of PDs, LGDs and EADs. Areas of review include adherence to all applicable minimum requirements. Internal audit must document its findings. External auditors are also required to conduct above-mentioned review on an annual basis.

                    Apr 08

              • 6. Use of Internal Ratings

                • CA-5.8.55

                  Internal ratings and default and loss estimates should play an essential role in the credit approval, risk management, internal capital allocations, and corporate governance functions of banks using the IRB approach. Ratings systems and estimates designed and implemented exclusively for the purpose of qualifying for the IRB approach and used only to provide IRB inputs are not acceptable. It is recognised that banks will not necessarily be using exactly the same estimates for both IRB and all internal purposes. For example, pricing models are likely to use PDs and LGDs relevant to the life of the asset. Where there are such differences, a bank must document them and demonstrate their reasonableness to the CBB.

                  Apr 08

                • CA-5.8.56

                  A bank must have a credible track record in the use of internal ratings information. Thus, the bank must demonstrate that it has been using a rating system that was broadly in line with the minimum requirements articulated in this section for at least the three years prior to qualification. For the retail asset class, banks must demonstrate that they have been estimating and employing LGDs and EADs in a manner that is broadly consistent with the minimum requirements for use of own estimates of LGDs and EADs for at least the three years prior to qualification. Improvements to a bank's rating system will not render a bank non-compliant with the three-year requirement.

                  Apr 08

              • 7. Risk Quantification

                • (i) Overall Requirements for Estimation

                  • — Structure and Intent

                    • CA-5.8.57

                      This section addresses the broad standards for own-estimates of PD, LGD, and EAD. Generally, all banks using the IRB approaches must estimate a PD50 for each internal borrower grade for corporate, sovereign and bank exposures or for each pool in the case of retail exposures.


                      50 Banks are not required to produce their own estimates of PD for certain equity exposures and certain exposures that fall within the SL sub-classes.

                      Apr 08

                    • CA-5.8.58

                      PD estimates must be a long-run average of one-year default rates for borrowers in the grade, with the exception of retail exposures (see below). Requirements specific to PD estimation are provided in paragraphs CA-5.8.72 to CA-5.8.78. For retail asset class banks must estimate an appropriate LGD (as defined in paragraphs CA-5.8.79 to CA-5.8.83) for each of its retail pools and must also estimate an appropriate long- run default-weighted average EAD for each of its facilities as defined in paragraphs CA-5.8.84 and CA-5.8.85. Requirements specific to EAD estimation appear in paragraphs CA-5.8.84 to CA-5.8.89.

                      Apr 08

                    • CA-5.8.59

                      Internal estimates of PD, LGD, and EAD must incorporate all relevant, material and available data, information and methods. A bank may utilise internal data and data from external sources (including pooled data). Where internal or external data is used, the bank must demonstrate that its estimates are representative of long run experience.

                      Apr 08

                    • CA-5.8.60

                      Estimates must be grounded in historical experience and empirical evidence, and not based purely on subjective or judgmental considerations. Any changes in lending practice or the process for pursuing recoveries over the observation period must be taken into account. A bank's estimates must promptly reflect the implications of technical advances and new data and other information, as it becomes available. Banks must review their estimates on a yearly basis or more frequently.

                      Apr 08

                    • CA-5.8.61

                      The population of exposures represented in the data used for estimation, and lending standards in use when the data were generated, and other relevant characteristics should be closely matched to or at least comparable with those of the bank's exposures and standards. The bank must also demonstrate that economic or market conditions that underlie the data are relevant to current and foreseeable conditions. For estimates of LGD and EAD, banks must take into account paragraphs CA-5.8.79 to CA-5.8.89. The number of exposures in the sample and the data period used for quantification must be sufficient to provide the bank with confidence in the accuracy and robustness of its estimates. The estimation technique must perform well in out-of-sample tests.

                      Apr 08

                    • CA-5.8.62

                      In general, estimates of PDs, LGDs, and EADs are likely to involve unpredictable errors. In order to avoid over-optimism, a bank must add to its estimates a margin of conservatism that is related to the likely range of errors. Where methods and data are less satisfactory and the likely range of errors is larger, the margin of conservatism must be larger. CBB may allow some flexibility in application of the required standards for data that are collected prior to the date of implementation of this Module. However, banks must demonstrate to CBB that appropriate adjustments have been made to achieve broad equivalence to the data without such flexibility. Data collected beyond the date of implementation must conform to the minimum standards unless otherwise stated.

                      Apr 08

                • (ii) Definition of Default

                  • CA-5.8.63

                    A default is considered to have occurred with regard to a particular obligor when either or both of the two following events have taken place:

                    (a) The bank considers that the obligor is unlikely to pay its credit obligations to the banking group in full, without recourse by the bank to actions such as realising security (if held); and
                    (b) The obligor is past due more than 90 days on any material credit obligation to the banking group. Overdrafts will be considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than current outstandings.
                    Amended: April 2011
                    Apr 08

                  • CA-5.8.64

                    The elements to be taken as indications of unlikeliness to pay include:

                    (a) The bank puts the credit obligation on non-accrued status;
                    (b) The bank makes a charge-off or account-specific provision resulting from a significant perceived decline in credit quality subsequent to the bank taking on the exposure;51
                    (c) The bank sells the credit obligation at a material credit-related economic loss;
                    (d) The bank consents to a distressed restructuring of the credit obligation where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, interest or (where relevant) fees;52
                    (e) The bank has filed for the obligor's bankruptcy or a similar order in respect of the obligor's credit obligation to the banking group; and
                    (f) The obligor has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of the credit obligation to the banking group.

                    51Specific provisions on equity exposures set aside for price risk do not signal default.

                    52Including, in the case of equity holdings assessed under a PD/LGD approach, such distressed restructuring of the equity itself.

                    Amended: April 2011
                    Apr 08

                  • CA-5.8.65

                    CBB will periodically provide appropriate guidance as to how these elements must be implemented and monitored.

                    Apr 08

                  • CA-5.8.66

                    For retail exposures, the definition of default can be applied at the level of a particular facility, rather than at the level of the obligor. As such, default by a borrower on one obligation does not require a bank to treat all other obligations to the banking group as defaulted.

                    Apr 08

                  • CA-5.8.67

                    A bank must record actual defaults on IRB exposure classes using this reference definition. A bank must also use the reference definition for its estimation of PDs, and (where relevant) LGDs and EADs. In arriving at these estimations, a bank may use external data available to it that is not itself consistent with that definition, subject to the requirements set out in paragraph CA-5.8.75. However, in such cases, banks must demonstrate to CBB that appropriate adjustments to the data have been made to achieve broad equivalence with the reference definition. This same condition would apply to any internal data used up to implementation of this Module. Internal data (including that pooled by banks) used in such estimates beyond the date of implementation of this Module must be consistent with the reference definition.

                    Apr 08

                  • CA-5.8.68

                    If the bank considers that a previously defaulted exposure's status is such that no trigger of the reference definition any longer applies, the bank must rate the borrower and estimate LGD as they would for a non-defaulted facility. Should the reference definition subsequently be triggered, a second default would be deemed to have occurred.

                    Apr 08

                • (iii) Re-ageing

                  • CA-5.8.69

                    The bank must have clearly articulated and documented policies in respect of the counting of days past due, in particular in respect of the re-ageing of the facilities and the granting of extensions, deferrals, renewals and rewrites to existing accounts. At a minimum, the re-ageing policy must include: (a) approval authorities and reporting requirements; (b) minimum age of a facility before it is eligible for re-ageing; (c) delinquency levels of facilities that are eligible for re-ageing; (d) maximum number of re-ageings per facility; and (e) a reassessment of the borrower's capacity to repay. These policies must be applied consistently over time, and must support the 'use test' (i.e. if a bank treats a re-aged exposure in a similar fashion to other delinquent exposures more than the past-due cut off point, this exposure must be recorded as in default for IRB purposes). The CBB may choose to establish more specific requirements on re-ageing for banks.

                    Apr 08

                • (iv) Treatment of Overdrafts

                  • CA-5.8.70

                    Authorised overdrafts must be subject to a credit limit set by the bank and brought to the knowledge of the client. Any break of this limit must be monitored; if the account were not brought under the limit after 90 days, it would be considered as defaulted. Non-authorised overdrafts will be associated with a zero limit for IRB purposes. Thus, days past due commence once any credit is granted to an unauthorised customer; if such credit were not repaid within 90, the exposure would be considered in default. Banks must have in place rigorous internal policies for assessing the creditworthiness of customers who are offered overdraft accounts.

                    Apr 08

                • (v) Definition of Loss for all Asset Classes

                  • CA-5.8.71

                    The definition of loss used in estimating LGD is economic loss. When measuring economic loss, all relevant factors should be taken into account. This must include material discount effects and material direct and indirect costs associated with collecting on the exposure. Banks must not simply measure the loss recorded in accounting records, although they must be able to compare accounting and economic losses. The bank's own workout and collection expertise significantly influences their recovery rates and must be reflected in their LGD estimates, but adjustments to estimates for such expertise must be conservative until the bank has sufficient internal empirical evidence of the impact of its expertise.

                    Apr 08

                • (vi) Requirements Specific to PD Estimation

                  • — Corporate, Sovereign, and Bank Exposures

                    • CA-5.8.72

                      Banks must use information and techniques that take appropriate account of the long-run experience when estimating the average PD for each rating grade. For example, banks may use one or more of the three specific techniques set out below: internal default experience, mapping to external data, and statistical default models.

                      Apr 08

                    • CA-5.8.73

                      Banks may have a primary technique and use others as a point of comparison and potential adjustment. CBB will not be satisfied by mechanical application of a technique without supporting analysis. Banks must recognise the importance of judgmental considerations in combining results of techniques and in making adjustments for limitations of techniques and information:

                      (a) A bank may use data on internal default experience for the estimation of PD. A bank must demonstrate in its analysis that the estimates are reflective of underwriting standards and of any differences in the rating system that generated the data and the current rating system. Where only limited data are available, or where underwriting standards or rating systems have changed, the bank must add a greater margin of conservatism in its estimate of PD. The use of pooled data across institutions may also be recognised. A bank must demonstrate that the internal rating systems and criteria of other banks in the pool are comparable with its own;
                      (b) Banks may associate or map their internal grades to the scale used by an external credit assessment institution or similar institution and then attribute the default rate observed for the external institution's grades to the bank's grades. Mappings must be based on a comparison of internal rating criteria to the criteria used by the external institution and on a comparison of the internal and external ratings of any common borrowers. Biases or inconsistencies in the mapping approach or underlying data must be avoided. The external institution's criteria underlying the data used for quantification must be oriented to the risk of the borrower and not reflect transaction characteristics. The bank's analysis must include a comparison of the default definitions used, subject to the requirements in paragraph CA-5.8.63 to CA-5.8.68. The bank must document the basis for the mapping; and
                      (c) A bank is allowed to use a simple average of default-probability estimates for individual borrowers in a given grade, where such estimates are drawn from statistical default prediction models. The bank's use of default probability models for this purpose must meet the standards specified in paragraph CA-5.8.29.
                      Amended: April 2011
                      Apr 08

                    • CA-5.8.74

                      Irrespective of whether a bank is using external, internal, or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used must be at least five years for at least one source. If the available observation period spans a longer period for any source, and this data are relevant and material, this longer period must be used.

                      Apr 08

                  • — Retail Exposures

                    • CA-5.8.75

                      Given the bank-specific basis of assigning exposures to pools, banks must regard internal data as the primary source of information for estimating loss characteristics. Banks are permitted to use external data or statistical models for quantification provided a strong link can be demonstrated between (a) the bank's process of assigning exposures to a pool and the process used by the external data source, and (b) between the bank's internal risk profile and the composition of the external data. In all cases banks must use all relevant and material data sources as points of comparison.

                      Apr 08

                    • CA-5.8.76

                      One method for deriving long-run average estimates of PD and default-weighted average loss rates given default (as defined in paragraph CA-5.8.79) for retail would be based on an estimate of the expected long-run loss rate. A bank may (i) use an appropriate PD estimate to infer the long-run default-weighted average loss rate given default, or (ii) use a long-run default-weighted average loss rate given default to infer the appropriate PD. In either case, it is important to recognise that the LGD used for the IRB capital calculation cannot be less than the long-run default-weighted average loss rate given default and must be consistent with the concepts defined in paragraph CA-5.8.79.

                      Apr 08

                    • CA-5.8.77

                      Irrespective of whether banks are using external, internal, pooled data sources, or a combination of the three, for their estimation of loss characteristics, the length of the underlying historical observation period used must be at least five years. If the available observation spans a longer period for any source, and these data are relevant, this longer period must be used. A bank need not give equal importance to historic data if it can convince CBB that more recent data are a better predictor of loss rates.

                      Apr 08

                    • CA-5.8.78

                      The CBB recognises that seasoning can be quite material for some long-term retail exposures characterised by seasoning effects that peak several years after origination. Banks must anticipate the implications of rapid exposure growth and take steps to ensure that their estimation techniques are accurate, and that their current capital level and earnings and funding prospects are adequate to cover their future capital needs. In order to avoid gyrations in their required capital positions arising from short-term PD horizons, banks are also encouraged to adjust PD estimates upward for anticipated seasoning effects, provided such adjustments are applied in a consistent fashion over time. The CBB may make such adjustments mandatory.

                      Apr 08

                • (vii) Requirements Specific to Own-LGD Estimates

                  • CA-5.8.79

                    A bank must estimate an LGD for each facility that aims to reflect economic downturn conditions where necessary to capture the relevant risks. This LGD cannot be less than the long-run default-weighted average loss rate given default calculated based on the average economic loss of all observed defaults within the data source for that type of facility. In addition, a bank must take into account the potential for the LGD of the facility to be higher than the default-weighted average during a period when credit losses are substantially higher than average. For certain types of exposures, loss severities may not exhibit such cyclical variability and LGD estimates may not differ materially (or possibly at all) from the long-run default-weighted average. However, for other exposures, this cyclical variability in loss severities may be important and banks will need to incorporate it into their LGD estimates. For this purpose, banks may use averages of loss severities observed during periods of high credit losses, forecasts based on appropriately conservative assumptions, or other similar methods. Appropriate estimates of LGD during periods of high credit losses might be formed using either internal and/or external data. CBB will continue to monitor and encourage the development of appropriate approaches to this issue.

                    Apr 08

                  • CA-5.8.80

                    In its analysis, the bank must consider the extent of any dependence between the risk of the borrower and that of the collateral or collateral provider. Cases where there is a significant degree of dependence must be addressed in a conservative manner. Any currency mismatch between the underlying obligation and the collateral must also be considered and treated conservatively in the bank's assessment of LGD.

                    Apr 08

                  • CA-5.8.81

                    LGD estimates must be grounded in historical recovery rates and, when applicable, must not solely be based on the collateral's estimated market value. This requirement recognises the potential inability of banks to gain both control of their collateral and liquidate it expeditiously. To the extent, that LGD estimates take into account the existence of collateral, banks must establish internal requirements for collateral management, operational procedures, legal certainty and risk management process that are generally consistent with those required for the standardised approach.

                    Apr 08

                  • CA-5.8.82

                    Recognising the principle that realised losses can at times systematically exceed expected levels, the LGD assigned to a defaulted asset should reflect the possibility that the bank would have to recognise additional, unexpected losses during the recovery period. For each defaulted asset, the bank must also construct its best estimate of the expected loss on that asset based on current economic circumstances and facility status. The amount, if any, by which the LGD on a defaulted asset exceeds the bank's best estimate of expected loss on the asset represents the capital requirement for that asset, and should be set by the bank on a risk-sensitive basis in accordance with paragraphs CA-5.3.3 and CA-5.4.3 to CA-5.4.5. Instances where the best estimate of expected loss on a defaulted asset is less than the sum of specific provisions and partial charge-offs on that asset will attract CBB's scrutiny and must be justified by the bank.

                    Apr 08

                  • CA-5.8.83

                    The minimum data observation period for LGD estimates for retail exposures is five years. The less data a bank has, the more conservative it must be in its estimation. A bank need not give equal importance to historic data if it can demonstrate to CBB that more recent data are a better predictor of loss rates.

                    Apr 08

                • (viii) Requirements Specific to Own-EAD Estimates

                  • CA-5.8.84

                    EAD for an on-balance sheet or off-balance sheet item is defined as the expected gross exposure of the facility upon default of the obligor. For on-balance sheet items, banks must estimate EAD at no less than the current drawn amount, subject to recognising the effects of on-balance sheet netting as specified in the foundation approach. The minimum requirements for the recognition of netting are the same as those under the foundation approach. The additional minimum requirements for internal estimation of EAD under the advanced approach for retail class, therefore, focus on the estimation of EAD for off-balance sheet items (excluding transactions that expose banks to counterparty credit risk as set out in Appendix CA-2). Banks must have established procedures in place for the estimation of EAD for off-balance sheet items for retail asset class. These must specify the estimates of EAD to be used for each facility type. Banks estimates of EAD should reflect the possibility of additional drawings by the borrower up to and after the time a default event is triggered. Where estimates of EAD differ by facility type, the delineation of these facilities must be clear and unambiguous.

                    Apr 08

                  • CA-5.8.85

                    Advanced approach banks must assign an estimate of EAD for each facility. It must be an estimate of the long-run default-weighted average EAD for similar facilities and borrowers over a sufficiently long period of time, but with a margin of conservatism appropriate to the likely range of errors in the estimate. If a positive correlation can reasonably be expected between the default frequency and the magnitude of EAD, the EAD estimate must incorporate a larger margin of conservatism. Moreover, for exposures for which EAD estimates are volatile over the economic cycle, the bank must use EAD estimates that are appropriate for an economic downturn, if these are more conservative than the long- run average. For banks that have been able to develop their own EAD models, this could be achieved by considering the cyclical nature, if any, of the drivers of such models. Other banks may have sufficient internal data to examine the impact of previous recession(s). However, some banks may only have the option of making conservative use of external data.

                    Apr 08

                  • CA-5.8.86

                    The criteria by which estimates of EAD are derived must be plausible and intuitive, and represent what the bank believes to be the material drivers of EAD. The choices must be supported by credible internal analysis by the bank. The bank must be able to provide a breakdown of its EAD experience by the factors it sees as the drivers of EAD. A bank must use all relevant and material information in its derivation of EAD estimates. Across facility types, a bank must review its estimates of EAD when material new information comes to light and at least on an annual basis.

                    Apr 08

                  • CA-5.8.87

                    Due consideration must be paid by the bank to its specific policies and strategies adopted in respect of account monitoring and payment processing. The bank must also consider its ability and willingness to prevent further drawings in circumstances short of payment default, such as covenant violations or other technical default events. Banks must also have adequate systems and procedures in place to monitor facility amounts, current outstandings against committed lines and changes in outstandings per borrower and per grade. The bank must be able to monitor outstanding balances on a daily basis.

                    Apr 08

                  • CA-5.8.88

                    For transactions that expose banks to counterparty credit risk, estimates of EAD must fulfill the requirements set forth in Appendix CA-2 of this Module.

                    Apr 08

                  • CA-5.8.89

                    The minimum data observation period for EAD estimates for retail exposures is five years. The less data a bank has, the more conservative it must be in its estimation. A bank need not give equal importance to historic data if it can demonstrate to CBB that more recent data are a better predictor of drawdowns.

                    Apr 08

                • (ix) Minimum Requirements for Assessing Effect of Guarantees and Credit Derivatives

                  • — Standards for Corporate, Sovereign, and Bank Exposures

                    • CA-5.8.90

                      The minimum requirements outlined in paragraphs CA-5.8.91 to CA-5.8.100 apply to banks using the foundation LGD estimates with the following exceptions:

                      (a) The bank is not able to use an 'LGD-adjustment' option; and
                      (b) The range of eligible guarantees and guarantors is limited to those outlined in paragraph CA-5.3.34.
                      Apr 08

                  • — Standards for Retail Exposures

                    • a. Guarantees

                      • CA-5.8.91

                        Where guarantees exist, either in support of an individual obligation or a pool of exposures, a bank may reflect the risk-reducing effect either through its estimates of PD or LGD, provided this is done consistently. In adopting one or the other technique, a bank must adopt a consistent approach, both across types of guarantees and over time.

                        Apr 08

                      • CA-5.8.92

                        In all cases, both the borrower and all recognised guarantors must be assigned a borrower rating at the outset and on an ongoing basis. A bank must follow all minimum requirements for assigning borrower ratings set out in this section, including the regular monitoring of the guarantor's condition and ability and willingness to honour its obligations. Consistent with the requirements in section CA-5.8.43, a bank must retain all relevant information on the assignment of an exposure to a pool, and the estimation of PD.

                        Apr 08

                      • CA-5.8.93

                        In no case can the bank assign the guaranteed exposure an adjusted PD or LGD such that the adjusted risk weight would be lower than that of a comparable, direct exposure to the guarantor. Neither criteria nor rating processes are permitted to consider possible favourable effects of imperfect expected correlation between default events for the borrower and guarantor for purposes of regulatory minimum capital requirements. As such, the adjusted risk weight must not reflect the risk mitigation of "double default."

                        Apr 08

                    • b. Eligible Guarantors and Guarantees

                      • CA-5.8.94

                        There are no restrictions on the types of eligible guarantors. The bank must, however, have clearly specified criteria for the types of guarantors it will recognise for regulatory capital purposes.

                        Apr 08

                      • CA-5.8.95

                        The guarantee must be evidenced in writing, non-cancellable on the part of the guarantor, in force until the debt is satisfied in full (to the extent of the amount and tenor of the guarantee) and legally enforceable against the guarantor in a jurisdiction where the guarantor has assets to attach and enforce a judgement. However, in contrast to the foundation approach to corporate, bank, and sovereign exposures, guarantees prescribing conditions under which the guarantor may not be obliged to perform (conditional guarantees) may be recognised under certain conditions. Specifically, the onus is on the bank to demonstrate that the assignment criteria adequately address any potential reduction in the risk mitigation effect.

                        Apr 08

                    • c. Adjustment Criteria

                      • CA-5.8.96

                        A bank must have clearly specified criteria for adjusting borrower grades or LGD estimates (or in the case of retail and eligible purchased receivables, the process of allocating exposures to pools) to reflect the impact of guarantees for regulatory capital purposes. These criteria must be as detailed as the criteria for assigning exposures to grades consistent with paragraphs CA-5.8.22 and CA-5.8.23, and must follow all minimum requirements for assigning borrower or facility ratings set out in this section.

                        Apr 08

                      • CA-5.8.97

                        The criteria must be plausible and intuitive, and must address the guarantor's ability and willingness to perform under the guarantee. The criteria must also address the likely timing of any payments and the degree to which the guarantor's ability to perform under the guarantee is correlated with the borrower's ability to repay. The bank's criteria must also consider the extent to which residual risk to the borrower remains, for example a currency mismatch between the guarantee and the underlying exposure.

                        Apr 08

                      • CA-5.8.98

                        In adjusting borrower grades or LGD estimates (or in the case of retail and eligible purchased receivables, the process of allocating exposures to pools), banks must take all relevant available information into account.

                        Apr 08

                    • d. Credit Derivatives

                      • CA-5.8.99

                        The minimum requirements for guarantees are relevant also for single-name credit derivatives. Additional considerations arise in respect of asset mismatches. The criteria used for assigning adjusted borrower grades or LGD estimates (or pools) for exposures hedged with credit derivatives must require that the asset on which the protection is based (the reference asset) cannot be different from the underlying asset, unless the conditions outlined in the foundation approach are met.

                        Apr 08

                      • CA-5.8.100

                        In addition, the criteria must address the payout structure of the credit derivative and conservatively assess the impact this has on the level and timing of recoveries. The bank must also consider the extent to which other forms of residual risk remain.

                        Apr 08

                • (x) Requirements Specific to Estimating PD and LGD (or EL) for Qualifying Purchased Receivables

                  • CA-5.8.101

                    The following minimum requirements for risk quantification must be satisfied for any purchased retail receivables making use of the top-down treatment of default risk and/or the IRB treatments of dilution risk.

                    Apr 08

                  • CA-5.8.102

                    The purchasing bank will be required to group the receivables into sufficiently homogeneous pools so that accurate and consistent estimates of PD and LGD (or EL) for default losses and EL estimates of dilution losses can be determined. In general, the risk bucketing process will reflect the seller's underwriting practices and the heterogeneity of its customers. In addition, methods and data for estimating PD, LGD, and EL must comply with the existing risk quantification standards for retail exposures. In particular, quantification should reflect all information available to the purchasing bank regarding the quality of the underlying receivables, including data for similar pools provided by the seller, by the purchasing bank, or by external sources. The purchasing bank must determine whether the data provided by the seller are consistent with expectations agreed upon by both parties concerning, for example, the type, volume and on-going quality of receivables purchased. Where this is not the case, the purchasing bank is expected to obtain and rely upon more relevant data.

                    Apr 08

                  • — Minimum Operational Requirements

                    • CA-5.8.103

                      A bank purchasing receivables has to justify confidence that current and future advances can be repaid from the liquidation of (or collections against) the receivables pool. To qualify for the top-down treatment of default risk, the receivable pool and overall lending relationship should be closely monitored and controlled. Specifically, a bank will have to demonstrate the following:

                      Apr 08

                  • — Legal Certainty

                    • CA-5.8.104

                      The structure of the facility must ensure that under all foreseeable circumstances the bank has effective ownership and control of the cash remittances from the receivables, including incidences of seller or servicer distress and bankruptcy. When the obligor makes payments directly to a seller or servicer, the bank must verify regularly that payments are forwarded completely and within the contractually agreed terms. As well, ownership over the receivables and cash receipts should be protected against bankruptcy 'stays' or legal challenges that could materially delay the lender's ability to liquidate/assign the receivables or retain control over cash receipts.

                      Apr 08

                  • — Effectiveness of Monitoring Systems

                    • CA-5.8.105

                      The bank must be able to monitor both the quality of the receivables and the financial condition of the seller and servicer. In particular:

                      (a) The bank must (i) assess the correlation among the quality of the receivables and the financial condition of both the seller and servicer, and (ii) have in place internal policies and procedures that provide adequate safeguards to protect against such contingencies, including the assignment of an internal risk rating for each seller and servicer;
                      (b) The bank must have clear and effective policies and procedures for determining seller and servicer eligibility. The bank or its agent must conduct periodic reviews of sellers and servicers in order to verify the accuracy of reports from the seller/servicer, detect fraud or operational weaknesses, and verify the quality of the seller's credit policies and servicer's collection policies and procedures. The findings of these reviews must be well documented;
                      (c) The bank must have the ability to assess the characteristics of the receivables pool, including (i) over-advances; (ii) history of the seller's arrears, bad debts, and bad debt allowances; (iii) payment terms, and (iv) potential contra accounts;
                      (d) The bank must have effective policies and procedures for monitoring on an aggregate basis single-obligor concentrations both within and across receivables pools; and
                      (e) The bank must receive timely and sufficiently detailed reports of receivables ageings and dilutions to (i) ensure compliance with the bank's eligibility criteria and advancing policies governing purchased receivables, and (ii) provide an effective means with which to monitor and confirm the seller's terms of sale (e.g. invoice date ageing) and dilution.
                      Amended: April 2011
                      Apr 08

                  • — Effectiveness of Work-out Systems

                    • CA-5.8.106

                      An effective programme requires systems and procedures not only for detecting deterioration in the seller's financial condition and deterioration in the quality of the receivables at an early stage, but also for addressing emerging problems pro-actively. In particular:

                      (a) The bank should have clear and effective policies, procedures, and information systems to monitor compliance with (i) all contractual terms of the facility (including covenants, advancing formulas, concentration limits, early amortisation triggers, etc.) as well as (ii) the bank's internal policies governing advance rates and receivables eligibility. The bank's systems should track covenant violations and waivers as well as exceptions to established policies and procedures;
                      (b) To limit inappropriate draws, the bank should have effective policies and procedures for detecting, approving, monitoring, and correcting over-advances; and
                      (c) The bank should have effective policies and procedures for dealing with financially weakened sellers or servicers and/or deterioration in the quality of receivable pools. These include, but are not necessarily limited to, early termination triggers in revolving facilities and other covenant protections, a structured and disciplined approach to dealing with covenant violations, and clear and effective policies and procedures for initiating legal actions and dealing with problem receivables.
                      Amended: April 2011
                      Apr 08

                  • — Effectiveness of Systems for Controlling Collateral, Credit Availability and Cash

                    • CA-5.8.107

                      The bank must have clear and effective policies and procedures governing the control of receivables, credit, and cash. In particular:

                      (a) Written internal policies must specify all material elements of the receivables purchase programme, including the advancing rates, eligible collateral, necessary documentation, concentration limits, and how cash receipts are to be handled. These elements should take appropriate account of all relevant and material factors, including the seller's/servicer's financial condition, risk concentrations, and trends in the quality of the receivables and the seller's customer base; and
                      (b) Internal systems must ensure that funds are advanced only against specified supporting collateral and documentation (such as servicer attestations, invoices, shipping documents, etc.).
                      Amended: April 2011
                      Apr 08

                  • — Compliance with the Bank's Internal Policies and Procedures

                    • CA-5.8.108

                      Given the reliance on monitoring and control systems to limit credit risk, the bank must have an effective internal process for assessing compliance with all critical policies and procedures, including:

                      (a) Regular internal and/or external audits of all critical phases of the bank's receivables purchase programme; and
                      (b) Verification of the separation of duties (i) between the assessment of the seller/servicer and the assessment of the obligor and (ii) between the assessment of the seller/servicer and the field audit of the seller/servicer.
                      Amended: April 2011
                      Apr 08

                    • CA-5.8.109

                      A bank's effective internal process for assessing compliance with all critical policies and procedures should also include evaluations of back office operations, with particular focus on qualifications, experience, staffing levels, and supporting systems.

                      Apr 08

              • 8. Validation of Internal Estimates

                • CA-5.8.110

                  Banks must have a robust system in place to validate the accuracy and consistency of rating systems, processes, and the estimation of all relevant risk components. A bank must demonstrate to CBB that the internal validation process enables it to assess the performance of internal rating and risk estimation systems consistently and meaningfully.

                  Apr 08

                • CA-5.8.111

                  Banks must regularly compare realised default rates with estimated PDs for each grade and be able to demonstrate that the realised default rates are within the expected range for that grade. Banks using the advanced IRB approach must complete such analysis for their estimates of LGDs and EADs. Such comparisons must make use of historical data that are over as long a period as possible. The methods and data used in such comparisons by the bank must be clearly documented by the bank. This analysis and documentation must be updated at least annually.

                  Apr 08

                • CA-5.8.112

                  Banks must also use other quantitative validation tools and comparisons with relevant external data sources. The analysis must be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period. Banks' internal assessments of the performance of their own rating systems must be based on long data histories, covering a range of economic conditions, and ideally one or more complete business cycles.

                  Apr 08

                • CA-5.8.113

                  Banks must demonstrate that quantitative testing methods and other validation methods do not vary systematically with the economic cycle. Changes in methods and data (both data sources and periods covered) must be clearly and thoroughly documented.

                  Apr 08

                • CA-5.8.114

                  Banks must have well-articulated internal standards for situations where deviations in realised PDs, LGDs and EADs from expectations become significant enough to call the validity of the estimates into question. These standards must take account of business cycles and similar systematic variability in default experiences. Where realised values continue to be higher than expected values, banks must revise estimates upward to reflect their default and loss experience.

                  Apr 08

                • CA-5.8.115

                  Where banks rely on the CBB's, rather than internal estimates of risk parameters, they are encouraged to compare realised LGDs and EADs to those set by the CBB. The information on realised LGDs and EADs should form part of the bank's assessment of economic capital.

                  Apr 08

              • 9. CBB's LGD and EAD estimates

                • CA-5.8.116

                  Banks under the foundation IRB approach, which do not meet the requirements for own-estimates of LGD and EAD, above, must meet the minimum requirements described in the standardised approach to receive recognition for eligible financial collateral (as set out in chapter CA-4). They must meet the following additional minimum requirements in order to receive recognition for additional collateral types.

                  Apr 08

                • (i) Definition of Eligibility of CRE and RRE as Collateral

                  • CA-5.8.117

                    Eligible CRE and RRE collateral for corporate, sovereign and bank exposures are defined as:

                    (a) Collateral where the risk of the borrower is not materially dependent upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources. As such, repayment of the facility is not materially dependent on any cash flow generated by the underlying CRE/RRE serving as collateral;53 and
                    (b) Additionally, the value of the collateral pledged must not be materially dependent on the performance of the borrower. This requirement is not intended to preclude situations where purely macro-economic factors affect both the value of the collateral and the performance of the borrower.

                    53 If the CBB ascertains that public housing policy is supportive of certain real estate sectors, considering them to be an important part of housing market in Bahrain, by means of guarantees or other credit support from government agencies, then mortgage on such multifamily residential real estate can be recognised as eligible collateral for corporate exposures.

                    Apr 08

                  • CA-5.8.118

                    In light of the generic description above and the definition of corporate exposures, income producing real estate that falls under the SL asset class is specifically excluded from recognition as collateral for corporate exposures.

                    Apr 08

                • (ii) Operational Requirements for Eligible CRE/RRE

                  • CA-5.8.119

                    Subject to meeting the definition above, CRE and RRE will be eligible for recognition as collateral for corporate claims only if all of the following operational requirements are met:

                    (a) Legal enforceability: any claim on a collateral taken must be legally enforceable in all relevant jurisdictions, and any claim on collateral must be properly filed on a timely basis. Collateral interests must reflect a perfected lien (i.e. all legal requirements for establishing the claim have been fulfilled). Furthermore, the collateral agreement and the legal process underpinning it must be such that they provide for the bank to realise the value of the collateral within a reasonable timeframe;
                    (b) Objective market value of collateral: the collateral must be valued at or less than the current fair value under which the property could be sold under private contract between a willing seller and an arm's-length buyer on the date of valuation;
                    (c) Frequent revaluation: the bank is expected to monitor the value of the collateral on a frequent basis and at a minimum once every year. More frequent monitoring is suggested where the market is subject to significant changes in conditions. Statistical methods of evaluation (e.g. reference to house price indices, sampling) may be used to update estimates or to identify collateral that may have declined in value and that may need re-appraisal. A qualified professional must evaluate the property when information indicates that the value of the collateral may have declined materially relative to general market prices or when a credit event, such as default, occurs; and
                    (d) Junior liens: Junior liens may be taken into account where there is no doubt that the claim for collateral is legally enforceable and constitutes an efficient credit risk mitigant. When recognised, junior liens are to be treated using the C*/C** threshold, which is used for senior liens. In such cases, the C* and C** are calculated by taking into account the sum of the junior lien and all more senior liens.
                    Amended: April 2011
                    Apr 08

                  • CA-5.8.120

                    Additional collateral management requirements are as follows:

                    (a) The types of CRE and RRE collateral accepted by the bank and lending policies (advance rates) when this type of collateral is taken must be clearly documented;
                    (b) The bank must take steps to ensure that the property taken as collateral is adequately insured against damage or deterioration;
                    (c) The bank must monitor on an ongoing basis the extent of any permissible prior claims (e.g. tax) on the property; and
                    (d) The bank must appropriately monitor the risk of environmental liability arising in respect of the collateral, such as the presence of toxic material on a property.
                    Amended: April 2011
                    Apr 08

                • (iii) Requirements for Recognition of Financial Receivables

                  • — Definition of Eligible Receivables

                    • CA-5.8.121

                      Eligible financial receivables are claims with an original maturity of less than or equal to one year where repayment will occur through the commercial or financial flows related to the underlying assets of the borrower. This includes both self-liquidating debt arising from the sale of goods or services linked to a commercial transaction and general amounts owed by buyers, suppliers, renters, national and local governmental authorities, or other non-affiliated parties not related to the sale of goods or services linked to a commercial transaction. Eligible receivables do not include those associated with securitisations, sub- participations or credit derivatives.

                      Apr 08

                  • — Operational Requirements

                    • a. Legal Certainty

                      • CA-5.8.122

                        The legal mechanism by which collateral is given must be robust and ensure that the lender has clear rights over the proceeds from the collateral.

                        Apr 08

                      • CA-5.8.123

                        Banks must take all steps necessary to fulfill local requirements in respect of the enforceability of security interest, e.g. by registering a security interest with a registrar. There should be a framework that allows the potential lender to have a perfected first priority claim over the collateral.

                        Apr 08

                      • CA-5.8.124

                        All documentation used in collateralised transactions must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.

                        Apr 08

                      • CA-5.8.125

                        The collateral arrangements must be properly documented, with a clear and robust procedure for the timely collection of collateral proceeds. Banks' procedures should ensure that any legal conditions required for declaring the default of the customer and timely collection of collateral are observed. In the event of the obligor's financial distress or default, the bank must have legal authority to sell or assign the receivables to other parties without consent of the receivables' obligors.

                        Apr 08

                    • b. Risk Management

                      • CA-5.8.126

                        The bank must have a sound process for determining the credit risk in the receivables. Such a process should include, among other things, analyses of the borrower's business and industry (e.g. effects of the business cycle) and the types of customers with whom the borrower does business. Where the bank relies on the borrower to ascertain the credit risk of the customers, the bank must review the borrower's credit policy to ascertain its soundness and credibility.

                        Apr 08

                      • CA-5.8.127

                        The margin between the amount of the exposure and the value of the receivables must reflect all appropriate factors, including the cost of collection, concentration within the receivables pool pledged by an individual borrower, and potential concentration risk within the bank's total exposures.

                        Apr 08

                      • CA-5.8.128

                        The bank must maintain a continuous monitoring process that is appropriate for the specific exposures (either immediate or contingent) attributable to the collateral to be utilised as a risk mitigant. This process may include, as appropriate and relevant, ageing reports, control of trade documents, borrowing base certificates, frequent audits of collateral, confirmation of accounts, control of the proceeds of accounts paid, analyses of dilution (credits given by the borrower to the issuers) and regular financial analysis of both the borrower and the issuers of the receivables, especially in the case when a small number of large-sized receivables are taken as collateral. Observance of the bank's overall concentration limits should be monitored. Additionally, compliance with loan covenants, environmental restrictions, and other legal requirements should be reviewed on a regular basis.

                        Apr 08

                      • CA-5.8.129

                        The receivables pledged by a borrower should be diversified and not be unduly correlated with the borrower. Where the correlation is high, e.g. where some issuers of the receivables are reliant on the borrower for their viability or the borrower and the issuers belong to a common industry, the attendant risks should be taken into account in the setting of margins for the collateral pool as a whole. Receivables from affiliates of the borrower (including subsidiaries and employees) will not be recognised as risk mitigants.

                        Apr 08

                      • CA-5.8.130

                        The bank should have a documented process for collecting receivable payments in distressed situations. The requisite facilities for collection should be in place, even when the bank normally looks to the borrower for collections.

                        Apr 08

                    • c. Requirements for Recognition of other Collateral

                      • CA-5.8.131

                        CBB may, on a case by case basis, allow for recognition of the credit risk mitigating effect of certain other physical collateral if the bank can demonstrate that such collateral meets the following two standards:

                        (a) Existence of liquid markets for disposal of collateral in an expeditious and economically efficient manner; and
                        (b) Existence of well established, publicly available market prices for the collateral. CBB will seek to ensure that the amount a bank receives when collateral is realised does not deviate significantly from these market prices.
                        Amended: April 2011
                        Apr 08

                      • CA-5.8.132

                        In order for a given bank to receive recognition for additional physical collateral, it must meet all the standards in paragraphs CA-5.8.119 and CA-5.8.120, subject to the following modifications:

                        (a) First Claim: Only first liens on, or charges over, collateral are permissible. As such, the bank must have priority over all other lenders to the realised proceeds of the collateral;
                        (b) The loan agreement must include detailed descriptions of the collateral plus detailed specifications of the manner and frequency of revaluation;
                        (c) The types of physical collateral accepted by the bank and policies and practices in respect of the appropriate amount of each type of collateral relative to the exposure amount must be clearly documented in internal credit policies and procedures and available for examination and/or audit review;
                        (d) Bank credit policies with regard to the transaction structure must address appropriate collateral requirements relative to the exposure amount, the ability to liquidate the collateral readily, the ability to establish objectively a price or market value, the frequency with which the value can readily be obtained (including a professional appraisal or valuation), and the volatility of the value of the collateral. The periodic revaluation process must pay particular attention to "fashion-sensitive" collateral to ensure that valuations are appropriately adjusted downward of fashion, or model-year, obsolescence as well as physical obsolescence or deterioration; and
                        (e) In cases of inventories (e.g. raw materials, work-in-process, finished goods, dealers' inventories of autos) and equipment, the periodic revaluation process must include physical inspection of the collateral.
                        Amended: April 2011
                        Apr 08

              • 10. Requirements for Recognition of Leasing

                • CA-5.8.133

                  Leases other than those that expose the bank to residual value risk (see paragraph CA-5.8.134) will be accorded the same treatment as exposures collateralised by the same type of collateral. The minimum requirements for the collateral type must be met (CRE/RRE or other collateral). In addition, the bank must also meet the following standards:

                  (a) Robust risk management on the part of the lessor with respect to the location of the asset, the use to which it is put, its age, and planned obsolescence;
                  (b) A robust legal framework establishing the lessor's legal ownership of the asset and its ability to exercise its rights as owner in a timely fashion; and
                  (c) The difference between the rate of depreciation of the physical asset and the rate of amortisation of the lease payments must not be so large as to overstate the CRM attributed to the leased assets.
                  Apr 08

                • CA-5.8.134

                  Leases that expose the bank to residual value risk will be treated in the following manner. Residual value risk is the bank's exposure to potential loss due to the fair value of the equipment declining below its residual estimate at lease inception:

                  (a) The discounted lease payment stream will receive a risk weight appropriate for the lessee's financial strength (PD) and CBB's or own-estimate of LGD, which ever is appropriate: and
                  (b) The residual value will be risk-weighted at 100%.
                  Amended: April 2011
                  Apr 08

              • 11. Calculation of Capital Charges for Equity Exposures

                • (i) The Internal Models Market-based Approach

                  • CA-5.8.135

                    To be eligible for the internal models market-based approach a bank must demonstrate to CBB that it meets certain quantitative and qualitative minimum requirements at the outset and on an ongoing basis. A bank that fails to demonstrate continued compliance with the minimum requirements must develop a plan for rapid return to compliance, obtain CBB's approval of the plan, and implement that plan in a timely fashion. In the interim, banks would be expected to compute capital charges using a simple risk weight approach.

                    Apr 08

                  • CA-5.8.136

                    CBB will periodically develop detailed examination procedures to ensure that banks' risk measurement systems and management controls are adequate to serve as the basis for the internal models approach.

                    Apr 08

                • (ii) Capital Charge and Risk Quantification

                  • CA-5.8.137

                    The following minimum quantitative standards apply for the purpose of calculating minimum capital charges under the internal models approach:

                    (a) The capital charge is equivalent to the potential loss on the institution's equity portfolio arising from an assumed instantaneous shock equivalent to the 99th percentile, one-tailed confidence interval of the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period;
                    (b) The estimated losses should be robust to adverse market movements relevant to the long-term risk profile of the institution's specific holdings. The data used to represent return distributions should reflect the longest sample period for which data are available and meaningful in representing the risk profile of the bank's specific equity holdings. The data used should be sufficient to provide conservative, statistically reliable and robust loss estimates that are not based purely on subjective or judgmental considerations. Institutions must demonstrate to CBB that the shock employed provides a conservative estimate of potential losses over a relevant long-term market or business cycle. Models estimated using data not reflecting realistic ranges of long-run experience, including a period of reasonably severe declines in equity market values relevant to a bank's holdings, are presumed to produce optimistic results unless there is credible evidence of appropriate adjustments built into the model. In the absence of built-in adjustments, the bank must combine empirical analysis of available data with adjustments based on a variety of factors in order to attain model outputs that achieve appropriate realism and conservatism. In constructing Value at Risk (VaR) models estimating potential quarterly losses, institutions may use quarterly data or convert shorter horizon period data to a quarterly equivalent using an analytically appropriate method supported by empirical evidence. Such adjustments must be applied through a well-developed and well-documented thought process and analysis. In general, adjustments must be applied conservatively and consistently over time. Furthermore, where only limited data are available, or where technical limitations are such that estimates from any single method will be of uncertain quality, banks must add appropriate margins of conservatism in order to avoid over-optimism;
                    (c) No particular type of VaR model (e.g. variance-covariance, historical simulation, or Monte Carlo) is prescribed. However, the model used must be able to capture adequately all of the material risks embodied in equity returns including both the general market risk and specific risk exposure of the institution's equity portfolio. Internal models must adequately explain historical price variation, capture both the magnitude and changes in the composition of potential concentrations, and be robust to adverse market environments. The population of risk exposures represented in the data used for estimation must be closely matched to or at least comparable with those of the bank's equity exposures;
                    (d) Banks may also use modelling techniques such as historical scenario analysis to determine minimum capital requirements for banking book equity holdings. The use of such models is conditioned upon the institution demonstrating to CBB that the methodology and its output can be quantified in the form of the loss percentile specified under (a);
                    (e) Banks must use an internal model that is appropriate for the risk profile and complexity of their equity portfolio. Banks with material holdings with values that are highly non-linear in nature (e.g. equity derivatives, convertibles) must employ an internal model designed to capture appropriately the risks associated with such instruments;
                    (f) Subject to CBB's review, equity portfolio correlations can be integrated into a bank's internal risk measures. The use of explicit correlations (e.g. utilisation of a variance/covariance VaR model) must be fully documented and supported using empirical analysis. The appropriateness of implicit correlation assumptions will be evaluated by CBB in its review of model documentation and estimation techniques;
                    (g) Mapping of individual positions to proxies, market indices, and risk factors should be plausible, intuitive, and conceptually sound. Mapping techniques and processes should be fully documented, and demonstrated with both theoretical and empirical evidence to be appropriate for the specific holdings. Where professional judgement is combined with quantitative techniques in estimating a holding's return volatility, the judgement must take into account the relevant and material information not considered by the other techniques utilised;
                    (h) Where factor models are used, either single or multi-factor models are acceptable depending upon the nature of an institution's holdings. Banks are expected to ensure that the factors are sufficient to capture the risks inherent in the equity portfolio. Risk factors should correspond to the appropriate equity market characteristics (for example, public, private, market capitalisation industry sectors and sub-sectors, operational characteristics) in which the bank holds significant positions. While banks will have discretion in choosing the factors, they must demonstrate through empirical analyses the appropriateness of those factors, including their ability to cover both general and specific risk;
                    (i) Estimates of the return volatility of equity investments must incorporate relevant and material available data, information, and methods. A bank may utilise independently reviewed internal data or data from external sources (including pooled data). The number of risk exposures in the sample, and the data period used for quantification must be sufficient to provide the bank with confidence in the accuracy and robustness of its estimates. Institutions should take appropriate measures to limit the potential of both sampling bias and survivorship bias in estimating return volatilities; and
                    (j) A rigorous and comprehensive stress-testing programme must be in place. Banks are expected to subject their internal model and estimation procedures, including volatility computations, to either hypothetical or historical scenarios that reflect worst-case losses given underlying positions in both public and private equities. At a minimum, stress tests should be employed to provide information about the effect of tail events beyond the level of confidence assumed in the internal models approach.
                    Amended: April 2011
                    Apr 08

                • (iii) Risk Management Process and Controls

                  • CA-5.8.138

                    Banks' overall risk management practices used to manage their banking book equity investments are expected to be consistent with the evolving sound practice guidelines issued by the Basel Committee and CBB. With regard to the development and use of internal models for capital purposes, institutions must have established policies, procedures, and controls to ensure the integrity of the model and modelling process used to derive regulatory capital standards. These policies, procedures, and controls should include the following:

                    (a) Full integration of the internal model into the overall management information systems of the institution and in the management of the banking book equity portfolio. Internal models should be fully integrated into the institution's risk management infrastructure including use in: (i) establishing investment hurdle rates and evaluating alternative investments; (ii) measuring and assessing equity portfolio performance (including the risk-adjusted performance); and (iii) allocating economic capital to equity holdings and evaluating overall capital adequacy. The institution should be able to demonstrate, through for example, investment committee minutes, that internal model output plays an essential role in the investment management process;
                    (b) Established management systems, procedures, and control functions for ensuring the periodic and independent review of all elements of the internal modelling process, including approval of model revisions, vetting of model inputs, and review of model results, such as direct verification of risk computations. Proxy and mapping techniques and other critical model components should receive special attention. These reviews should assess the accuracy, completeness, and appropriateness of model inputs and results and focus on both finding and limiting potential errors associated with known weaknesses and identifying unknown model weaknesses. Such reviews may be conducted as part of internal or external audit programmes, by an independent risk control unit, or by an external third party;
                    (c) Adequate systems and procedures for monitoring investment limits and the risk exposures of equity investments;
                    (d) The units responsible for the design and application of the model must be functionally independent from the units responsible for managing individual investments; and
                    (e) Parties responsible for any aspect of the modelling process must be adequately qualified. Management must allocate sufficient skilled and competent resources to the modelling function.
                    Amended: April 2011
                    Apr 08

                • (iv) Validation and Documentation

                  • CA-5.8.139

                    Institutions employing internal models for regulatory capital purposes are expected to have in place a robust system to validate the accuracy and consistency of the model and its inputs. They must also fully document all material elements of their internal models and modelling process. The modelling process itself as well as the systems used to validate internal models including all supporting documentation, validation results, and the findings of internal and external reviews are subject to oversight and review by the CBB.

                    Apr 08

                  • Validation

                    • CA-5.8.140

                      Banks must have a robust system in place to validate the accuracy and consistency of their internal models and modelling processes. A bank must demonstrate to CBB that the internal validation process enables it to assess the performance of its internal model and processes consistently and meaningfully.

                      Apr 08

                    • CA-5.8.141

                      Banks must regularly compare actual return performance (computed using realised and unrealised gains and losses) with modelled estimates and be able to demonstrate that such returns are within the expected range for the portfolio and individual holdings. Such comparisons must make use of historical data that are over as long a period as possible. The methods and data used in such comparisons must be clearly documented by the bank. This analysis and documentation should be updated at least annually.

                      Apr 08

                    • CA-5.8.142

                      Banks should make use of other quantitative validation tools and comparisons with external data sources. The analysis must be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period. Banks' internal assessments of the performance of their own model must be based on long data histories, covering a range of economic conditions, and ideally one or more complete business cycles.

                      Apr 08

                    • CA-5.8.143

                      Banks must demonstrate that quantitative validation methods and data are consistent through time. Changes in estimation methods and data (both data sources and periods covered) must be clearly and thoroughly documented.

                      Apr 08

                    • CA-5.8.144

                      Since the evaluation of actual performance to expected performance over time provides a basis for banks to refine and adjust internal models on an ongoing basis, it is expected that banks using internal models will have established well-articulated model review standards. These standards are especially important for situations where actual results significantly deviate from expectations and where the validity of the internal model is called into question. These standards must take account of business cycles and similar systematic variability in equity returns. All adjustments made to internal models in response to model reviews must be well documented and consistent with the bank's model review standards.

                      Apr 08

                    • CA-5.8.145

                      To facilitate model validation through backtesting on an ongoing basis, institutions using the internal model approach must construct and maintain appropriate databases on the actual quarterly performance of their equity investments as well on the estimates derived using their internal models. Institutions should also backtest the volatility estimates used within their internal models and the appropriateness of the proxies used in the model. CBB may ask banks to scale their quarterly forecasts to a different, in particular shorter, time horizon, store performance data for this time horizon and perform backtests on this basis.

                      Apr 08

                  • Documentation

                    • CA-5.8.146

                      The burden is on the bank to satisfy CBB that a model has good predictive power and that regulatory capital requirements will not be distorted as a result of its use. Accordingly, all critical elements of an internal model and the modelling process should be fully and adequately documented. Banks must document in writing their internal model's design and operational details. The documentation should demonstrate banks' compliance with the minimum quantitative and qualitative standards, and should address topics such as the application of the model to different segments of the portfolio, estimation methodologies, responsibilities of parties involved in the modelling, and the model approval and model review processes. In particular, the documentation should address the following points:

                      (a) A bank must document the rationale for its choice of internal modelling methodology and must be able to provide analyses demonstrating that the model and modelling procedures are likely to result in estimates that meaningfully identify the risk of the bank's equity holdings. Internal models and procedures must be periodically reviewed to determine whether they remain fully applicable to the current portfolio and to external conditions. In addition, a bank must document a history of major changes in the model over time and changes made to the modelling process subsequent to the last supervisory review. If changes have been made in response to the bank's internal review standards, the bank must document that these changes are consistent with its internal model review standards;
                      (b) In documenting their internal models banks must:
                      •   provide a detailed outline of the theory, assumptions and/or mathematical and empirical basis of the parameters, variables, and data source(s) used to estimate the model;
                      •   establish a rigorous statistical process (including out-of-time and out-of-sample performance tests) for validating the selection of explanatory variables; and
                      •   indicate circumstances under which the model does not work effectively.
                      (c) Where proxies and mapping are employed, institutions must have performed and documented rigorous analysis demonstrating that all chosen proxies and mappings are sufficiently representative of the risk of the equity holdings to which they correspond. The documentation should show, for instance, the relevant and material factors (e.g. business lines, balance sheet characteristics, geographic location, company age, industry sector and subsector, operating characteristics) used in mapping individual investments into proxies. In summary, institutions must demonstrate that the proxies and mappings employed:
                      •   are adequately comparable to the underlying holding or portfolio;
                      •   are derived using historical economic and market conditions that are relevant and material to the underlying holdings or, where not, that an appropriate adjustment has been made; and,
                      •   are robust estimates of the potential risk of the underlying holding.
                      Amended: April 2011
                      Apr 08

              • 12. Disclosure Requirements

                • CA-5.8.147

                  In order to be eligible for the IRB approach, banks must meet the disclosure requirements that the CBB may set periodically. Failure to meet those requirements will render banks ineligible to use the relevant IRB approach.

                  Apr 08

          • CA-6 CA-6 Credit Risk — Securitisation Framework

            • CA-6.1 CA-6.1 Scope and Definitions of Transactions Covered under the Securitisation Framework

              • CA-6.1.1

                Banks must apply the securitisation framework for determining regulatory capital requirements on exposures arising from traditional and synthetic securitisations or similar structures that contain features common to both.

                Apr 08

              • CA-6.1.1A

                A bank must meet all the requirements listed in the paragraph CA-6.1.1B below, to use any of the approaches specified in the securitisation framework. If a bank does not perform the level of the due diligence specified, it must deduct the amount of the securitisation (or re-securitisation) exposure from its regulatory capital using the approach outlined in the paragraphs CA-6.4.2 to CA-6.4.4.

                Added: January 2012

              • CA-6.1.1B

                In order for a bank to use the securitisation framework, a bank must have the information specified below or deduct the exposure from regulatory capital:

                (a) A bank must have a comprehensive understanding of the risk characteristics of its individual securitisation exposures, whether on-balance sheet or off-balance sheet, as well as the risk characteristics of the pools underlying its securitisation exposures;
                (b) A bank must be able to access performance information on the underlying pools on an on-going basis in a timely manner. Such information should include: exposure type, percentage of loans more than 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure, property type, occupancy, average credit score or other measures of creditworthiness, average loan-to-value ratio, and industry and geographic diversification. For re-securitisations, a bank must have not only information on the underlying securitisation tranches, such as the issuer name and credit quality, but also the characteristics and performance of the pools underlying the securitisation tranches; and
                (c) A bank must have a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the bank's exposures to the transaction, such as the contractual waterfall and waterfall-related triggers, credit enhancements, liquidity enhancements, market value triggers, and deal-specific definitions of default.
                Added: January 2012

              • CA-6.1.2

                Since securitisations may be structured in many different ways, the capital treatment of a securitisation exposure must be determined on the basis of its economic substance rather than its legal form. Similarly, CBB will look to the economic substance of a transaction to determine whether it should be subject to the securitisation framework for purposes of determining regulatory capital. Banks are encouraged to consult with the CBB when there is uncertainty about whether a given transaction should be considered a securitisation. For example, transactions involving cash flows from real estate (e.g. rents) may be considered specialised lending exposures, if warranted.

                Amended: January 2012
                Apr 08

              • CA-6.1.3

                A traditional securitisation is a structure where the cash flow from an underlying pool of exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of credit risk. Payments to the investors depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the entity originating those exposures. The stratified/tranched structures that characterise securitisations differ from ordinary senior/subordinated debt instruments in that junior securitisation tranches can absorb losses without interrupting contractual payments to more senior tranches, whereas subordination in a senior/subordinated debt structure is a matter of priority of rights to the proceeds of liquidation.

                Apr 08

              • CA-6.1.4

                A synthetic securitisation is a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of funded (e.g. credit-linked notes) or unfunded (e.g. credit default swaps) credit derivatives or guarantees that serve to hedge the credit risk of the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool.

                Apr 08

              • CA-6.1.5

                Banks' exposures to a securitisation are hereafter referred to as "securitisation exposures". Securitisation exposures can include but are not restricted to the following: asset-backed securities, mortgage-backed securities, credit enhancements, liquidity facilities, interest rate or currency swaps, credit derivatives and tranched cover as described in paragraph CA-4.5.11. Reserve accounts, such as cash collateral accounts, recorded as an asset by the originating bank must also be treated as securitisation exposures.

                Apr 08

              • CA-6.1.5A

                A re-securitisation exposure is a securitisation exposure in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is a securitisation exposure. In addition, an exposure to one or more re-securitisation exposures is a re-securitisation exposure.

                Added: January 2012

              • CA-6.1.5B

                Given the complexity of many securitisation transactions, licensees are encouraged to consult with the CBB when there is uncertainty about whether a particular structured credit position should be considered a re-securitisation exposure. The CBB will consider the exposure's economic substance when making a determination on whether a structured credit position is a re-securitisation exposure.

                Added: January 2012

              • CA-6.1.5C

                Re-securitisation exposures include collateralised debt obligations (CDOs) of asset-backed securities (ABS) including, for example, a CDO backed by residential mortgage-backed securities (RMBS). Moreover, it also captures a securitisation exposure where the pool contains many individual mortgage loans and a single RMBS. This means that even if only one of the underlying exposures is a securitisation exposure, then any tranched position (such as senior or subordinated ABS) exposed to that pool is considered a re-securitisation exposure.

                Added: January 2012

              • CA-6.1.5D

                Furthermore, when an instrument's performance is linked to one or more re-securitisation exposures, generally that instrument is a re-securitisation exposure. Thus a credit derivative providing credit protection for a CDO squared tranche is a re-securitisation exposure.

                Added: January 2012

              • CA-6.1.5E

                The definition of re-securitisation also applies to ABCP programmes. The ratings based risk approach tables include weightings for both securitisation and re-securitisation exposures (see CA-6.4.8 onward).

                Added: January 2012

              • CA-6.1.6

                Underlying instruments in the pool being securitised may include but are not restricted to the following: loans, commitments, asset-backed and mortgage-backed securities, corporate bonds, equity securities, and private equity investments. The underlying pool may include one or more exposures.

                Apr 08

            • CA-6.2 CA-6.2 Definitions and General Terminology

              • Originating Bank

                • CA-6.2.1

                  For risk-based capital purposes, a bank is considered to be an originator with regard to a certain securitisation if it meets either of the following conditions:

                  (a) The bank originates directly or indirectly underlying exposures included in the securitisation; or
                  (b) The bank serves as a sponsor of an asset-backed commercial paper (ABCP) conduit or similar programme that acquires exposures from third-party entities. In the context of such programmes, a bank would generally be considered a sponsor and, in turn, an originator if it, in fact or in substance, manages or advises the programme, places securities into the market, or provides liquidity and/or credit enhancements.
                  Apr 08

              • Asset Backed Commercial Paper (ABCP) Programme

                • CA-6.2.2

                  An asset-backed commercial paper (ABCP) programme predominately issues commercial paper with an original maturity of one year or less that is backed by assets or other exposures held in a bankruptcy-remote, Special Purpose Securitisation Vehicle (SPSV).

                  Apr 08

              • Clean-up Call

                • CA-6.2.3

                  A clean-up call is an option that permits the securitisation exposures (e.g. asset-backed securities) to be called before all of the underlying exposures or securitisation exposures have been repaid. In the case of traditional securitisations, this is generally accomplished by repurchasing the remaining securitisation exposures once the pool balance or outstanding securities have fallen below some specified level. In the case of a synthetic transaction, the clean-up call may take the form of a clause that extinguishes the credit protection.

                  Apr 08

              • Credit Enhancement

                • CA-6.2.4

                  A credit enhancement is a contractual arrangement in which the bank retains or assumes a securitisation exposure and, in substance, provides some degree of added protection to other parties to the transaction.

                  Apr 08

              • Credit Enhancing Interest-Only strip

                • CA-6.2.5

                  A credit-enhancing interest-only strip (I/O) is an on-balance sheet asset that (i) represents a valuation of cash flows related to future margin income, and (ii) is subordinated.

                  Apr 08

              • Early Amortization

                • CA-6.2.6

                  Early amortisation provisions are mechanisms that, once triggered, allow investors to be paid out prior to the originally stated maturity of the securities issued. For risk-based capital purposes, an early amortisation provision will be considered either controlled or non-controlled. A controlled early amortisation provision must meet all of the following conditions:

                  (a) The bank must have an appropriate capital/liquidity plan in place to ensure that it has sufficient capital and liquidity available in the event of an early amortisation;
                  (b) Throughout the duration of the transaction, including the amortisation period, there is the same pro-rata sharing of interest, principal, expenses, losses and recoveries based on the bank's and investors' relative shares of the receivables outstanding at the beginning of each month;
                  (c) The bank must set a period for amortisation that would be sufficient for at least 90% of the total debt outstanding at the beginning of the early amortisation period to have been repaid or recognised as in default; and
                  (d) The pace of repayment should not be any more rapid than would be allowed by straight-line amortisation over the period set out in criterion (c).
                  Amended: April 2011
                  Apr 08

                • CA-6.2.7

                  An early amortisation provision that does not satisfy the conditions for a controlled early amortisation provision must be treated as a non-controlled early amortisation provision.

                  Apr 08

              • Excess Spread

                • CA-6.2.8

                  Excess spread is generally defined as gross finance charge collections and other income received by the trust or SPSV (specified in paragraph CA-6.2.10) minus certificate interest, servicing fees, charge-offs, and other senior trust or SPSV expenses.

                  Apr 08

              • Implicit Support

                • CA-6.2.9

                  Implicit support arises when a bank provides support to a securitisation in excess of its predetermined contractual obligation.

                  Apr 08

                • SPSV

                  • CA-6.2.10

                    An SPSV is a corporation, trust, or other entity organised for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPSV, and the structure of which is intended to isolate the SPSV from the credit risk of an originator or seller of exposures. SPSVs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.

                    Apr 08

            • CA-6.3 CA-6.3 Operational Requirements for the Recognition of Risk Transference

              • CA-6.3.1

                The following operational requirements are applicable to both the standardised and IRB approaches of the securitisation framework.

                Apr 08

              • Operational Requirements for Traditional Securitisations

                • CA-6.3.2

                  An originating bank may exclude securitised exposures from the calculation of risk weighted assets under paragraph CA-6.4.1, only if all of the following conditions have been met. Banks meeting these conditions must still hold regulatory capital against any securitisation exposures they retain:

                  (a) Significant credit risk associated with the securitised exposures has been transferred to third parties;
                  (b) The transferor does not maintain effective or indirect control54 over the transferred exposures. The assets are legally isolated from the transferor in such a way (e.g. through the sale of assets or through sub-participation) that the exposures are put beyond the reach of the transferor and its creditors, even in bankruptcy or receivership. These conditions must be supported by an opinion provided by a qualified legal counsel;
                  (c) The securities issued are not obligations of the transferor. Thus, investors who purchase the securities only have claim to the underlying pool of exposures;
                  (d) The transferee is an SPSV and the holders of the beneficial interests in that entity have the right to pledge or exchange them without restriction;
                  (e) Clean-up calls must satisfy the conditions set out in paragraph CA-6.3.5; and
                  (f) The securitisation does not contain clauses that (i) require the originating bank to alter systematically the underlying exposures such that the pool's weighted average credit quality is improved unless this is achieved by selling assets to independent and unaffiliated third parties at market prices; (ii) allow for increases in a retained first loss position or credit enhancement provided by the originating bank after the transaction's inception; or (iii) increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the underlying pool.

                  54 The transferor is deemed to have maintained effective control over the transferred credit risk exposures if it: (i) is able to repurchase from the transferee the previously transferred exposures in order to realise their benefits; or (ii) is obligated to retain the risk of the transferred exposures. The transferor's retention of servicing rights to the exposures will not necessarily constitute indirect control of the exposures.

                  Amended: April 2011
                  Apr 08

              • Operational Requirements for Synthetic Securitisations

                • CA-6.3.3

                  For synthetic securitisations, the use of CRM techniques (i.e. collateral, guarantees and credit derivatives) for hedging the underlying exposure may be recognised for risk-based capital purposes only if the conditions outlined below are satisfied:

                  (a) Credit risk mitigants must comply with the requirements as set out in Chapter CA-4 of this Module;
                  (b) Eligible collateral is limited to that specified in paragraphs CA-4.3.1 and CA-4.3.2. Eligible collateral pledged by SPSVs may be recognised;
                  (c) Eligible guarantors are defined in paragraph CA-4.5.7. Banks may not recognise SPSVs as eligible guarantors in the securitisation framework;
                  (d) Banks must transfer significant credit risk associated with the underlying exposure to third parties;
                  (e) The instruments used to transfer credit risk may not contain terms or conditions that limit the amount of credit risk transferred, such as those provided below:
                  •   Clauses that materially limit the credit protection or credit risk transference (e.g. significant materiality thresholds below which credit protection is deemed not to be triggered even if a credit event occurs or those that allow for the termination of the protection due to deterioration in the credit quality of the underlying exposures);
                  •   Clauses that require the originating bank to alter the underlying exposures to improve the pool's weighted average credit quality;
                  •   Clauses that increase the banks' cost of credit protection in response to deterioration in the pool's quality;
                  •   Clauses that increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the reference pool; and
                  •   Clauses that provide for increases in a retained first loss position or credit enhancement provided by the originating bank after the transaction's inception.
                  (f) An opinion must be obtained from a qualified legal counsel that confirms the enforceability of the contracts in all relevant jurisdictions; and
                  (g) Clean-up calls must satisfy the conditions set out in paragraph CA-6.3.5.
                  Amended: April 2011
                  Apr 08

                • CA-6.3.4

                  For synthetic securitisations, the effect of applying CRM techniques for hedging the underlying exposure are treated according to chapter CA-4. In case there is a maturity mismatch, the capital requirement will be determined in accordance with paragraphs CA-4.6.1 to CA-4.6.4. When the exposures in the underlying pool have different maturities, the longest maturity must be taken as the maturity of the pool. Maturity mismatches may arise in the context of synthetic securitisations when, for example, a bank uses credit derivatives to transfer part or all of the credit risk of a specific pool of assets to third parties. When the credit derivatives unwind, the transaction will terminate. This implies that the effective maturity of the tranches of the synthetic securitisation may differ from that of the underlying exposures. Originating banks of synthetic securitisations must treat such maturity mismatches in the following manner. A bank applying the standardised approach for securitisation must deduct all retained positions that are unrated or rated below investment grade. A bank applying the IRB approach must deduct unrated, retained positions if the treatment of the position is deduction specified in paragraphs CA-6.4.51 to CA-6.4.88. Accordingly, when deduction is required, maturity mismatches are not taken into account. For all other securitisation exposures, the bank must apply the maturity mismatch treatment set forth in paragraphs CA-4.6.1 to CA-4.6.4.

                  Apr 08

              • Operational Requirements and Treatment of Clean-up Calls

                • CA-6.3.5

                  For securitisation transactions that include a clean-up call, no capital will be required due to the presence of a clean-up call if the following conditions are met:

                  (a) The exercise of the clean-up call must not be mandatory, in form or in substance, but rather must be at the discretion of the originating bank;
                  (b) The clean-up call must not be structured to avoid allocating losses to credit enhancements or positions held by investors or otherwise structured to provide credit enhancement; and
                  (c) The clean-up call must only be exercisable when 10% or less of the original underlying portfolio, or securities issued remain, or, for synthetic securitisations, when 10% or less of the original reference portfolio value remains.
                  Amended: April 2011
                  Apr 08

                • CA-6.3.6

                  Securitisation transactions that include a clean-up call that does not meet all of the criteria stated in paragraph CA-6.3.5 result in a capital requirement for the originating bank. For a traditional securitisation, the underlying exposures must be treated as if they were not securitised. Additionally, banks must not recognise in regulatory capital any gain-on-sale, as defined in paragraph CA-6.4.3. For synthetic securitisations, the bank purchasing protection must hold capital against the entire amount of the securitised exposures as if they did not benefit from any credit protection. If a synthetic securitisation incorporates a call (other than a cleanup call) that effectively terminates the transaction and the purchased credit protection on a specific date, the bank must treat the transaction in accordance with paragraph CA-6.3.4 and paragraphs CA-4.6.1 to CA-4.6.4.

                  Apr 08

                • CA-6.3.7

                  If a clean-up call, when exercised, is found to serve as a credit enhancement, the exercise of the clean-up call must be considered a form of implicit support provided by the bank and must be treated in accordance with the supervisory guidance pertaining to securitisation transactions.

                  Apr 08

            • CA-6.4 CA-6.4 Treatment of Securitisation Exposures

              • Calculation of Capital Requirements

                • CA-6.4.1

                  Except as stated in paragraph CA-6.3.2, banks are required to hold regulatory capital against all of their securitisation exposures and re-securitisation exposures, including those arising from the provision of credit risk mitigants to a securitisation transaction, investments in asset-backed securities, retention of a subordinated tranche, and extension of a liquidity facility or credit enhancement, as set forth in the following sections. Repurchased securitisation exposures must be treated as retained securitisation exposures.

                  Amended: January 2012
                  Apr 08

                • (i) Deduction

                  • CA-6.4.2

                    When a bank is required to deduct a securitisation exposure from regulatory capital, the deduction must be taken 50% from Tier 1 and 50% from Tier 2 with the one exception noted in paragraph CA-6.4.3. Credit enhancing I/Os (net of the amount that must be deducted from Tier 1 as in paragraph CA-6.4.3) are deducted 50% from Tier 1 and 50% from Tier 2. Deductions from capital may be calculated net of any specific provisions taken against the relevant securitisation exposures.

                    Apr 08

                  • CA-6.4.3

                    Banks must deduct from Tier 1 any increase in equity capital resulting from a securitisation transaction, such as that associated with expected future margin income (FMI) resulting in a gain-on-sale that is recognised in regulatory capital. Such an increase in capital is referred to as a "gain-on-sale" for the purposes of the securitisation framework.

                    Apr 08

                  • CA-6.4.4

                    For the purposes of the EL-provision calculation as set out in Section CA-5.7, securitisation exposures do not contribute to the EL amount. Similarly, any specific provisions against securitisation exposures are not to be included in the measurement of eligible provisions.

                    Apr 08

                • (ii) Implicit Support

                  • CA-6.4.5

                    When a bank provides implicit support to a securitisation, it must, at a minimum, hold capital against all of the exposures associated with the securitisation transaction as if they had not been securitised. Additionally, banks would not be permitted to recognise in regulatory capital any gain-on-sale, as defined in paragraph CA-6.4.3. Furthermore, the bank is required to disclose publicly that (a) it has provided non-contractual support and (b) the capital impact of doing so.

                    Apr 08

                  • Operational Requirements for use of External Credit Assessments

                    • CA-6.4.6

                      The following operational criteria concerning the use of external credit assessments apply in the standardised and IRB approaches of the securitisation framework:

                      (a) To be eligible for risk-weighting purposes, the external credit assessment must take into account and reflect the entire amount of credit risk exposure the bank has with regard to all payments owed to it. For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with timely repayment of both principal and interest;
                      (b) The exteral credit assessments must be from an eligible ECAI as recognised by the CBB in accordance with section CA-3.4 with the following exception. In contrast with (c) of paragraph CA-3.4.1, an eligible credit assessment must be publicly available. In other words, a rating must be published in an accessible form and included in the ECAI's transition matrix. Consequently, ratings that are made available only to the parties to a transaction do not satisfy this requirement;
                      (c) Eligible ECAIs must have a demonstrated expertise in assessing securitisations, which may be evidenced by strong market acceptance;
                      (d) A bank must apply external credit assessments from eligible ECAIs consistently across a given type of securitisation exposure. Furthermore, a bank cannot use the credit assessments issued by one ECAI for one or more tranches and those of another ECAI for other positions (whether retained or purchased) within the same securitisation structure that may or may not be rated by the first ECAI. Where two or more eligible ECAIs can be used and these assess the credit risk of the same securitisation exposure differently, paragraphs CA-3.4.5 and CA-3.4.6 will apply;
                      (e) Where CRM is provided directly to an SPSV by an eligible guarantor defined in paragraph CA-4.5.7 and is reflected in the external credit assessment assigned to a securitisation exposure(s), the risk weight associated with that external credit assessment should be used. In order to avoid any double counting, no additional capital recognition is permitted. If the CRM provider is not recognised as an eligible guarantor in paragraph CA-4.5.7, the covered securitisation exposures should be treated as unrated; and
                      (f) In the situation where a credit risk mitigant is not obtained by the SPSV but rather applied to a specific securitisation exposure within a given structure (e.g. ABS tranche), the bank must treat the exposure as if it is unrated and then use the CRM treatment outlined in chapter CA-4 or in the foundation IRB approach of chapter CA-5, to recognise the hedge.
                      Amended: April 2011
                      Apr 08

                    • CA-6.4.6A

                      A bank is not permitted to use any external credit assessment for risk-weighting purposes where the assessment is at least partly based on unfunded support provided by the bank. For example, if a bank buys ABCP where it provides an unfunded securitisation exposure extended to the ABCP programme (e.g. liquidity facility or credit enhancement), and that exposure plays a role in determining the credit assessment on the ABCP, the bank must treat the ABCP as if it were not rated. The bank must continue to hold capital against the other securitisation exposures it provides (e.g. against the liquidity facility and/or credit enhancement). The treatment described above is also applicable to exposures held in the trading book. A bank's capital requirement for such exposures held in the trading book can be no less than the amount required under the banking book treatment. Banks are permitted to recognise overlap in their exposures, consistent with CA-6.4.23. For example, a bank providing a liquidity facility supporting 100% of the ABCP issued by an ABCP programme and purchasing (for its own account) 20% of the outstanding ABCP of that programme could recognise an overlap of 20% (100% liquidity facility + 20% CP held – 100% CP issued = 20%). If a bank provided a liquidity facility that covered 90% of the outstanding ABCP and purchased 20% of the ABCP, the two exposures would be treated as if 10% of the two exposures overlapped (90% liquidity facility + 20% CP held – 100% CP issued = 10%). If a bank provided a liquidity facility that covered 50% of the outstanding ABCP and purchased 20% of the ABCP, the two exposures would be treated as if there were no overlap.

                      Added: January 2012

                  • Standardised Approach for Securitisation Exposures

                    • (i) Scope

                      • CA-6.4.7

                        Banks that apply the standardised approach to credit risk for the type of underlying exposure(s) securitised must use the standardised approach under the securitisation framework.

                        Apr 08

                    • (ii) Risk Weights

                      • CA-6.4.8

                        The risk-weighted asset amount of a securitisation exposure is computed by multiplying the amount of the position by the appropriate risk weight determined in accordance with the following tables. For off-balance sheet exposures, banks must apply a CCF and then risk weight the resultant credit equivalent amount. If such an exposure is rated, a CCF of 100% must be applied. For positions with long-term ratings of B+ and below and short-term ratings other than A-1/P-1, A-2/P-2, A-3/P-3, deduction from capital as defined in paragraph CA-6.4.2 is required. Deduction is also required for unrated positions with the exception of the circumstances described in paragraphs CA-6.4.12 to CA-6.4.16.

                        The following risk weights are applied in the standardised approach.

                        Long term rating50 Securitisation Exposure Re-securitisation Exposure
                        AAA to AA- 20% 40%
                        A+ to A- 50% 100%
                        BBB+ to BBB- 100% 225%
                        BB+ to BB- 350% 650%
                        B+ and below or unrated Deduction Deduction

                        Short term rating Securitisation Exposure Re-securitisation Exposure
                        A-1/P-1 20% 40%
                        A-2/P-2 50% 100%
                        A-3/P-3 100% 225%
                        All other ratings or unrated Deduction Deduction


                        50 The rating designations used in the following tables are for illustrative purposes only and do not indicate any preference for, or endorsement of, any particular external assessment system.

                        Amended: January 2012
                        Apr 08

                      • CA-6.4.9

                        The capital treatment of positions retained by originators, liquidity facilities, credit risk mitigants, and securitisations of revolving exposures are identified separately. The treatment of clean-up calls is provided in paragraphs CA-6.3.5 to CA-6.3.7.

                        Apr 08

                  • Recognition of Ratings on Below-investment Grade Exposures

                    • CA-6.4.10

                      Only third-party investors, as opposed to banks that serve as originators, may recognise external credit assessments that are equivalent to BB+ to BB- for risk weighting purposes of securitisation exposures.

                      Apr 08

                  • Originators to Deduct Below-investment Grade Exposures

                    • CA-6.4.11

                      Originating banks as defined in paragraph CA-6.2.1 must deduct all retained securitisation exposures rated below investment grade (i.e. BBB-).

                      Apr 08

                • (iii) Exceptions to General Treatment of Unrated Securitisation Exposures

                  • CA-6.4.12

                    As noted in the tables above, unrated securitisation exposures must be deducted with the following exceptions: (i) the most senior exposure in a securitisation, (ii) exposures that are in a second loss position or better in ABCP programmes and meet the requirements outlined in paragraph CA-6.4.15, and (iii) eligible liquidity facilities.

                    Apr 08

                  • Treatment of Unrated Most Senior Securitisation Exposures

                    • CA-6.4.13

                      If the most senior exposure in a securitisation of a traditional or synthetic securitisation is unrated, a bank that holds or guarantees such an exposure may determine the risk weight by applying the "look-through" treatment, provided the composition of the underlying pool is known at all times. Banks are not required to consider interest rate or currency swaps when determining whether an exposure is the most senior in a securitisation for the purpose of applying the "look-through" approach.

                      Apr 08

                    • CA-6.4.14

                      In the look-through treatment, the unrated most senior position receives the average risk weight of the underlying exposures subject to CBB review. Where the bank is unable to determine the risk weights assigned to the underlying credit risk exposures, the unrated position must be deducted.

                      Apr 08

                  • Treatment of Exposures in a Second Loss Position or Better in ABCP Programmes

                    • CA-6.4.15

                      Deduction is not required for those unrated securitisation exposures provided by sponsoring banks to ABCP programmes that satisfy the following requirements:

                      (a) The exposure is economically in a second loss position or better and the first loss position provides significant credit protection to the second loss position;
                      (b) The associated credit risk is the equivalent of investment grade or better; and
                      (c) The bank holding the unrated securitisation exposure does not retain or provide the first loss position.
                      Apr 08

                    • CA-6.4.16

                      Where these conditions are satisfied, the risk weight is the greater of (i) 100% or (ii) the highest risk weight assigned to any of the underlying individual exposures covered by the facility.

                      Apr 08

                  • Risk Weights for Eligible Liquidity Facilities

                    • CA-6.4.17

                      For eligible liquidity facilities as defined in paragraph CA-6.4.19 and where the conditions for use of external credit assessments in paragraph CA-6.4.6 are not met, the risk weight applied to the exposure's credit equivalent amount is equal to the highest risk weight assigned to any of the underlying individual exposures covered by the facility.

                      Apr 08

                • (iv) Credit Conversion Factors for Off-balance Sheet Exposures

                  • CA-6.4.18

                    For risk-based capital purposes, banks must determine whether, according to the criteria outlined below, an off-balance sheet securitisation exposure qualifies as an 'eligible liquidity facility' or an 'eligible servicer cash advance facility'. All other off-balance sheet securitisation exposures will receive a 100% CCF.

                    Apr 08

                  • Eligible Liquidity Facilities

                    • CA-6.4.19

                      Banks are permitted to treat off-balance sheet securitisation exposures as eligible liquidity facilities if the following minimum requirements are satisfied:

                      (a) The facility documentation must clearly identify and limit the circumstances under which it may be drawn. Draws under the facility must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements. In addition, the facility must not cover any losses incurred in the underlying pool of exposures prior to a draw, or be structured such that draw-down is certain (as indicated by regular or continuous draws);
                      (b) The facility must be subject to an asset quality test that precludes it from being drawn to cover credit risk exposures that are in default as defined in paragraphs CA-5.8.63 to CA-5.8.70. In addition, if the exposures that a liquidity facility is required to fund are externally rated securities, the facility can only be used to fund securities that are externally rated investment grade at the time of funding;
                      (c) The facility cannot be drawn after all applicable (e.g. transaction-specific and programme-wide) credit enhancements from which the liquidity would benefit have been exhausted; and
                      (d) Repayment of draws on the facility (i.e. assets acquired under a purchase agreement or loans made under a lending agreement) must not be subordinated to any interests of any note holder in the programme (e.g. ABCP programme) or subject to deferral or waiver.
                      Apr 08

                    • CA-6.4.20

                      Where these conditions are met, the bank may apply a 50% CCF to the eligible facility regardless of the maturity of the facility. However, if an external rating of the facility itself is used for risk-weighting the facility, a 100% CCF must be applied.

                      Amended: January 2012
                      Apr 08

                  • [Deleted]

                    Deleted: January 2012

                    • CA-6.4.21 [Deleted]

                      [This Paragraph has been deleted in January 2012].

                      Deleted: January 2012

                    • CA-6.4.22 [Deleted]

                      [This Paragraph has been deleted in January 2012].

                      Deleted: January 2012

                  • Treatment of Overlapping Exposures

                    • CA-6.4.23

                      A bank may provide several types of facilities that can be drawn under various conditions. The same bank may be providing two or more of these facilities. Given the different triggers found in these facilities, it may be the case that a bank provides duplicative coverage to the underlying exposures. In other words, the facilities provided by a bank may overlap since a draw on one facility may preclude (in part) a draw under the other facility. In the case of overlapping facilities provided by the same bank, the bank does not need to hold additional capital for the overlap. Rather, it is only required to hold capital once for the position covered by the overlapping facilities (whether they are liquidity facilities or credit enhancements). Where the overlapping facilities are subject to different conversion factors, the bank must attribute the overlapping part to the facility with the highest conversion factor. However, if overlapping facilities are provided by different banks, each bank must hold capital for the maximum amount of the facility (see also Paragraph CA-6.4.6A).

                      Amended: January 2012
                      Apr 08

                  • Eligible Servicer Cash Advance Facilities

                    • CA-6.4.24

                      If contractually provided for, servicers may advance cash to ensure an uninterrupted flow of payments to investors so long as the servicer is entitled to full reimbursement and this right is senior to other claims on cash flows from the underlying pool of exposures. A 0% CCF must be applied to such un-drawn servicer cash advances or facilities provided that these are unconditionally cancellable without prior notice.

                      Apr 08

                  • Treatment of Credit Risk Mitigation for Securitisation Exposures

                    • CA-6.4.25

                      The treatment below applies to a bank that has obtained a credit risk mitigant on a securitisation exposure. Credit risk mitigants include guarantees, credit derivatives, collateral and on-balance sheet netting. Collateral in this context refers to that used to hedge the credit risk of a securitisation exposure rather than the underlying exposures of the securitisation transaction.

                      Apr 08

                    • CA-6.4.26

                      When a bank other than the originator provides credit protection to a securitisation exposure, it must calculate a capital requirement on the covered exposure as if it were an investor in that securitisation. If a bank provides protection to an unrated credit enhancement, it must treat the credit protection provided as if it were directly holding the unrated credit enhancement.

                      Apr 08

                  • Collateral

                    • CA-6.4.27

                      Eligible collateral is limited to that recognised under the standardised approach for CRM (paragraphs CA-4.3.1 and CA-4.3.2). Collateral pledged by SPSVs may be recognised.

                      Apr 08

                  • Guarantees and Credit Derivatives

                    • CA-6.4.28

                      Credit protection provided by the entities listed in paragraph CA-4.5.7 may be recognised. SPSVs cannot be recognised as eligible guarantors. A bank must not recognise any support provided by itself (see also Paragraph CA-6.4.6).

                      Amended: January 2012
                      Apr 08

                    • CA-6.4.29

                      Where guarantees or credit derivatives fulfill the minimum operational conditions as specified in paragraphs CA-4.5.1 to CA-4.5.6, banks can take account of such credit protection in calculating capital requirements for securitisation exposures.

                      Apr 08

                    • CA-6.4.30

                      Capital requirements for the guaranteed/protected portion will be calculated according to CRM for the standardised approach as specified in paragraphs CA-4.5.8 to CA-4.5.13.

                      Apr 08

                  • Maturity Mismatches

                    • CA-6.4.31

                      For the purpose of setting regulatory capital against a maturity mismatch, the capital requirement will be determined in accordance with paragraphs CA-4.6.1 to CA-4.6.4. When the exposures being hedged have different maturities, the longest maturity must be used.

                      Apr 08

                • (vi) Capital Requirement for Early Amortisation Provisions

                  • Scope

                    • CA-6.4.32

                      As described below, an originating bank is required to hold capital against all or a portion of the investors' interest (i.e. against both the drawn and un-drawn balances related to the securitised exposures) when:

                      (a) It sells exposures into a structure that contains an early amortisation feature; and
                      (b) The exposures sold are of a revolving nature. These involve exposures where the borrower is permitted to vary the drawn amount and repayments within an agreed limit under a line of credit (e.g. credit card receivables and corporate loan commitments).
                      Apr 08

                    • CA-6.4.33

                      The capital requirement should reflect the type of mechanism through which an early amortisation is triggered.

                      Apr 08

                    • CA-6.4.34

                      For securitisation structures wherein the underlying pool comprises revolving and term exposures, a bank must apply the relevant early amortisation treatment (outlined below in paragraphs CA-6.4.36 to CA-6.4.47) to that portion of the underlying pool containing revolving exposures.

                      Apr 08

                    • CA-6.4.35

                      Banks are not required to calculate a capital requirement for early amortisations in the following situations:

                      (a) Replenishment structures where the underlying exposures do not revolve and the early amortisation ends the ability of the bank to add new exposures;
                      (b) Transactions of revolving assets containing early amortisation features that mimic term structures (i.e. where the risk on the underlying facilities does not return to the originating bank);
                      (c) Structures where a bank securitises one or more credit line(s) and where investors remain fully exposed to future draws by borrowers even after an early amortisation event has occurred;
                      (d) The early amortisation clause is solely triggered by events not related to the performance of the securitised assets or the selling bank, such as material changes in tax laws or regulations.
                      Apr 08

                  • Maximum Capital Requirement

                    • CA-6.4.36

                      For a bank subject to the early amortisation treatment, the total capital charge for all of its positions will be subject to a maximum capital requirement (i.e. a 'cap') equal to the greater of (i) that required for retained securitisation exposures, or (ii) the capital requirement that would apply had the exposures not been securitised. In addition, banks must deduct the entire amount of any gain-on-sale and credit enhancing I/Os arising from the securitisation transaction in accordance with paragraphs CA-6.4.2 to CA-6.4.4.

                      Apr 08

                  • Mechanics

                    • CA-6.4.37

                      The originator's capital charge for the investors' interest is determined as the product of (a) the investors' interest, (b) the appropriate CCF (as discussed below), and (c) the risk weight appropriate to the underlying exposure type, as if the exposures had not been securitised. As described below, the CCFs depend upon whether the early amortisation repays investors through a controlled or non-controlled mechanism. They also differ according to whether the securitised exposures are uncommitted retail credit lines (e.g. credit card receivables) or other credit lines (e.g. revolving corporate facilities). A line is considered uncommitted if it is unconditionally cancellable without prior notice.

                      Apr 08

                • (vii) Determination of CCFs for Controlled Early Amortisation Features

                  • CA-6.4.38

                    An early amortisation feature is considered controlled when the definition as specified in paragraph CA-6.2.6 is satisfied.

                    Apr 08

                  • Uncommitted Retail Exposures

                    • CA-6.4.39

                      For uncommitted retail credit lines (e.g. credit card receivables) in securitisations containing controlled early amortisation features, banks must compare the three-month average excess spread defined in paragraph CA-6.2.8 to the point at which the bank is required to trap excess spread as economically required by the structure (i.e. excess spread trapping point).

                      Apr 08

                    • CA-6.4.40

                      In cases where such a transaction does not require excess spread to be trapped, the trapping point is deemed to be 4.5 percentage points.

                      Apr 08

                    • CA-6.4.41

                      The bank must divide the excess spread level by the transaction's excess spread trapping point to determine the appropriate segments and apply the corresponding conversion factors, as outlined in the following table.

                      Controlled Early Amortisation Features

                        Uncommitted Committed
                      Retail credit lines 3-month average excess spread Credit Conversion Factor (CCF)

                      133.33% of trapping point or more

                      0% CCF

                      less than 133.33% to 100% of trapping point

                      1% CCF

                      less than 100% to 75% of trapping point

                      2% CCF

                      less than 75% to 50% of trapping point

                      10% CCF

                      less than 50% to 25% of trapping point

                      20% CCF

                      less than 25%

                      40% CCF
                      90% CCF
                      Non-retail credit lines 90% CCF 90% CCF
                      Amended: April 2011
                      Apr 08

                    • CA-6.4.42

                      Banks are required to apply the conversion factors set out above for controlled mechanisms to the investors' interest referred to in paragraph CA-6.4.37.

                      Apr 08

                  • Other Exposures

                    • CA-6.4.43

                      All other securitised revolving exposures (i.e. those that are committed and all non-retail exposures) with controlled early amortisation features will be subject to a CCF of 90% against the off-balance sheet exposures.

                      Apr 08

                • (viii) Determination of CCFs for Non-controlled Early Amortisation Features

                  • CA-6.4.44

                    Early amortisation features that do not satisfy the definition of a controlled early amortisation as specified in paragraph CA-6.2.6 will be considered non-controlled and treated as follows.

                    Apr 08

                  • Uncommitted Retail Exposures

                    • CA-6.4.45

                      For uncommitted retail credit lines (e.g. credit card receivables) in securitisations containing non-controlled early amortisation features, banks must make the comparison described in paragraphs CA-6.4.38 and CA-6.4.40.

                      Apr 08

                    • CA-6.4.46

                      The bank must divide the excess spread level by the transaction's excess spread trapping point to determine the appropriate segments and apply the corresponding conversion factors, as outlined in the following table.

                      Non-controlled Early Amortisation Features

                        Uncommitted Committed
                      Retail credit lines 3-month average excess spread Credit Conversion Factor (CCF)

                      133.33% or more of trapping point

                      0% CCF

                      less than 133.33% to 100% of trapping point

                      5% CCF

                      less than 100% to 75% of trapping point

                      15% CCF

                      less than 75% to 50% of trapping point

                      50% CCF

                      less than 50% of trapping point

                      100% CCF
                      100% CCF
                      Non-retail credit lines 100% CCF 100% CCF
                      Amended: April 2011
                      Apr 08

                  • Other Exposures

                    • CA-6.4.47

                      All other securitised revolving exposures (i.e. those that are committed and all non-retail exposures) with non-controlled early amortisation features will be subject to a CCF of 100% against the off-balance sheet exposures.

                      Apr 08

                  • Internal Ratings-based Approach for Securitisation Exposures

                    • (i) Scope

                      • CA-6.4.48

                        Banks that have received approval from CBB to use the IRB approach for the type of underlying exposures securitised (e.g. for their corporate or retail portfolio) must use the IRB approach for securitisations. Conversely, banks may not use the IRB approach to securitisation unless they receive approval to use the IRB approach for the underlying exposures from CBB.

                        Apr 08

                      • CA-6.4.49

                        If the bank is applying the IRB approach for some exposures and the standardised approach for other exposures in the underlying pool, it should generally use the approach corresponding to the predominant share of exposures within the pool. The bank must consult with the CBB on which approach to apply to its securitisation exposures. To ensure appropriate capital levels, there may be instances where the CBB requires a treatment other than this general rule.

                        Apr 08

                      • CA-6.4.50

                        Where there is no specific IRB treatment for the underlying asset type, originating banks that have received approval to use the IRB approach must calculate capital charges on their securitisation exposures applying the standardised approach in the securitisation framework, and investing banks with approval to use the IRB approach must apply the RBA.

                        Apr 08

                    • (ii) Hierarchy of Approaches

                      • CA-6.4.51

                        The Ratings-Based Approach (RBA) must be applied to securitisation exposures that are rated, or where a rating can be inferred as described in paragraph CA-6.4.60. Where an external or an inferred rating is not available, either the Supervisory Formula (SF) or the Internal Assessment Approach (IAA) must be applied. The IAA is only available to exposures (e.g. liquidity facilities and credit enhancements) that banks (including third-party banks) extend to ABCP programmes. Such exposures must satisfy the conditions of paragraphs CA-6.4.62 and CA-6.4.63. For liquidity facilities to which none of these approaches can be applied, banks may apply the treatment specified in paragraph CA-6.4.84. Exceptional treatment for eligible servicer cash advance facilities is specified in paragraph CA-6.4.86. Securitisation exposures to which none of these approaches can be applied must be deducted.

                        Apr 08

                    • (iii) Maximum Capital Requirement

                      • CA-6.4.52

                        For a bank applying the IRB approach to securitisation, the maximum capital requirement for the securitisation exposures it holds is equal to the IRB capital requirement that would have been assessed against the underlying exposures had they not been securitised and treated under the appropriate sections of the IRB framework including section CA-5.7. In addition, banks must deduct the entire amount of any gain-on-sale and credit enhancing I/Os arising from the securitisation transaction in accordance with paragraphs CA-6.4.2 to CA-6.4.4.

                        Apr 08

                    • (iv) Ratings-Based Approach (RBA)

                      • CA-6.4.53

                        Under the RBA, the risk-weighted assets are determined by multiplying the amount of the exposure by the appropriate risk weights, provided in the tables in paragraph CA-6.4.58 and CA-6.4.59.

                        Apr 08

                      • CA-6.4.54

                        The risk weights depend on (i) the external rating grade or an available inferred rating, (ii) whether the credit rating (external or inferred) represents a long-term or a short term credit rating, (iii) the granularity of the underlying pool and (iv) the seniority of the position.

                        Apr 08

                      • CA-6.4.55

                        For purposes of the RBA, a securitisation exposure is treated as a senior tranche if it is effectively backed or secured by a first claim on the entire amount of the assets in the underlying securitised pool. While this generally includes only the most senior position within a securitisation transaction, in some instances there may be some other claim that, in a technical sense, may be more senior in the waterfall (e.g. a swap claim) but may be disregarded for the purpose of determining which positions are subject to the "senior tranches" column.

                        Apr 08

                      • CA-6.4.56

                        Examples:

                        (a) In a typical synthetic securitisation, the "super-senior" tranche would be treated as a senior tranche, provided that all of the conditions for inferring a rating from a lower tranche are fulfilled;
                        (b) In a traditional securitisation where all tranches above the first-loss piece are rated, the most highly rated position would be treated as a senior tranche. However, when there are several tranches that share the same rating, only the most senior one in the waterfall would be treated as senior; and
                        (c) Usually a liquidity facility supporting an ABCP programme would not be the most senior position within the programme; the commercial paper, which benefits from the liquidity support, typically would be the most senior position. However, a liquidity facility may be viewed as covering all losses on the underlying receivables pool that exceed the amount of overcollateralization or reserves provided by the seller and as being most senior only if it is sized to cover all of the outstanding commercial paper and other senior debt supported by the pool, so that no cash flows from the underlying pool could be transferred to other creditors until any liquidity draws were repaid in full. In such a case, the RBA risk weights in the left-most column can be used. If these conditions are not satisfied or for other reasons the liquidity facility constitutes a mezzanine position in economic substance rather than a senior position in the underlying pool, then the "Base risk weights" column is applicable.
                        Amended: January 2012
                        Amended: April 2011
                        Apr 08

                      • CA-6.4.57

                        The risk weights provided in the table in paragraph CA-6.4.58 apply when the external assessment represents a long-term credit rating, as well as when an inferred rating based on a long-term rating is available.

                        Apr 08

                      • CA-6.4.58

                        Banks may apply the risk weights for senior positions if the effective number of underlying exposures (N, as defined in paragraph CA-6.4.77) is 6 or more and the position is senior as defined above. When N is less than 6, the risk weights in column 4 of the first table below apply. In all other cases, the risk weights in column 3 of the first table below apply.

                        RBA risk weights when the external assessment represents a long-term credit rating and/or an inferred rating derived from a long-term assessment
                        External Rating (Illustrative) Risk weights for senior positions and eligible senior IAA exposures Base risk weights Risk weights for tranches backed by non-granular pools
                        AAA 7% 12% 20%
                        AA 8% 15% 25%
                        A+ 10% 18% 35%
                        A 12% 20%
                        A- 20% 35%
                        BBB+ 35%   50%
                        BBB 60%   75%
                        BBB- 100%
                        BB+ 250%
                        BB 425%
                        BB- 650%
                        Below BB- and unrated Deduction
                        Apr 08

                      • CA-6.4.59

                        The risk weights in the table below apply when the external assessment represents a short-term credit rating, as well as when an inferred rating based on a short-term rating is available. The decision rules outlined in paragraph CA-6.4.58 also apply for short-term credit ratings.

                        RBA risk weights when the external assessment represents a short-term credit rating and/or an inferred rating derived from a short-term assessment
                        External Rating (Illustrative) Risk weights for senior positions and eligible senior IAA exposures Base risk weights Risk weights for tranches backed by non-granular
                        A-1/P- 7% 12% 2
                        A-2/P- 12% 20% 3
                        A-3/P- 60% 75% 7
                        All other ratings/unrated Deduction Deduction Deduction
                        Apr 08

                      • Use of Inferred Ratings