• 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 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.
              BC-A.1 10/2007 New Rule BC-A.1.4 introduced, categorising this Module as a Directive.
              BC-8 04/2008 New conduct of business requirements for Investment Business
              BC-4.9 04/2008 New requirement to comply with Code of Best Practice on Consumer Credit and Charging.
              BC-7.2 07/2009 Removal of numerical restrictions related to margin trading requirement.
              BC-8.5.17 10/2010 Clarified the wording of Rule by replacing the term "legal" with "licensing".
              BC-A.1.4 01/2011 Clarified legal basis.
              BC-1.1.13 01/2011 Corrected reference to Ministry of Industry and Commerce.
              BC-8 01/2011 Changes made to reflect new definitions related to licensed exchange(s).
              BC-1.1.11 04/2011 Clarified retention period of records for promotional schemes.
              BC-3.1.1 and BC-4.3.1 04/2011 Minor amendments to clarify Rules.
              BC-A.2.2 10/2011 Added new Section to list of activities covered by this Module.
              BC-4.7.3 10/2011 Deleted Paragraph. Reduced notification requirements on new or expanded products and facilities.
              BC-4.8.2 10/2011 Updated name of Ministry of Justice and Islamic Affairs.
              BC-4.10 10/2011 Added new Section on transaction advice.
              BC-8.11 and BC-9 10/2011 Replaced 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-9 01/2012 Minor corrections to correct typos and clarify language.
              BC-9.3.9 01/2012 Paragraph deleted as it repeats what is in Paragraph BC-9.3.7.
              BC-6.1.6 04/2012 Cross reference added.
              BC-6.1.10 and BC-6.1.11 04/2012 Rule clarified and split into one Rule and one Guidance Paragraphs.
              BC-8.2.1 04/2012 Corrected cross reference.
              BC-1.2 07/2012 Added Section on Advertisements for retail banking products and services
              BC-4.3 07/2012 Corrected cross reference.
              BC-8.5.12A 07/2012 Added guidance to clarify promotion material from banks.
              BC-9.1.3A 07/2012 Added guidance on the appointment of the customer complaints officer.
              BC-1.1.2 10/2012 Added cross reference to advertising requirements under Section BC-1.2.
              BC-4.3 10/2012 Section amended to reflect outcome of consultation on disclosure of interest/profit rate fees and charges by retail banks.
              BC-4.8 10/2012 Amended to make Rules clearer.
              BC-6.1.2 10/2012 Clarified process for applications for the installation of off-site ATMs.
              BC-4.4 01/2013 This Section was deleted and requirements are now covered under Section FC-1.6.
              BC-1.2.2 04/2013 Corrected cross reference.
              BC-4.3.2 04/2013 Clarified Rule on instances when customers must be kept informed of charges.
              BC-8.9.14 and BC-8.9.16(e)(v) 04/2013 Clarified Rules on allocations.
              BC-9.7 07/2013 Additional details provided on reporting of complaints.
              BC-4.2.15 10/2013 Corrected cross-reference.
              BC-5.3 10/2013 Updated penalty charges on dishonoured cheques.
              BC-6.3 01/2014 Added new Section on local ATM network charges.
              BC-4.11 04/2014 Added new Section on donations to NGO accounts.
              BC-4.12 10/2015 Added new Section on credit check reports.
              BC-A.2.2, and BC-10 04/2016 Added new Section on Measures and Procedures for Services Provided to Disabled Customers by Bahraini retail banks.
              BC-6.3 04/2016 Amendment to local ATM charges.
              BC-6.1.6 07/2016 Deleted reference to Ministry of Interior.
              BC-4.7 10/2016 Clarified Rules on notification for new or changes to customer products and facilities.
              BC-4.10.1 10/2016 Amendment to Transaction Advice
              BC-4.10.2 10/2016 Deleted Paragraph
              BC-7.2.5 10/2016 Rectified term 'Credit Reference Bureau'
              BC-5A 01/2017 Added new Section on Return Policy – Post-Dated Cheques
              BC-10.1, BC-10.2 and BC-10.3 04/2017 Amended Paragraphs to clarify applicability of Rules.
              BC-5.3.1 07/2017 Amended Paragraph to include penalty charges on returned cheques for the reason of Insufficient Funds.
              BC-4.1 04/2018 Deleted Section on "Minimum Balance and Charges on Savings Accounts".
              BC-4.13 04/2018 Added new Section on "Fees and Charges for Services Provided to Individuals".
              BC-5.3.2 04/2018 Deleted Paragraph on "Dishonoured Cheques".
              BC-6.2 04/2018 Deleted Section on "GCC ATM Network Charges".
              BC-6.3 04/2018 Deleted Section on "Local ATM Network Charges".
              BC-4.14 10/2018 Added a new Section on Fees and Charges for Services Provided to Companies under Formation.
              BC-11 10/2018 Added a new Chapter on Financial Advice Programme.
              BC-4.3.22 01/2019 Amended Paragraph on disclosure of charges by retail banks.
              BC-4.3.24 01/2019 Amended Paragraph on disclosure to individual customers.
              BC-4.3.25A 01/2019 Added a new Paragraph on rounding off in transactions.
              BC-4.13.2 01/2019 Added a new Paragraph on waived fees and charges.
              BC-4.15 07/2019 Added a new Section on Interest on Credit Card Transactions.
              BC-4.16 10/2019 Added a new Section on Interest on Credit Facilities.
              BC-6.1 10/2019 Deleted Section.
              BC-10.2.2 01/2020 Amended Paragraph.
              BC-4.17 04/2020 Added a new Section on Blocking Customer Accounts.
              BC-9.3.15 04/2020 Amended Paragraph adding reference to CBB consumer protection.
              04/2020 Amended Paragraph adding reference to CBB consumer protection.
              BC-9.7.1 - BC-9.7.3 04/2020 Amended Paragraph adding reference to CBB consumer protection.
              BC-B 10/2020 Added a new Chapter on Provision of Financial Services on a Non-discriminatory Basis.
              BC-4.18 10/2020 Added a new Section on Fund Transfers by Customers of Payment Service Providers (PSP).

            • 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 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 requirements pertaining to the promotion of banking/financial products offered in/from Bahrain by conventional bank licensees by means of incentives etc. (herein referred to as 'promotional schemes').

                October 07

              • BC-1.1.2

                The CBB has no objection to the use of promotional schemes in general and, unless it otherwise specifically directs in any particular case, the CBB does not expect to be actively consulted/have its approval sought about the idea and/or substance of any promotional schemes. Any advertising of promotional schemes are subject to the requirements of Section BC-1.2. The CBB should also be sent copies of documentation relating to promotional schemes at least ten days prior to their launch for information purposes.

                Amended: October 2012
                Amended: January 2011
                October 07

              • BC-1.1.3

                The CBB 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 CBB at any time regarding any matters referred to in the explanatory note set out in this Section.

                Amended: January 2011
                October 07

              • BC-1.1.4

                Banks undertaking investment business activities should refer to Chapter BC-8 for additional requirements.

                October 07
                Amended: April 2008

            • General Requirements

              • BC-1.1.5

                Retail bank licensees should take care to ensure that promotional schemes do not involve a breach of Bahrain law or any other relevant applicable law and regulation. In addition, promotional schemes should not in any way be detrimental to the public good or public morals.

                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 for Retail Banking Products and Services

            • BC-1.2.1

              Retail bank licensees must seek the CBB's prior written approval before placing advertisements in newspapers, public places, website or through the use of any other media.

              Added: July 2012

            • BC-1.2.2

              In implementing BC-1.2.1, the CBB will provide the retail bank licensee with a written decision within five business days of the receipt of request for approval.

              Amended: April 2013
              Added: July 2012

        • 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) The CBB is notified of any changes in dealing staff, in accordance with CBB 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.
              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. All advertisements for retail banking products and services are subject to CBB prior approval as per Paragraph BC-1.2.1. 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.

                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 obtain the CBB's prior written approval before the introduction of any new or changes to customer products.

              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-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. 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.

            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

            The related reporting requirement to the CBB is included in Section BR-1.1 and BR-1.2.

            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.

            • 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 the written approval of 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.
                January 2015

              • 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 35% subject to meeting conditions, (a) and (b) in CA-3.2.19A.

                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

            • 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 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 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 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 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 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 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 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 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 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 CA-6.4.21

                                                    [This Paragraph has been deleted in January 2012].

                                                    January 2015

                                                    • CA-6.4.22 CA-6.4.22

                                                      [This Paragraph has been deleted in January 2012].

                                                      January 2015

                                                      • Treatment of Overlapping Exposures

                                                        • CA-6.4.23 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 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 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 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 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 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 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 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 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

                                                                                      • CA-6.4.32 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 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 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 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

                                                                                              • Scope

                                                                                              • Maximum Capital Requirement

                                                                                                • CA-6.4.36 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 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 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 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 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 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 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 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 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 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: