Back Custom print Link Text Only Rich Text Print

  • CM-4.2 CM-4.2 The Measure of Exposure

    • CM-4.2.1

      For large exposure(s) purposes, the measure of exposure reflects the maximum loss that will arise should a counterparty fail, or the loss that may arise due to the realisation of any financing assets, shareholdings or other exposures or off-balance sheet positions, or losses experienced due to non-repayment of facilities granted. In the case of undrawn L/C or similar facilities, the advised limit must be included in the measure of exposure. In particular for Islamic banks, the measure of exposure also includes facilities or transactions or purchases of assets where the bank itself is not exposed, but is committing client funds through arrangements such as a wakala. In certain cases (particularly off-balance sheet items or derivatives), the measure of a large exposure may be larger than that used in published financial statements. Consistent with this, an exposure encompasses the amount at risk arising from a bank's:

      (a) Claims on a counterparty including actual claims, and potential claims which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide, and claims which the bank has committed itself to purchase or underwrite. Such claims would include but are not limited to:
      (i) Financing and other credit facilities whether or not drawn;
      (ii) Exposures arising through lease agreements;
      (iii) Margin held with exchanges or counterparties;
      (iv) Claims under Shari'a compliant derivative contracts such as swaps and similar contracts on profit rates, foreign currencies, equities, securities, or commodities;
      (v) Claims arising in the course of settlement of securities transactions;
      (vi) Receivables such as fees or commissions;
      (vii) Claims arising in the case of forward sales and purchases of financial instruments in the trading or banking books;
      (viii) Amounts outstanding under sale and repurchase agreements, forward asset purchase agreements, buyback agreements, secured financing or similar transactions;
      (ix) Sukuk, bills or other non-equity financial instruments; and
      (x) Underwriting exposures for sukuk, bills, or other non-equity financial instruments.
      (b) Contingent liabilities arising in the normal course of business, and those contingent liabilities which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide. In the case of an undrawn L/C or similar facility, the advised limit must be included in the measure of exposure. Such liabilities may include:
      (i) Direct credit substitutes (including guarantees, standby letters of credit, bills accepted but not held by the reporting bank, and endorsements creating payable obligations);
      (ii) Claims sold with recourse (i.e. where the credit risk remains with the reporting bank);
      (iii) Transaction related contingents not having the character of direct credit substitutes (e.g. performance bonds, bid bonds, transaction-related L/Cs etc); and
      (iv) Undrawn documentary letters of credit issued or confirmed;
      (c) Any other assets or transactions whose value depends wholly or mainly on a counterparty performing his obligations, or whose value depends upon that counterparty's financial soundness but which do not represent a claim on the counterparty. Such assets or transactions include:
      (i) Equities and other capital instruments (including significant investments in commercial entities—see CM-4.4.1.E for definition);
      (ii) Convertible Murabahas or other similar instruments.
      (iii) Exposures arising from arrangements that have been entered into by the reporting bank for the purpose of providing credit protection;
      (iv) Underwriting or purchase commitments for equities; and
      (v) Claims on fund managers. Banks must regard assets placed with third parties under management as exposures. Under no circumstances may a bank place funds with fund managers (or mudaribs or trustees) that also act as custodian; and
      (d) Any other assets, receivables or transactions (whether on or off- balance sheet), which constitute a claim (or potential claim) for the customers of the bank which are not included in (a), (b) or (c) above. In particular, it includes exposures where the bank is committing client funds through arrangements such as a wakala.
      Amended: January 2015
      Amended: April 2011
      Amended: January 2011
      October 2007

    • CM-4.2.2

      As a general rule, exposures must be reported on a gross basis (i.e. no offset). However, debit balances on accounts may be offset against credit balances on other accounts with the bank if:

      (a) A legally enforceable right of set off exists in all cases (as confirmed by an independent legal opinion addressed to the bank) in respect of the recognised amounts;
      (b) The debit and credit balances relate to the same customer or to customers in the same group (for a group facility, a full cross guarantee structure must also exist before debit balances on accounts may be offset against credit balances i.e. full multilateral guarantees must be in place between all the companies within the group); and
      (c) The bank intends either to settle on a net basis, or to realise the debit balances and settle the credit balances simultaneously; and
      (d) The transactions are subject to the regulation in respect of close-out netting under market contract whenever it is applicable (see Appendix CM-4).
      Amended: January 2015
      Amended: July 2011
      Amended: April 2011
      Amended: January 2011
      October 2007

    • CM-4.2.3

      Large exposures are calculated using the sum of the nominal amounts before the application of the risk weighting and credit conversion factors for:

      (a) On-balance sheet claims;
      (b) Guarantees and other contingent claims; and
      (c) Potential claims in the case of undrawn facilities.

      The amount at risk from Shari'a compliant derivative contracts is taken to be the credit equivalent amount calculated based on the guidelines for the prudential returns (see module CA). In the case of equity exposures, the current fair value as shown in the books of the bank must be taken as the measure of exposure.

      Amended: July 2011
      Amended: January 2011
      October 2007

    • CM-4.2.4

      In case of syndicated facilities, the nominal amount would include only the bank's share of the syndication (financed by unrestricted investment accounts, current accounts and bank's own funds) and any amounts for which binding commitments from other financial institutions are not available. Where a binding commitment is available, that amount would be excluded in calculation of the large exposures. See Section CM-4.5 for exemptions.

      Amended: January 2011
      October 2007

    • CM-4.2.5

      For the purpose of large exposures, balance sheet claims involving assets acquired to be leased under Ijarah Muntahia Bittamleek should be reflected as an exposure against the lessee. Further, murabaha contracts where assets are held for resale, under a binding promise, such exposure should be reflected as an exposure to the counterparty which has signed the binding promise. Potential claims in the case of Istisna'a contracts should include the total amount expected to be paid to al-Sani (the seller) and shown as an exposure to al-Mustasni (ultimate buyer).

      October 07

    • CM-4.2.6

      A bank's exposure arising from securities' trading operations is calculated as its net long position in a particular security (a short position in one security issue may not be offset against a long position in another issue made by the same issuer). A bank's 'net long position' in a security refers to its commitments to buy that security together with its current holding of the same security, less its commitments to sell such securities.

      Amended: January 2011
      October 2007

    • CM-4.2.7

      "Underwriting" is defined as "A binding commitment by the reporting bank to purchase securities issued by, or provide syndicated credit facilities to (as the case may be) an unconnected party ("the issuer" or "the borrower") at a mutually agreed price. Underwriting does not take place if a bank commits to purchase its own securities or securities issued by a party connected to it as there is no transfer of risk; therefore banks may not utilise the limits concerned with these definitions in connection with any commitments to any connected counterparties." Temporary exposure limits for "underwriting" and other investment business related exposures are covered in more detail in paragraphs CM-4.5.2A-F.

      Amended: July 2012
      Added: January 2011