CA-4.5.1

Off-balance sheet items must be converted into credit exposure equivalents using credit conversion factors (CCFs).

CA-4.5.2

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.

CA-4.5.3

Any commitments that are unconditionally cancellable at any time by the Islamic bank licensee without prior notice, or that are subject to automatic cancellation due to deterioration in a borrowers' creditworthiness, must receive a 0% CCF.

CA-4.5.4

A CCF of 100% must be applied to the lending of other banks' securities or the posting of securities as collateral by banks.

CA-4.5.5

For short-term self-liquidating trade letters of credit arising from the movement of goods a 20% CCF must be applied to both issuing or confirming banks. See also Paragraph CA-4.2.11A.

CA-4.5.6

An import or export financing, which is based on Murabahah where the underlying goods/shipment are collateralised and insured, must attract a 20% credit conversion factor to the Islamic bank licensees that issues or confirms the letter of credit. This treatment of collateral assumes there are no obstacles to the exercise of rights over it by the issuer or confirmer (see Pledge of assets as collateral as detailed below under Credit Risk Mitigation).

CA-4.5.7

Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for finance and securities) and acceptances (including endorsements with the character of acceptances) must be applied a CCF of 100%.

CA-4.5.8

Shari'a compliant sale and repurchase agreements, securitised lending/borrowing and asset sales with recourse, where the credit risk remains with the Islamic bank licensee, must be applied a CCF of 100%.

CA-4.5.9

Forward asset purchases, forward deposits and partly-paid shares and securities, which represent commitments with certain drawdown must be applied a CCF of 100%.

CA-4.5.10

Certain transaction-related contingent items (e.g. performance bonds, bid bonds, and warranties) must be applied a CCF of 50%.

CA-4.5.11

Note issuance facilities and revolving underwriting facilities must be applied a CCF of 50%.

CA-4.5.12

Islamic 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'.

CA-4.5.13

With regard to unsettled securities, commodities, and foreign exchange transactions, Islamic 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.

CA-4.5.14

When transactions mentioned in Paragraph CA-4.5.12 are not processed through a delivery-versus-payment (DvP) or payment-versus-payment (PvP) mechanism, Islamic bank licensees must calculate a capital charge as set forth in Appendix CA-4.

CA-4.5.15

Shari'a-compliant over-the-counter (OTC) hedging contracts expose an Islamic bank licensee to counterparty credit risk (CCR). CCR refers to 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 had a positive economic value at the time of default. Unlike an Islamic bank licensee's exposure to credit risk through a financing arrangement, where the exposure to credit risk is unilateral and only the Islamic bank licensee financing the transaction faces the risk of loss, CCR involves a bilateral risk of loss; that is, the market value of the transaction can be positive or negative o either counterparty to the transaction, depending on the movements in the market prices of the underlying variables.

CA-4.5.16

A credit equivalent for Shari'a-compliant hedging techniques can be derived using the Current Exposure Method.²⁴ The credit equivalent exposure is based on the positive mark-to-market replacement cost of the contract. An add-on factor must be added to cover for potential future credit exposure. (See Appendix CA-2 for full details. Also see Paragraph CA-4.7.20 for conditions for applying 0% RW to such contracts.)

²⁴ Current exposure is the larger of zero or the market value of a transaction, or portfolio of transactions with a counterparty that would be lost upon the default of the counterparty, assuming no recovery on the value of those transactions in bankruptcy. Current exposure is often also called replacement cost (see Appendix CA-2 for details).