CA-4.7.21

In the comprehensive approach, the exposure to a counterparty is adjusted based on the collateral used without the 20% floor of the simple approach. The Islamic bank licensee must adjust both the amount of the exposure to the counterparty and the value of the collateral shown in Paragraph CA-4.7.25, using haircuts and add-ons in order to reflect variations in the value of both the exposure and the collateral due to market movements. The resultant volatility-adjusted amount of exposure and collateral is used for the calculation of capital requirements for the underlying risk exposure. In most cases, the adjusted exposure is higher than the unadjusted exposure after application of the add-on and adjusted collateral is lower than the unadjusted collateral after application of the haircut, unless either of them is cash. An additional downward adjustment for collateral must be made if the underlying currencies of exposure and collateral are not denominated in the same currency, so as to take account of foreign exchange fluctuations in the future.

CA-4.7.22

Risk-weighted assets must be calculated by calculating the difference between the volatility adjusted exposure and the volatility-adjusted collateral and multiplying this adjusted exposure by the RW of the counterparty.³⁰

³⁰ This calculation will be carried out when the volatility-adjusted exposure amount is greater than the volatility-adjusted collateral amount, including any additional adjustment for foreign exchange risk.

CA-4.7.23

The formula for calculation of the adjusted exposure after incorporating risk mitigation using the comprehensive approach is as follows:

E* = max {0, [E x (1 + He) — C x (1 - Hc - Hfx)]}, where:
E* = Adjusted exposure amount after risk mitigation
E = Exposure amount
He = Applicable add-on for exposure
C = The current value of underlying collateral
Hc = Applicable haircut for collateral
Hfx = Applicable haircut for foreign exchange exposure, in case exposure and collateral have dissimilar currencies

CA-4.7.24

If more than one asset is involved in a collateralised transaction, the haircut on the basket (H) will be a weighted sum of applicable haircuts to each asset (Hi), with asset weights (ai) measured by units of currency — that is, H = Σ ai Hi.