CA-5.4.2

The capital charge for specific risk covers the possibility of an adverse movement in the price of a Sukūk held for trading due to factors related to an individual issuer. Offsetting is restricted only to matched positions in the identical issues. No offsetting will be permitted between different issues even if the issuer is the same, since differences in features of Sukūk with respect to profit rates, liquidity and call features, etc. would imply that prices may diverge in the short run. In the case of Sukuk in the trading book, the specific risk charge must be provided on the RW of the issue and the term to maturity of the Sukuk, as follows:

CA-5.4.3

The general market risk must be provided on the residual term to maturity or to the next repricing date, using either a simplified form of the Maturity Method on the net positions in each time-band in accordance with the table below or the Duration Method shown in Paragraph CA-5.4.3A:

CA-5.4.3A

With the CBB's prior written approval, an Islamic bank licensee with the necessary capability may use the more accurate "duration" method. This method calculates the price sensitivity of each position of Sukuk held separately. This method must be used consistently by an Islamic bank licensee, unless a change is approved by the CBB. The steps involved in the calculation using this method are outlined in Paragraphs CA-5.4.3B to CA-5.4.3D.

CA-5.4.3B

Calculate the price sensitivity of each Sukuk position (called "weighted positions") in terms of a change in profit rates between 0.6 and 1 percentage points depending on the maturity of the Sukuk and subject to supervisory guidance. Slot the resulting sensitivity measures into a duration-based ladder with 13 time bands as set out in Table 1 below. Subject long positions in each time band to a 5% vertical disallowance on the smaller of offsetting positions (i.e. a matched position) in each time band.

Table 1 Duration Method: Time Bands and Assumed Changes in Yield

CA-5.4.3C

From the results of the above calculations, two sets of weighted positions — the net long position in each time band — are produced. The maturity ladder is then divided into three zones, as follows: zone 1, 0–1 year; zone 2, >1–4 years; and zone 3, >4 years. Islamic bank licensees are required to conduct two further rounds of offsetting: (i) between the net time band positions in each of the three zones; and (ii) between the net positions across the three different zones (i.e. between adjacent zones and non-adjacent zones). The residual net positions are then carried forward and offset against opposite positions in other zones when calculating net positions between zones 2 and 3, and 1 and 3. The offsetting is subject to a scale of disallowances (horizontal disallowances) expressed as a fraction of matched position, subject to a second set of disallowance factors (Table 2).

Table 2 Duration Method: Horizontal Disallowances

CA-5.4.3D

The general market risk capital charge is the aggregation of three charges: net position, vertical disallowances and horizontal disallowances (Table 3 below).

Table 3 General Risk Capital Charge Calculation

CA-5.4.4

In the case of equity investments made by means of a Musharakah or a Mudarabah contract where the underlying assets are commodities, the market risk provisions for commodities, as described in Sections CA-5.5, CA-3.6 (Musharakah) and CA-3.7 (Mudarabah) are applicable.