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  • CA-8.3 CA-8.3 Capital Requirements for Holdings of Sukuk

    • CA-8.3.1

      The following sets out the minimum capital requirements to cover the credit risk and market risk arising from the holding of a Sukuk in the "banking book" by an Islamic bank licensee. The CBB will use its discretion to specify measurement approaches as it thinks appropriate for other types of Sukuk which are not listed in this sub-section, provided they are approved by an Islamic bank licensee's Shari'a board. For unrated Sukuk that use a combination of more than one of the Shari'a-compliant contracts outlined below, the capital requirement will be calculated taking into account the risk implications of the overall structure.

      January 2015

    • CA-8.3.2

      Where Sukuk are externally rated, Islamic bank licensees must apply the relevant risk weight given in Paragraph CA-8.4.3 based on the ECAI ratings from recognised agencies listed in Section CA-4.6. Where there are no acceptable ECAI ratings, the RWs will be 1,250% (as shown on table CA-8.4.3) or determined on the basis of the underlying assets as shown in the remainder of this Section for the different types of Sukuk (which may involve market risk as well as credit risk).

      January 2015

    • CA-8.3.3

      An Islamic bank licensee must have methodologies that enable it to assess the credit risk involved in securitisation exposures at individual and portfolio levels. Islamic bank licensees must refer to Paragraph CA-8.2.23 for details of the suggested criteria to be used in credit analysis. An Islamic bank licensee must assess exposures, regardless of whether they are rated or unrated, and determine whether the RWs applied to such exposures, under the standardised approach, are appropriate for their inherent risk. In those instances where an Islamic bank licensee determines that the inherent risk of such an exposure, particularly if it is unrated, is significantly higher than that implied by the RW to which it is assigned, the Islamic bank licensee must consider the higher degree of credit risk in the evaluation of its overall capital adequacy.

      January 2015

    • CA-8.3.4

      For Sukuk classified in the trading book, the market risk capital requirement as mentioned in Section CA-5.4 on market risk is applicable.

      January 2015

    • Salam Sukuk

      • CA-8.3.5

        The credit risk in Salam Sukuk is similar to that of the underlying Salam contract, where the credit risk exists upon the subscription of the Sukuk until the delivery and sale of the subject matter. The RW is based on the counterparty (Salam supplier) unless the Salam capital is guaranteed by a third party, in which case the RW is that of the guarantor if lower than that of the supplier.

        January 2015

      • CA-8.3.6

        The market risk in Salam Sukuk (in the absence of a parallel Salam contract or other hedge) is likewise the same as that of the underlying contract, namely a long position in the underlying commodity. This risk can be measured according to either the maturity ladder approach or the simplified approach as set out in Section CA-5.6 (commodities and inventory risk).

        January 2015

      • CA-8.3.7

        A Salam Sukuk issuance which is structured with an undertaking from the issuer that the underlying commodity will be sold to a third party at a specified selling price (by means of a parallel Salam contract) must carry the RW of the buyer of that underlying commodity in the parallel Salam contract.

        January 2015

      • CA-8.3.8

        For the type of Salam Sukuk described in Paragraph CA-8.3.7, there is no capital charge for market risk that consists of basis and forward gap risks (namely, the risk that the hedge may be impaired because the underlying commodity delivered may be of inferior quality or may be delivered later than the contractual date) as the underlying commodity is normally traded on an exchange that eliminates the risk of late/non-delivery or delivery of a commodity of inferior quality.

        January 2015

    • Istisna Sukuk

      • CA-8.3.9

        The asset may be constructed on behalf of an ultimate customer or off-taker with whom the Islamic bank licensee enters into a parallel Istisna contract. In this case, there is a credit risk exposure to the ultimate customer for the payment due under the parallel contract. This credit risk occurs upon commencement of the construction work by construction firm, until the whole amount or all the instalments (progress billings) are paid by the ultimate customer. The RW for this credit exposure is that of the ultimate customer, unless there is a guarantee, in which case the RW is that of the guarantor if lower.

        January 2015

      • CA-8.3.10

        The RW for Istisna Sukuk where there is no parallel Istisna is based on that of the issuer, unless a third party provides a guarantee, in which case the third party's RW (if lower than that of the issuer) will be applicable. In addition, a RW of 20% will be added to cater for the price risk to which the underlying Istisna is exposed.

        January 2015

      • CA-8.3.11

        In the event the returns to the Sukuk holder are from the cash flow of the underlying assets, which fall under the category of "Exposure to Assets" Istisna, the RW must be based on the "supervisory slotting criteria" approach which carries RW of 70–250%.

        January 2015

      • CA-8.3.12

        Refer to Section CA-3.4 on Istisna for detailed treatment.

        January 2015

    • Ijara and IMB Sukuk

      • CA-8.3.13

        The RW for IMB rentals is based on the lessee's counterparty credit risk, since the bearer of the residual value risk of the underlying asset is not borne by the Sukuk holders. Refer to Section CA-3.5 on Ijara and IMB for detailed treatment.

        January 2015

    • Musharakah Sukuk

      • CA-8.3.14

        The capital treatment of Musharakah Sukuk is based on the intent of the underlying investments in Musharakah that can be categorised as follows:

        (a) For private commercial enterprise to undertake trading activities in, for example, commodities, the RW must be based on the applicable underlying assets as set out in the market risk section of Section CA-5.1;
        (b) For private commercial enterprise to undertake business venture or project (other than Subparagraph CA-8.3.14(a)), the RW is measured according to either the simple RW method or the supervisory slotting criteria approach;
        (c) Income-producing Musharakah investments through leasing of jointly-owned real estate or movable assets such as cars to third parties by means of Ijara must carry the RW of the counterparty — that is, the lessee; and
        (d) Income-producing Musharakah investments with Murabahah subcontracts carry the RW of the Murabahah.
        January 2015

      • CA-8.3.15

        Refer to Section CA-3.6 on Musharakah for detailed treatment.

        January 2015

    • Mudarabah Sukuk

      • CA-8.3.16

        The treatment of Mudarabah Sukuk is based on the intent of the underlying investments in Mudarabah, as follows:

        (a) For private commercial enterprise to undertake trading activities in, for example, commodities, the RW must be based on the applicable underlying assets as set out in the market risk section in Section CA-5.1
        (b) For private commercial enterprise to undertake business venture or project (other than Subparagraph CA-8.3.16(a)), the RW in respect of an equity exposure is measured according to either the simple RW method or the supervisory slotting criteria approach.
        January 2015

      • CA-8.3.17

        Refer to Section CA-3.7 on Mudarabah for detailed treatment.

        January 2015

    • Wakalah Sukuk

      • CA-8.3.18

        The treatment of Wakalah Sukuk is based on the intent of the underlying investments in Wakalah, which can be categorised as follows:

        (a) To undertake trading activities in foreign exchange, shares or commodities, the RW must be based on the applicable underlying assets as set out in the market risk section in Section CA-5.1;
        (b) Income-producing Wakalah investments through leasing to third parties by means of Ijara must carry the RW of the counterparty — that is, the lessee;
        (c) Income-producing Wakalah investments with Murabahah subcontracts carry the RW of the Murabahah; and
        (d) To invest in a combination of assets comprising shares, leasable assets, receivables from Murabahah or Salam, etc. the RW is measured according to the percentage of assets allocated in the investment portfolio of Wakalah Sukuk based on Subparagraphs CA-8.3.18(a) and CA-8.3.18 (b).
        January 2015

      • CA-8.3.19

        Refer to Section CA-3.10 on Wakalah for detailed treatment.

        January 2015

    • Murabahah Sukuk

      • CA-8.3.20

        The applicable RW must be based on the standing of the obligor or issuer as shown in the table in CA-8.4.3. If the Sukuk structure involves funding of an asset purchase in foreign currency, the relevant exposure must be calculated based on measures of foreign exchange risk described in Section CA-5.5 (foreign exchange risk).

        January 2015

      • CA-8.3.21

        Refer to Section CA-3.2 on Murabahah for detailed treatment.

        January 2015

    • Exclusions

      • CA-8.3.22

        For all those Sukuk structures where legal transfer of assets has not taken place due to the reasons outlined in Section CA-8.2, the applicable RW must be the credit RW as shown in table CA-8.4.3, subject to any Shari'a-compliant credit enhancement by the issuer (see Paragraphs CA-8.4.23 and CA-8.4.24). In some cases, a number of originators may form a pool to contribute assets in an asset-based structure (e.g. multiple sovereigns). In such cases, the rating of the Sukuk is that of the pool, subject to any Shari'a-compliant credit enhancement.

        January 2015

    • Treatment of Holdings of Sukuk Where Credit Enhancement Is Provided by an Issuer or Originator

      • CA-8.3.23

        For Sukuk with credit enhancement provided by the issuer or the originator, the RW is based on the credit rating of the credit enhancer (see table in CA-8.3.24 below). See Section CA-8.2 for details of various types of credit enhancements.

        January 2015

    • Treatment of Credit Enhancement Provided by a Structure

      • CA-8.3.24

        Exposures in a Shari'a-compliant credit enhancement structure (described in section CA-8.2) must be risk-weighted as shown in the following table.

        Risk Weights
        Rating AAA to AA- A+ to A- BBB+ to BBB- BB+ to BB- B+ and below or Unrated
        Risk weight 20% 50% 100% 350% 1250%
        January 2015

    • Treatment of Credit Risk Mitigation Received for Holdings of Securitisation Exposures

      • CA-8.3.25

        The treatment in Paragraphs CA-8.3.26 to CA-8.2.30 applies to an Islamic bank licensee that has obtained a credit risk mitigant to a securitisation exposure. Credit risk mitigants include guarantees, collateral and on-balance sheet netting or any other Shari'a-compliant credit risk mitigation as recognised in Paragraph CA-4.7.21. Collateral in this context is that used to mitigate the credit risk of a securitisation exposure, rather than the underlying exposures of the securitisation transaction, subject to fulfilling criteria in Paragraphs CA-8.2.5 and CA-8.2.6.

        January 2015

    • Collateral

      • CA-8.3.26

        Eligible collateral is limited to that recognised under Section CA-4.7. Collateral pledged by SPVs may be recognised.

        January 2015

    • Guarantees

      • CA-8.3.27

        Credit protection provided by the entities listed in Paragraph CA-4.7.21 may be recognised. SPVs cannot be recognised as eligible guarantors. An Islamic bank licensee must not recognise any support provided by itself.

        January 2015

      • CA-8.3.28

        Where guarantees fulfil the minimum operational conditions as specified in Paragraph CA-4.7.12, Islamic bank licensees can take account of such credit protection in calculating capital requirements for securitisation exposures.

        January 2015

      • CA-8.3.29

        Capital requirements for the guaranteed/protected portion is calculated according to CRM as specified in Paragraphs CA-4.7.24 to CA-4.7.31.

        January 2015

    • Maturity Mismatches

      • CA-8.3.30

        For the purpose of setting regulatory capital against a maturity mismatch, the capital requirement is determined in accordance with Paragraphs CA-4.7.27 to CA-4.7.28. When the exposures being hedged have different maturities, the longest maturity must be used.

        January 2015