Treatment of Off-Balance Sheet Exposures — Liquidity Facilities and Credit Risk Mitigants Provided to Securitisations
CA-8.4.4
For off-balance sheet exposures arising from the provision of a liquidity facility,
Islamic bank licensees must apply a 100% credit conversion factor (CCF) and then risk-weight the resultant credit-equivalent amount as shown in table CA-8.4.3. For risk-based capital purposes,Islamic bank licensees must determine whether, subject to the criteria in Paragraph CA-8.4.4A, an off-balance sheet securitisation exposure qualifies as an 'eligible liquidity facility' or an 'eligible servicer cash advance facility', in which case a lower CCF may apply (see CA-8.4.4B and CA-8.4.5).January 2015CA-8.4.4A
Islamic bank licensees are permitted to treat off-balance sheet securitisation exposures as 'eligible liquidity facilities' if the following minimum requirements are satisfied:(a) The facility documentation must clearly identify and limit the circumstances under which it may be drawn. Draws under the facility must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements. In addition, the facility must not cover any losses incurred in the underlying pool of exposures prior to a draw, or be structured such that draw-down is certain (as indicated by regular or continuous draws);(b) The facility must be subject to an asset quality test that precludes it from being drawn to covercredit risk exposures that are past due by more than 90 days. In addition, if the exposures that a liquidity facility is required to fund are externally rated securities, the facility can only be used to fund securities that are externally rated investment grade at the time of funding; and(c) The facility cannot be drawn after all applicable (e.g. transaction-specific and programme-wide) credit enhancements from which the liquidity facility would benefit have been exhausted.January 2015CA-8.4.4B
Where the conditions in Paragraph CA8.4.4A are met, the
Islamic bank licensee may apply a 50% CCF to the eligible facility regardless of the maturity of the facility. However, if an external rating of the facility itself is used for risk-weighting the facility, a 100% CCF must be applied.January 2015CA-8.4.4C
Liquidity facilities in certain types of Sukuk structures are commitments from the facility provider to provide liquid funds if these are needed to meet contractual payments to Sukuk holders and there is a delay between the date of their collection and the date on which the payment to the Sukuk holders is due. The need for such facilities may result from a timing mismatch between cash collections from the underlying Sukuk assets (such as Ijara rentals) and the scheduled payments due under the programme to the Sukuk holders.
January 2015
