CM-2.3.3

Bahraini conventional bank licensee must recognise an eligible CRM technique in the calculation of an exposure whenever it has used this technique to calculate the risk-based capital requirements under Chapter CA-4. Eligible credit risk mitigation techniques for large exposures are those that meet the minimum requirements and eligibility criteria for the recognition of unfunded credit protection and financial collateral that qualify under Chapter CA-4. Other forms of collaterals, e.g. receivables, commercial and residential real estate are not eligible to reduce exposure values for large exposure purposes unless the title deeds, in the case of real estate, are held in the name of the licensee and it is able to demonstrate that it has the ability to realise the value of the collateral.

CM-2.3.4

In accordance with Paragraph CA-4.6.3, hedges with maturity mismatches are recognised only when their original maturities are equal to or greater than 1 year and the residual maturity of a hedge is not less than 3 months.

CM-2.3.5

If there is a maturity mismatch in respect of credit risk mitigants (collateral, on balance sheet netting, guarantees and credit derivatives) recognised under Paragraph CA-4.6.3, the adjustment of the credit protection for the purpose of calculating large exposures must be calculated according to CA-4.6.4.

CM-2.3.6

Bahraini conventional bank licensee must reduce the value of the exposure to the original counterparty by the amount of eligible CRM technique recognised under Chapter CA-4. The recognised amount is:

CM-2.3.7

The exposure value for instruments that give rise to counterparty credit risk and are not securities financing transactions, must be the exposure at default according to the standardised approach for the purpose of computing capital adequacy (See Module CA).

CM-2.3.8

Off-balance sheet items must be converted into credit exposure equivalents through the use of credit conversion factors (‘CCFs’) by applying the CCFs set-out in Section CA-3.3, with a floor of 10 percent.

CM-2.3.9

Instruments such as swaps, futures, forwards and credit derivatives must be converted into positions following Section CA-3.3. These instruments are decomposed into their individual legs.

CM-2.3.10

For credit derivatives that represent sold protection, the exposure to the referenced name must be the amount due in cases where the referenced name triggers the instrument, minus the absolute value of the credit protection. For credit-linked notes, the protection seller needs to consider positions both in the bond of the note issuer and in the underlying referenced by the note.

CM-2.3.11

The measures of exposure values of options for this Chapter differ from the exposure value used for purposes of Chapter CA-4. The exposure value must be based on the change(s) in option prices that would result from a default of the respective underlying instrument. The exposure value for a simple long call option is its market value and for a short put option is the strike price of the option minus its market value. In cases involving short-call or long-put options, a default of the underlying would lead to a profit (i.e. a negative exposure) instead of a loss, resulting in an exposure of the option’s market value in the former case and equal the strike price of the option minus its market value in the latter case. The resulting positions will, in all cases, be aggregated with those from other exposures. After aggregation, negative net exposures must be set to zero.

CM-2.3.12

In case of syndicated facilities initially underwritten by the licensee, the nominal amount would include only the licensee’s share of the syndication and any amounts for which binding commitments from other financial institutions are not available or have not been sold down. Where a binding commitment is available, that amount would be excluded in calculation of the large exposures. See Section CM-2.6 for exemptions.

CM-2.3.13

Bahraini conventional bank licensee’s exposure arising from securities’ trading operations is calculated as its net long position in a particular security (a short position in one security issue may not be offset against a long position in another issue made by the same issuer). The licensee’s ‘net long position’ in a security refers to its commitment to buy that security together with its current holdings of the same security, less its commitment to sell these securities.

CM-2.3.14

Positions in the same issue (two issues are defined as the same if the issuer, coupon, currency and maturity are identical) may only be offset for the purpose of calculating large exposure.

CM-2.3.15

Positions in different issues from the same counterparty may be offset only when the short position is junior to the long position, or if the positions are of the same seniority.

CM-2.3.16

For positions hedged by credit derivatives, the hedge may be recognised provided the underlying of the hedge and the position hedged fulfil the provision of Paragraph CM-2.3.15.

CM-2.3.17

When the result of the offsetting is a net short position with a single counterparty, this net exposure need not be considered as an exposure for the purpose of this Chapter.

CM-2.3.18

In order to determine the relative seniority of positions, securities may be allocated into broad buckets of degrees of seniority (for example, ‘equity’, ‘subordinated debt’ and ‘senior debt’).

CM-2.3.19

When the credit protection takes the form of a Credit Default Swap (‘CDS’) and either the CDS provider or the referenced entity is not a financial entity, the amount to be assigned to the credit protection provider is not the amount by which the exposure to the original counterparty is reduced but, instead, the counterparty credit risk exposure calculated in accordance with Module CA .

CM-2.3.20

Bahraini conventional bank licensee must add any exposure to any single counterparty arising in the trading book to any other exposures to that counterparty that lie in the banking book to calculate its total exposure to that counterparty.

CM-2.3.21

Netting across the banking and the trading books is not permitted.

CM-2.3.22

Covered bonds are bonds issued by a bank or mortgage institutions and are subject by law to special public supervision designed to protect bond-holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.

CM-2.3.23

A covered bond satisfying the conditions set out in Paragraph CM-2.3.24, may be assigned an exposure value of no less than 20 percent of the nominal value of the licensee’s covered bond holding. Other covered bonds must be assigned an exposure equal to 100 percent of the nominal value of the licensee’s covered bond holding. The counterparty to which the exposure value is assigned is the issuing bank.

CM-2.3.24

To be eligible to be assigned an exposure value of less than 100 percent, a covered bond must satisfy all the following conditions:

CM-2.3.25

In order to calculate the required maximum loan-to-value for residential real estate and commercial real estate referred to in Paragraph CM-2.3.24, the following requirements must be met:

CM-2.3.26

The conditions set out in Paragraph CM-2.3.24 must be satisfied at the inception of the covered bond and throughout its remaining maturity.

CM-2.3.27

Bahraini conventional bank licensees must consider exposures even when a structure lies between the licensee and the exposures, that is, even when the licensee invests in structures through an entity which itself has exposures to assets (‘underlying assets’). Bahraini conventional bank licensees must assign the exposure amount, i.e. the amount invested in a particular structure, to specific counterparties following the approach described in Paragraphs CM-2.3.28 to CM-2.3.35. The structures include funds, securitisations and other structures with underlying assets.

CM-2.3.28

Bahraini conventional bank licensee may assign the exposure amount to the structure itself, defined as a distinct counterparty, if it can demonstrate that the licensee’s exposure amount to each underlying asset of the structure is smaller than 1 percent of total consolidated capital, considering only those exposures to underlying assets that result from the investment in the structure itself, and using the exposure value calculated according to Paragraphs CM-2.3.34 and CM-2.3.35. In this case, the licensee is not required to look through the structure to identify the underlying assets.

CM-2.3.29

Bahraini conventional bank licensees must look through the structure to identify those underlying assets for which the underlying exposure value is equal to or above 1 percent of total consolidated capital. In this case, the counterparty corresponding to each of the underlying assets must be identified so that these underlying exposures can be added to any other direct or indirect exposure to the same counterparty. The licensee’s exposure amount to the underlying assets that are below 1 percent of the licensee’s total consolidated capital may be assigned to the structure itself (i.e. partial Look-Through-Approach (‘LTA’) is permitted).

CM-2.3.30

If a Bahraini conventional bank licensee is unable to identify the underlying assets of a structure where the total amount of its exposure does not exceed 1 percent of its Total consolidated capital, the licensee must:

CM-2.3.31

Bahraini conventional bank licensees must aggregate all ‘unknown exposures’ as if they are related to a single counterparty (the unknown client), to which the large exposure limit would apply.

CM-2.3.32

When a LTA is not required, according to Paragraph CM-2.3.28, a Bahraini conventional bank licensee must, nevertheless, be able to demonstrate that regulatory arbitrage considerations have not influenced the decision whether to look through or not – e.g. that the licensee has not circumvented the large exposure limit by investing in several individually immaterial transactions with identical underlying assets.

CM-2.3.33

If the LTA need not be applied, Bahraini conventional bank licensee’s exposure to the structure must be the nominal amount it invests in the structure.

CM-2.3.34

When the LTA is required, the exposure value assigned to a counterparty is equal to the pro rata share that the licensee holds in the structure multiplied by the value of the underlying asset in the structure. Thus, the licensee holding a 1 percent share of a structure that invests in 20 assets each with a value of 5, must assign an exposure of 0.05 to each of the counterparties. An exposure to a counterparty must be added to any other direct or indirect exposures the licensee has to that counterparty.

CM-2.3.35

When the LTA is required, the exposure value to a counterparty is measured for each tranche within the structure, assuming a pro rata distribution of losses amongst investors in a single tranche. To compute the exposure value to the underlying asset, the licensee must:

CM-2.3.36

Bahraini conventional bank licensees must identify third parties that may constitute an additional risk factor inherent in a structure itself rather than in the underlying assets. This third party could be a risk factor for more than one structure that the licensee invests in. Examples of roles played by third parties include originator, fund manager, liquidity provider and credit protection provider.

CM-2.3.37

Bahraini conventional bank licensees should connect their investments in those structures with a common risk factor, to form a group of connected counterparties. In such cases, the manager would be regarded as a distinct counterparty so that the sum of the licensee’s investments in all of the funds managed by this manager would be subject to the large exposure limit, with the exposure value being the total value of the different investments. In other cases, the identity of the manager may not comprise of an additional risk factor – for example, if the legal framework governing the regulation of particular funds requires separation between the legal entity that manages the fund, and the legal entity that has custody of the fund’s assets.

CM-2.3.38

In the case of structured finance products, the liquidity provider or sponsor of short-term programmes (asset-backed commercial paper – ‘ABCP’, or conduits and structured investment vehicles – ‘SIVs’) may warrant consideration as an additional risk factor (with the exposure value being the amount invested). Similarly, in synthetic deals, the protection providers (sellers of protection by means of CDS/guarantees) may be an additional source of risk and a common factor for interconnecting different structures (in this case, the exposure value would correspond to the percentage value of the underlying portfolio).

CM-2.3.39

Bahraini conventional bank licensees may add their investments in a set of structures associated with a third party that constitutes a common risk factor to other exposures (such as a loan) it has to that third party. Whether the exposures to such structures must be added to any other exposures to the third party, would again depend on a case-by-case consideration of the specific features of the structure and on the role of the third party. In the example of the fund manager, adding together the exposures may not be necessary because potentially fraudulent behaviour may not necessarily affect the repayment of a loan.

CM-2.3.40

It is conceivable that the licensee may consider multiple third parties to be potential drivers of additional risk. In this case, the licensee should assign the exposure resulting from the investment in the relevant structures to each of the third parties.

CM-2.3.41

The requirement set out in Paragraph CM-2.3.36 to recognise a structural risk inherent in the structure instead of the risk stemming from the underlying exposures is independent of whatever the general assessment of additional risks concludes.

CM-2.3.42

Exposures to qualified central counterparties (‘QCCPs’) related to clearing activities are exempted from the requirements of this Chapter.

CM-2.3.43

In the case of non-QCCPs, Bahraini conventional bank licensees must measure their exposure as a sum of both the clearing exposures described in Paragraph CM-2.3.45 and the non-clearing exposures described in Paragraph CM-2.3.48 and must respect the general large exposure limit of 15 percent of Total consolidated capital.

CM-2.3.44

The concept of closely related counterparties referred to in CM-2.5.4 does not apply in the context of exposures to centralised counterparties (‘CCPs’) that are specifically related to clearing activities.

CM-2.3.45

Bahraini conventional bank licensees must identify exposures to a CCP related to clearing activities and sum together these exposures. Exposures related to clearing activities are listed in the table below, together with the exposure value to be used:

CM-2.3.46

Regarding exposures subject to clearing services (the licensee acting as a clearing member or being a client of a clearing member), the licensee must determine the counterparty to which exposures must be assigned by applying the provisions of Module CA.

CM-2.3.47

Bahraini conventional bank licensees must apply a risk weight of 2 percent to their trade exposure to the CCP in respect of OTC derivatives, exchange-traded derivative transactions, securities financing transactions (SFTs) and long-settlement transactions, where the licensee acts as a clearing member of a CCP for its own purposes. Where the clearing member offers clearing services to clients, the 2 percent risk weight also applies to the clearing member’s trade exposure to the CCP that arises when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults.

CM-2.3.48

Other types of exposures that are not directly related to clearing services provided by the CCP, such as funding facilities, credit facilities, guarantees, etc. must be measured according to the rules set out in this Chapter as for any other type of counterparty. These exposures will be added together and be subjected to the large exposure limit.

CM-2.5.1

A ‘large exposure’ is any exposure to a counterparty or a group of closely related counterparties which is greater than, or equal to, 10 percent of the reporting Bahraini conventional bank licensee’s Total Consolidated capital but excluding intragroup exposures.

CM-2.5.2

CBB requires that any large exposure, as defined in Paragraph CM-2.5.1, must have a prior approval by the Bahraini conventional bank licensee's Board of Directors unless the exposure was incurred within the specific borrower limits for which the licensee has prior Board approval.

CM-2.5.3

A Bahraini conventional bank licensee may not incur an exposure to an individual counterparty or a group of closely related counterparties (not connected to the reporting licensee) which is 15 percent or more of the reporting licensee’s Total consolidated capital without the prior written approval of the CBB. Where this limit has been exceeded, the excess amount must be risk-weighted at 800 percent.

CM-2.5.4

In order for the licensee to establish the existence of a group of closely related counterparties, it must assess the relationship amongst counterparties by referring to one or more of the following criteria:

CM-2.5.5

Bahraini conventional bank licensees are also expected to refer to criteria specified in IFRS for further qualitative guidance when determining control.

CM-2.5.6

Bahraini conventional bank licensees must assess the control relationship using the following criteria:

CM-2.5.7

The CBB will exercise its discretion in applying the definition of closely related counterparties on a case-by-case basis if it finds, during its onsite or offsite supervisory review, any linkage of such counterparties.

CM-2.5.8

In establishing closely related counterparty relationships based on economic interdependence (CM-2.5.4 (b)), licensees must consider, at a minimum, the following qualitative criteria:

CM-2.5.9

Exposures to connected counterparties of Bahraini conventional bank licensees may be justified only when undertaken for the clear commercial advantage of the licensee, when negotiated and agreed on an arm’s-length basis, and when included in the Large Exposures Policy statement.

CM-2.5.10

A Bahraini conventional bank licensee may not exceed the individual or aggregate limits for exposures to connected counterparties shown in Paragraph CM-2.5.15, without the prior written approval of the CBB.

CM-2.5.11

The licensee may not undertake exposures to its own external auditor. In this context, ‘external auditor’ refers to the firm/partnership, the partners, the directors and the managers of the audit firm.

CM-2.5.12

For the purpose of this Module, ‘connected counterparties’ include legal and natural persons connected with the Bahraini conventional bank licensee, including, in particular; controllers of the licensee (and Board members, senior management and key staff of the controller, the controller’s appointed Board representatives, subsidiaries and associated companies of controllers including their Board members, senior management and key staff), approved persons of the licensee, as defined by Module LR-1A, and their close family members (as defined by IFRS – IAS 24); associated companies not mentioned hereinabove, unconsolidated subsidiaries and members of the Shari’a Supervisory Board (‘SSB’), if any.

CM-2.5.13

Equity participations in, and credit exposures to, consolidated banking and financial subsidiaries (see CA-2.3.1(c)) need not be included in exposures to connected counterparties for the sake of the table in CM-2.5.15. Equity participations in, and credit or financing exposures to, unconsolidated subsidiaries are included in the definition of exposure in order to understand the degree of support the parent is supplying to its unconsolidated subsidiaries on a day-to-day basis.

CM-2.5.14

The CBB will exercise its discretion in applying the definition of connected counterparties of the licensee on a case-by-case basis, if it finds during its onsite or offsite supervisory review any linkage of such counterparties.

CM-2.5.15

Exposures (both on and off-balance sheet) to all connected counterparties of Bahraini conventional bank licensees listed below, when taken together, may not exceed 25 percent of the Total consolidated capital. Where any of these limits have been exceeded, the excess amount must be risk-weighted at 800 percent.

CM-2.5.16

The CBB will closely examine all exposures to ‘connected counterparties’ and will deduct them from the licensee’s consolidated total capital if they are, in the CBB's opinion, of the nature of a capital investment, or provision of long-term working capital, or are made on particularly concessionary terms.

CM-2.5.17

Reciprocal cross-holdings of capital between the licensee and its controllers (see GR-5) which artificially inflate the capital of licensee concerned are not permitted. Any cross-holdings that occur, due to acquisitions or takeovers, must be deducted from the concerned licensee’s total capital (see also CA-2).

CM-2.5.18

Any other form of lending to connected counterparties outside the scope of the above will be dealt with by the CBB on a case-by-case basis.

CM-2.5.19

Bahraini conventional bank licensees must perform valuations of collaterals covering large exposures to ensure that collaterals are, and continue to be, enforceable and realisable at least on an annual basis when market conditions are adverse.

CM-2.6.1

Certain types of exposure are exempt from the 15 percent exposure limit set out in CM-2.5.3, but commitment to such exposures must be reported to the CBB on a quarterly basis using the Form PIR provided in Appendix BR-5.

CM-2.6.2

These exemptions fall into the following categories and are subject, in each case, to the policy statement:

CM-2.6.3

Where two or more entities that are outside the scope of sovereign exemption are controlled by or are economically dependent on an entity that falls within the scope of the sovereign exemption referred to in paragraph CM-2.6.2, and are closely related, those entities need not be deemed to constitute a group of closely related counterparties pursuant to paragraph CM-2.5.4. Additionally, consistent with Module CA, where other supervisors also treat claims on named PSEs as claims on their sovereigns, claims to those PSEs are treated as claims on the respective sovereigns.

CM-2.6.4

If a Bahraini conventional bank licensee has an exposure to any entity noted in Paragraph CM-2.6.2 which is hedged by a credit derivative, the licensee will have to recognise an exposure to the counterparty providing the credit protection, as prescribed in Paragraphs CM-2.4.2 and CM-2.3.16, notwithstanding the fact that the original exposure is exempted.

CM-2.6.5

Exposures to subsidiaries which are always fully consolidated on a line-by-line basis for all supervisory purposes are exempt from the limits in this Module on a consolidated basis. However, licensees must observe the CBB's solo capital adequacy requirements in Module CA.

CM-2.6.6

Exposures to unconsolidated subsidiaries (normally non-financial and outside the scope of regulatory consolidation) are not exempt from the limits in this Module and are included under the limits for exposures to associates, related parties and unconsolidated subsidiaries (See Paragraph CM-2.5.14).

CM-2.6.7

Bahraini conventional bank licensees may apply to the CBB to take on a treasury role on behalf of the group as a whole (provided that the group is subject to consolidated supervision by its home supervisor). The CBB's policy regarding the taking on of a treasury role includes exposures arising from a central risk management function. Such exposures must be approved by the CBB before they may be exempted.

CM-2.6.8

In the above scenario (Paragraph CM-2.6.7), for example, exposures of more than 15% of Total Consolidated Capital to a parent bank from a subsidiary bank may be permitted where they constitute short term lending of excess liquid funds.

CM-2.6.9

Where exposures undertaken by a Bahrain subsidiary of an overseas bank are guaranteed by its parent bank, the Bahrain subsidiary bank may be deemed to have an exposure to its parent bank.

CM-2.6.10

Under the terms of this Module (see Sub-Paragraph CM-2.6.2(f)), such indirect exposures to a parent bank may be exempted from the limits on large exposures if the CBB is satisfied that:

CM-2.6.11

In the case of a Bahrain incorporated bank’s subsidiary in Bahrain, in order for an exposure exceeding 15% of Total Capital to be acceptable in the subsidiary, the Bahrain parent bank must at all times have the capacity to take on the exposure to the third party, without itself exceeding the limit of 15% of its own Total Capital. Also, the total exposure of the banking group to the customer must be within 15% of the parent bank’s consolidated Total Capital.

CM-2.6.12

The CBB will need to be satisfied that adequate control systems are in place to ensure that risks taken in the group as a whole are properly monitored and controlled.

CM-2.10.1

Bahraini conventional bank licensees must obtain the CBB’s prior written approval before making an investment in another commercial or financial entity (whether incorporated inside or outside of Bahrain) which falls within the definition of a major investment. Additionally, the CBB’s prior approval must be obtained for any subsequent increases in the licensee’s ownership in excess of 5% of similar exposure. Where the increase is due to a revaluation or change in capital of the licensee, a written notification outlining the percentage increase and reasons for the increase must be provided to the CBB.

CM-2.10.2

In assessing a proposed major investment, the CBB will take into account the impact of such investment on the risk profile of the licensee. See Appendix CM-5 for criteria for assessment.

CM-2.10.3

A major investment is defined as either of the following:

CM-2.10.4

Any major investments by a Bahraini conventional bank licensee in the capital instruments of another entity must be included in the measure of an ‘exposure’ for the purposes of this Chapter, i.e. such major investments must be aggregated with all other facilities to a client for the purpose of calculating the level of ‘large exposures’. Where a percentage ownership increase results in the licensee exceeding the single large exposure limit, the 800 percent risk-weight rule must be applied (see CM-2.5).

CM-2.10.5

The CBB reserves the right to require Bahraini conventional bank licensees to dispose of any major investments acquired without its prior approval. Where a ‘major investment’ is acquired without the approval of the CBB, the entire value of the holding must be deducted from the consolidated total capital of the concerned licensee. Approval will not be given for ‘major investments’ in entities incorporated in jurisdictions where secrecy constraints exist, or there are restrictions on the passage of information to the bank (other than customer confidentiality requirements imposed by financial regulators).

CM-2.10.6

If the licensee’s close links with another entity prevent effective supervision of the licensee (or bank group), the CBB may refuse or revoke a license, or require the licensee to sell or otherwise dispose of entities within its corporate group, or to restructure the licensee.

CM-2.10.7

The total amount of the licensee’s investments in commercial entities, other than associated companies considered under CM-2.5.14, may not exceed the limits set forth below:

*Exposure for this purpose includes investment in capital instruments and any other exposure to the subject entity
** Limits expressed as a percentage of Total Tier 1 Capital.