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  • CM-2.3 CM-2.3 Measure of Exposure

    • CM-2.3.1

      For the purpose of the banking book and the trading book, the measure of exposure, net of specific provisions, reflects the maximum loss that will arise should a counterparty fail, or the loss that may arise due to exposures relating to concentration per product, asset classes, collateral, segments, country, region, currencies, market, etc. In certain cases (particularly derivatives), the measure of an exposure may be larger than that used in published financial statements. Consistent with this, an exposure encompasses the amount at risk arising from the licensee’s:

      (a) Claims on a counterparty, including actual and potential claims which would arise from the drawing down in full of undrawn advised facilities (whether revocable/irrevocable, conditional or unconditional) which the licensee has committed itself to provide, and claims which the licensee has committed itself to purchase or guarantee/underwrite. In the case of undrawn facilities (including overdrafts), the advised limit must be included in the measure of exposure (after deduction of any provisions). In the case of loans, the net outstanding balance to be repaid, as shown in the books of the licensee, must be included in the measure of exposure after deduction of any provisions. These claims would include, but are not limited to:
      (i) Loans and other credit facilities (including overdrafts) whether or not drawn;
      (ii) Exposures arising through lease agreements;
      (iii) Margin held with exchanges or counterparties;
      (iv) Claims under derivative contracts such as futures, forwards, options, swaps and similar contracts on interest rates, foreign currencies, equities, securities, commodities or indexes;
      (v) Claims arising in the course of settlement of securities transactions;
      (vi) Receivables, such as fees or commissions;
      (vii) Claims arising in the case of forward sales and purchases of financial instruments in the trading or banking books;
      (viii) Amounts outstanding under sale and repurchase agreements, forward asset purchase agreements, buyback agreements, stock borrowing/lending or similar transactions;
      (ix) Bonds, bills or other non-equity financial instruments; and
      (x) Underwriting exposures for bonds, bills, or other non-equity financial instruments.
      (b) Contingent liabilities arising in the normal course of business, and those contingent liabilities which would arise from the drawing-down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the licensee has committed itself to provide. In the case of an undrawn overdraft, letter of credit (‘L/C’) or similar facility, the advised limit must be included in the measure of exposure. Such liabilities may include:
      (i) Direct credit substitutes (including guarantees, standby letters of credit, bills accepted but not held by the reporting bank, and endorsements creating payable obligations);
      (ii) Claims sold with recourse (i.e. where the credit risk remains with the reporting bank);
      (iii) Transaction-related contingents not having the character of direct credit substitutes (e.g. performance bonds, bid bonds, transaction-related L/Cs etc.);
      (iv) Undrawn documentary letters of credit issued or confirmed;
      (v) Credit derivatives sold (where the licensee is providing credit protection); and
      (vi) Asset value guarantees (where the licensee provides protection on exit price or realisable value of a non-financial asset).
      (c) Any other assets or transactions whose value depends wholly or mainly on a counterparty performing its obligations, or whose value depends upon that counterparty’s financial soundness, but which do not represent a claim on the counterparty. Such assets or transactions include:
      (i) Equities and other capital instruments;
      (ii) Equity warrants, options, or equity derivatives where the reporting bank is obtaining credit protection; and
      (iii) Underwriting or purchase commitments for equities.
      (d) Investments transactions in trading book (e.g. index positions, securitisations, investments in hedge funds or investment funds) must be calculated by applying the same rules as for similar instruments in the banking book (see Paragraph CM-2.3.27 to CM-2.3.41). The amount invested in a particular structure may be assigned to the structure itself, defined as a distinct counterparty to the counterparties corresponding to the underlying assets, or to the unknown client.
      Added: June 2022

    • CM-2.3.2

      Where the licensee has a legally enforceable netting arrangement in place for loans and deposits, it may calculate the exposure values for large exposures in accordance with Section CA-4.4.

      Added: June 2022

    • Eligible Credit Risk Mitigation (‘CRM’) Techniques

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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:

        (a) The value of the protected portion in the case of unfunded credit protection;
        (b) The value of the portion of the claim collateralised by the market value of the recognised financial collateral when the licensee uses the simple approach under Section CA-4.2; and
        (c) The value of the collateral adjusted after applying the required haircuts, in the case of financial collateral when the licensee applies the comprehensive approach (see Section CA-4.3).
        Added: June 2022

      • 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).

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

    • Offsetting Long and Short Positions in the Trading Book

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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’).

        Added: June 2022

      • 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 .

        Added: June 2022

      • 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.

        Added: June 2022

      • CM-2.3.21

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

        Added: June 2022

    • Covered Bonds

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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:

        (a) It must meet the general definition set out in CM-2.3.22.
        (b) The pool of underlying assets must exclusively consist of one or more of the following:
        (i) Claims on, or guaranteed by, sovereigns, their central banks, public sector entities or multilateral development banks;
        (ii) Claims secured by mortgages on residential real estate that would qualify for a 35 percent or lower risk-weight under Section CA-3.2 and have a loan-to-value ratio of 80 percent or lower;
        (iii) Claims secured by commercial real estate that would qualify for the 100 percent or lower risk-weight under Section CA-3.2 and with a loan-to-value ratio of 60 percent or lower; and/or
        (iv) Claims on, or guaranteed by banks that qualify for a 30 percent or lower risk weight. However, such assets cannot exceed 15 percent of covered bond issuances; and
        (c) The nominal value of the pool of assets assigned to the covered bond instrument(s) by its issuer must exceed its nominal outstanding value by at least 10 percent. The value of the pool of assets for this purpose does not need to be that outlined by the legislative framework. However, if the legislative framework does not stipulate a requirement of at least 10 percent, the issuing bank needs to publicly disclose on a regular basis that their cover pool meets the 10 percent requirement in practice. In addition to the primary assets listed under this Sub-paragraph, the additional collateral may include substitution assets (cash or short-term liquid and secure assets held in substitution of the primary assets to top up the cover pool for management purposes) and derivatives entered into for the purposes of hedging the risks arising in the covered bond program.
        Added: June 2022

      • 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:

        (a) Legal Enforceability: Any claim on a collateral taken must be legally enforceable in all relevant jurisdictions, and any claim on collateral must be properly filed on a timely basis. Collateral interests must reflect a perfected lien (i.e. all legal requirements for establishing the claim have been fulfilled). In addition to this, the collateral agreement and the legal process underpinning it must be such that they allow the licensee to realise the value of the collateral within a reasonable timeframe; and
        (b) Frequent Revaluation: The licensee must monitor the value of the collateral on a frequent basis and, at a minimum, once a year. More frequent monitoring is suggested where the market is subject to significant changes in conditions. Statistical methods of evaluation (e.g. reference to house price indices, sampling) may be used to update estimates or to identify collateral that may have declined in value and that may need reappraisal. A qualified professional must evaluate the property when information indicates that the value of the collateral may have declined materially relative to general market prices, or when a credit event, such as a default, occurs.
        Added: June 2022

      • 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.

        Added: June 2022

    • Collective Investment Undertakings, Securitisation Vehicles and Other Structures

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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).

        Added: June 2022

      • 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:

        (a) Assign the total exposure amount of its investment to the structure; or
        (b) Assign this total exposure amount to the unknown client.
        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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:

        (a) Consider the lower of the value of the tranche in which the licensee invests and the nominal value of each underlying asset included in the underlying portfolio of assets; and
        (b) Apply the pro rata share of the licensee’s investment in the tranche to the value determined in the first step above.
        Added: June 2022

    • Identification of Additional Risks

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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).

        Added: June 2022

      • 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.

        Added: June 2022

    • Identification of Additional Risks

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

    • Exposures to Central Counterparties

      • CM-2.3.42

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

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

    • Identification of Additional Risks

      • 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:

        Trade Exposures The exposure value of trade exposures must be calculated using the exposure measures prescribed in this Chapter for the respective type of exposures.
        Segregated Initial Margin The exposure value is 0.
        Non-segregated Initial Margin The exposure value is the nominal amount of initial margin posted.
        Pre-funded Default Fund Contributions Nominal amount of the funded contribution.
        Unfunded Default Fund Contributions The exposure value is 0.
        Equity Stakes The exposure value is the nominal amount.
        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022

      • 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.

        Added: June 2022