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  • Covered Sukuks

    • CM-2.3.17

      Covered Sukuks are Sukuks issued by a bank or mortgage institutions and are subject by law to special public supervision designed to protect Sukuk-holders. Proceeds deriving from the issue of these Sukuks must be invested in conformity with the law in assets which, during the whole period of the validity of the Sukuks, are capable of covering claims attached to the Sukuks 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 profit.

      Added: June 2022

    • CM-2.3.18

      A covered Sukuk satisfying the conditions set out in Paragraph CM-2.3.19, may be assigned an exposure value of no less than 20 percent of the nominal value of the licensee’s covered Sukuk holding. Other covered Sukuks must be assigned an exposure equal to 100 percent of the nominal value of the licensee’s covered Sukuk holding. The counterparty to which the exposure value is assigned is the issuing bank.

      Added: June 2022

    • CM-2.3.19

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

      (a) It must meet the general definition set out in CM-2.3.17.
      (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-4.2 and have a financing -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-4.2 and with a financing-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 Sukuk issuances; and
      (c) The nominal value of the pool of assets assigned to the covered Sukuk 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 Shari’a compliant hedging instruments entered into for the purposes of hedging the risks arising in the covered Sukuk program.
      Added: June 2022

    • CM-2.3.20

      In order to calculate the required maximum financing-to-value for residential real estate and commercial real estate referred to in Paragraph CM-2.3.19, 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-2.3.21

      The conditions set out in Paragraph CM-2.3.19 must be satisfied at the inception of the covered Sukuk and throughout its remaining maturity.

      Added: June 2022