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CM-4.2.1

For large exposure(s) purposes, the measure of exposure reflects the maximum loss that will arise should a counterparty fail, or the loss that may arise due to the realisation of any financing assets, shareholdings or other exposures or off-balance sheet positions, or losses experienced due to non-repayment of facilities granted. In the case of undrawn L/C or similar facilities, the advised limit must be included in the measure of exposure. In particular for Islamic banks, the measure of exposure also includes facilities or transactions or purchases of assets where the bank itself is not exposed, but is committing client funds through arrangements such as a wakala. In certain cases (particularly off-balance sheet items or derivatives), the measure of a large exposure may be larger than that used in published financial statements. Consistent with this, an exposure encompasses the amount at risk arising from a bank's:

(a) Claims on a counterparty including actual claims, and potential claims which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide, and claims which the bank has committed itself to purchase or underwrite. Such claims would include but are not limited to:
(i) Financing and other credit facilities whether or not drawn;
(ii) Exposures arising through lease agreements;
(iii) Margin held with exchanges or counterparties;
(iv) Claims under Shari'a compliant derivative contracts such as swaps and similar contracts on profit rates, foreign currencies, equities, securities, or commodities;
(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, secured financing or similar transactions;
(ix) Sukuk, bills or other non-equity financial instruments; and
(x) Underwritingexposures for sukuk, 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 bank has committed itself to provide. In the case of an undrawn 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); and
(iv) Undrawn documentary letters of credit issued or confirmed;
(c) Any other assets or transactions whose value depends wholly or mainly on a counterparty performing his 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 (including significant investments in commercial entities—see CM-4.4.1.E for definition);
(ii) Convertible Murabahas or other similar instruments.
(iii) Exposures arising from arrangements that have been entered into by the reporting bank for the purpose of providing credit protection;
(iv) Underwriting or purchase commitments for equities; and
(v) Claims on fund managers. Banks must regard assets placed with third parties under management as exposures. Under no circumstances may a bank place funds with fund managers (or mudaribs or trustees) that also act as custodian; and
(d) Any other assets, receivables or transactions (whether on or off- balance sheet), which constitute a claim (or potential claim) for the customers of the bank which are not included in (a), (b) or (c) above. In particular, it includes exposures where the bank is committing client funds through arrangements such as a wakala.
Amended: January 2015
Amended: April 2011
Amended: January 2011
October 2007