• BANK Chapter 4 BANK Chapter 4 Credit risk

    • BANK Part 4.1 BANK Part 4.1 General

      • BANK 4.1.1 Introduction

        (1) This Chapter sets out the requirements for a banking business firm’s credit risk management policy (including credit risk assessments and the use of ratings from ECRAs) to implement the risk-based framework for capital adequacy and the early identification and management of problem assets.
        (2) This Chapter also deals with the following means to determine regulatory capital and control or mitigate credit risk:
        (a) the risk-weighted assets approach;
        (b) CRM techniques;
        (c) provisioning.
        (3) To guard against abuses and to address conflicts of interest, this Chapter requires transactions with related parties to be at arm’s length.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.1.2 BANK 4.1.2 Credit risk

        Credit risk is:

        (a) the risk of default by counterparties; and
        (b) the risk that an asset will lose value because its credit quality has deteriorated.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.1.2 Guidance

          Credit risk may result from on-balance-sheet and off-balance-sheet exposures, including loans and advances, investments, inter-bank lending, derivative transactions, securities financing transactions and trading activities. It can exist in a firm's trading book or banking book.

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.1.3 Requirements — management of credit risk and problem assets

        (1) A banking business firm must manage credit risk by adopting a prudent credit risk management policy that allows its credit risk to be identified, measured, evaluated, managed and controlled or mitigated.
        (2) The policy must also provide for problem assets to be recognised, measured and reported. The policy must set out the factors that must be taken into account in identifying problem assets.
        (3) Problem assets include impaired credits and other assets if there is reason to believe that the amounts due may not be collectable in full or in accordance with their terms.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.1.4 Role of governing body — credit risk

        A banking business firm’s governing body must ensure that the firm’s credit risk management policy enables the firm to obtain a comprehensive firm-wide view of its credit risk and covers the full credit lifecycle (including credit underwriting, credit evaluation, and the management of the firm’s trading and banking activities).

        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK Part 4.2 BANK Part 4.2 Credit risk management policy

      • BANK 4.2.1 Credit risk management policy

        (1) A banking business firm must establish and implement a credit risk management policy:
        (a) that is appropriate for the nature, scale and complexity of its business and for its risk profile; and
        (b) that enables the firm to identify, measure, evaluate, manage and control or mitigate credit risk.
        (2) The objective of the policy is to give the firm the capacity to absorb any existing and estimated future losses arising from credit risk.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.2.2 BANK 4.2.2 Policies — general credit risk environment

        A banking business firm's credit risk management policy must establish:

        (a) a well-documented and effectively-implemented process for assuming credit risk that does not rely unduly on external credit ratings;
        (b) well-defined criteria for approving credit (including prudent underwriting standards), and renewing, refinancing and restructuring existing credit;
        (c) a process for identifying the approving authority for credit, given its size and complexity;
        (d) effective credit risk administration, including:
        (i) regular analysis of counterparties' ability and willingness to repay; and
        (ii) monitoring of documents, legal covenants, contractual requirements, and collateral and other CRM techniques;
        (e) effective systems for the accurate and timely identification, measurement, evaluation, management and control or mitigation of credit risk, and reporting to the firm's governing body and senior management;
        (f) procedures for tracking and reporting exceptions to, and deviations from, credit limits or policies;
        (g) prudent and appropriate credit limits that are consistent with the firm's risk tolerance, risk profile and capital; and
        (h) effective controls for the quality, reliability and relevance of data and validation procedures.
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

        • BANK 4.2.2 Guidance

          Depending on the nature, scale and complexity of a banking business firm's credit risk, and how often it provides credit or incurs credit risk, the firm's credit risk management policy should include:

          (a) how the firm defines and measures credit risk;
          (b) the firm's business aims in incurring credit risk, including:
          •   identifying the types and sources of credit risk that the firm will permit itself to be exposed to (and the limits on that exposure) and those that it will not;
          •   setting out the degree of diversification that the firm requires, the firm's tolerance for risk concentrations and the limits on exposures and concentrations; and
          •   stating the risk-return trade-off that the firm is seeking to achieve;
          (c) the kinds of credit to be offered, and ceilings, pricing, profitability, maximum maturities and ratios for each kind of credit;
          (d) a ceiling for the total credit portfolio (in terms, for example, of loan-to-deposit ratio, undrawn commitment ratio, a maximum amount or a percentage of the firm's capital);
          (e) portfolio limits for maximum gross exposures by region or country, by industry or sector, by category of counterparty (such as banks, non-bank financial entities and corporate counterparties), by product, by counterparty and by connected counterparties;
          (f) limits, terms and conditions, approval and review procedures and records kept for lending to connected counterparties;
          (g) types of collateral, loan-to-value ratios and criteria for accepting guarantees;
          (h) the detailed limits for credit risk, and a credit risk structure, that:
          •   takes into account all significant risk factors, including intra-group exposures;
          •   is commensurate with the scale and complexity of the firm's activities; and
          •   is consistent with the firm's business aims, historical performance, and the amount of capital it is willing to risk;
          (i) procedures for:
          •   approving new products and activities that give rise to credit risk;
          •   regular risk position and performance reporting; and
          •   approving and reporting exceptions to limits;
          (j) allocating responsibilities for implementing the credit risk management policy and monitoring adherence to, and the effectiveness of, the policy; and
          (k) the required information systems, staff and other resources.
          Amended by QFCRA RM/2015-1 (as from 1st July 2015).

      • BANK 4.2.3 BANK 4.2.3 Policies — credit decisions

        (1) A banking business firm's credit risk management policy must ensure that credit decisions are free of conflicts of interest and are made on an arm's-length basis. In particular, the credit approval and credit review functions must be independent of the credit initiation function.

        Guidance

        1 This rule does not prevent arrangements such as an employee loan scheme, so long as the policy ensures that the scheme's terms, conditions and limits are generally available to employees and adequately address the risks and conflicts that arise from loans under it.
        2 The credit risk management policy of a banking business firm should clearly set out who has the authority to approve loans to employees. The authority of a credit committee or credit officer should be appropriate for the products or portfolio and should be commensurate with the committee's or officer's credit experience and expertise.
        3 Each authority to approve should be reviewed regularly to ensure that it remains appropriate for current market conditions and the committee's or officer's performance.
        4 A banking business firm's remuneration policy should be consistent with its credit risk management policy and should not encourage officers to attempt to generate short-term profits by taking an unacceptably high level of risk.
        (2) The policy must state that decisions relating to the following are made at the appropriate level of the firm's senior management or governing body:
        (a) exposures exceeding a stated amount or percentage of the firm's capital;
        (b) exposures that, in accordance with criteria set out in the policy, are especially risky;
        (c) exposures that are outside the firm's core business.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.2.3 Guidance

          1 The level at which credit decisions are made should vary depending on the kind and amount of credit and the nature, scale and complexity of the firm's business. For some firms, a credit committee with formal terms of reference might be appropriate; for others, individuals with pre-assigned limits would do.
          2 A banking business firm should ensure, through periodic independent audits, that the credit approval function is properly managed and that credit exposures comply with prudential standards and internal limits. The results of audits should be reported directly to the governing body, credit committee or senior management, as appropriate.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.2.4 Policies — monitoring, testing and access

        (1) A banking business firm's credit risk management policy must provide for monitoring the total indebtedness of each counterparty and any risk factors that might result in default (including any significant unhedged foreign exchange risk).
        (2) The policy must include stress-testing the firm's credit exposures at intervals appropriate for the nature, scale and complexity of the firm's business and for its risk profile. It must also include a yearly review of stress scenarios, and procedures to make any necessary changes arising from the review.

        Note The firm's ICAAP sets out how these monitoring and testing are to be achieved. ICAAP includes procedures to continuously identify, measure, evaluate, manage and control or mitigate the risks arising from the firm's activities, and the capital held against such risks — see rules 3.1.4 and 3.1.5.
        (3) A firm must give the Regulatory Authority full access to information in its credit portfolio. The firm must also give the authority access to staff involved in assuming, managing and reporting on credit risk.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK Part 4.3 BANK Part 4.3 Credit risk assessment

      • BANK 4.3.1 BANK 4.3.1 Introduction

        This Part sets out a standardised approach for credit risk assessment and requires a banking business firm to establish and implement policies to identify, measure, evaluate, manage and control or mitigate credit risk and to calculate its credit risk capital requirement.

        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.3.1 Guidance

          1 Credit risk assessment under this Part is different from the evaluation (often called credit assessment) made by a firm as part of its credit approval process.
          2 Credit assessment is part of the firm's internal commercial decision-making for approving or refusing credit; it consists of the evaluation of a prospective counterparty's repayment ability. In contrast, credit risk assessment is done by the firm (using ratings and risk-weights set out in these rules) as part of calculating its credit risk capital requirement.
          Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 4.3.2 BANK 4.3.2 Policies — credit risk assessment

        A banking business firm must establish and implement appropriate policies to enable it to assess credit risk when the credit is granted or the risk is incurred and afterwards. In particular, the policies must enable the firm:

        (a) to measure credit risk (including the credit risk of off-balance-sheet items, such as derivatives, in credit equivalent terms);
        (b) to effectively use its internal credit risk assessment;
        (c) to rate and risk-weight a counterparty;
        (d) to monitor the condition of individual credits;
        (e) to administer its credit portfolio, including keeping the credit files current, getting up-to-date financial information on counterparties, and the electronic storage of important documents;
        (f) to ensure that the value of collateral and the value of the other CRM techniques used by the firm are assessed regularly;
        (g) to assess whether its CRM techniques are effective; and
        (h) to calculate its credit risk capital requirement.
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

        • BANK 4.3.2 Guidance

          A banking business firm involved in loan syndications or consortia should not rely on other parties' assessments of the credit risk involved but should carry out a full assessment based on its own credit risk management policy.

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.3.3 Categories of credits

        (1) Unless a banking business firm has established something more detailed, the firm must classify credits into 1 of the 5 categories in table 4.3.3. Nothing in the table prevents a banking business firm from classifying a credit under a higher risk category than the table requires.
        (2) Unless there is good reason not to do so, the same category must be given to all credit exposures to the same counterparty.

        Table 4.3.3 Categories of credit

        column 1 item column 2 category column 3 description
        1 performing In this category, there is no uncertainty about timely repayment of the outstanding amounts. This category comprises credits that are currently in regular payment status with prompt payments.
        2 special mention This category comprises:
        (a) credits with deteriorating or potentially deteriorating credit quality that may adversely affect the counterparty's ability to make scheduled payments on time;
        (b) credits that are 30 to 90 days in arrears;
        (c) credits showing weakness arising from the customer's financial position;
        (d) credits affected by market circumstances or any other industry-related concerns; and
        (e) credits that have been restructured and are not classified into a higher risk category.
        3 substandard This category comprises:
        (a) credits that show definite deterioration in credit quality and impaired repayment ability of the counterparty; and
        (b) credits that are 91 to 180 days in arrears.
        4 doubtful This category comprises:
        (a) credits that show significant credit quality deterioration, worse than those in the substandard category, to the extent that the prospect of full recovery of all the outstanding amounts is questionable and the probability of a credit loss is high (though the exact amount of loss cannot be determined yet); and
        (b) credits that are 181 to 270 days in arrears.
        5 loss This category comprises:
        (a) credits that are assessed as uncollectable;
        (b) credits where the probability of recovering the amount due is very low; and
        (c) credits that are more than 270 days in arrears.

        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.3.4 Policies — problem assets

        A banking business firm’s credit risk management policy must facilitate the firm’s collection of past-due obligations, and its management of problem assets through:

        (a) monitoring of their credit quality;
        (b) early identification and ongoing oversight; and
        (c) review of their classification, provisioning and write-offs.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.3.5 Impaired credits

        (1) Impaired credit means a credit that is categorised as substandard, doubtful or loss. For the purpose of applying risk-weights, interest is suspended on an impaired credit.
        (2) A large exposure that is an impaired credit must be managed individually in terms of its valuation, categorisation and provisioning.

        Note For large exposures — see rule 5.3.1. For the provisioning of impaired credits — see rule 4.7.3.
        (3) The review of impaired credits and other problem assets may be done individually, or by class, but must be done at least once a month.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.3.6 Restructuring, refinancing and re-provisioning of credits

        (1) A credit is a restructured credit if it has been re-aged, extended, deferred, renewed, rewritten or placed in a workout program. Unless there is good reason to do so, a restructured credit can never be classified as performing.
        (2) A restructured credit may be reclassified to a more favourable category, but only by 1 rating up from its category before the restructure. The credit may be reclassified 1 further category up after 180 days of satisfactory performance under the terms of the new contract.
        (3) The refinancing of a special mention or impaired credit must not be used to reclassify the credit to a more favourable category.

        Note A banking business firm must not restructure, refinance or reclassify assets with a view to circumventing the requirements on provisioning — see rule 4.7.5.
        (4) The Regulatory Authority may require a special mention credit to be managed individually, and may set a higher level of provision for the credit, if the authority is of the view that market circumstances or any other industry-related concerns require such action.

        Note For the provisioning of special mention credits — see rule 4.7.3.
        Amended by QFCRA RM/2015-1 (as from 1st July 2015).

      • BANK 4.3.7 Using external credit rating agencies

        (1) A banking business firm must use only a solicited credit risk rating determined by an ECRA in determining the risk-weights for the firm's exposures.
        (2) A rating is a solicited rating if the rating was initiated and paid for by the issuer of the instrument, the rated counterparty or any other entity in the same corporate group as the issuer or rated counterparty.
        (3) The firm must use the ratings determined by an ECRA consistently and in accordance with these rules and its credit risk management policy.

        Example

        A firm that chooses to use ratings determined by an ECRA for exposures belonging to a class must consistently use those ratings for all the exposures belonging to that class. The firm must not selectively pick between ECRAs or ratings in determining risk-weights.
        (4) Unsolicited ratings must not be used except with the written approval of the Regulatory Authority or in accordance with a direction of the authority. The authority may give a written direction setting out conditions that must be satisfied before a firm may use an unsolicited rating.
        (5) The firm must ensure that the relevant rating takes into account the total amount of the exposure (that is, the principal and any interest due).
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 4.3.7A Multiple assessments

        (1) If there is only 1 assessment by an ECRA for a particular claim or asset, that assessment must be used to determine the risk-weight of the claim or asset.
        (2) If there are 2 assessments by ECRAs and the assessments map into different risk weights, the higher risk-weight must be applied.
        (3) If there are 3 or more assessments with different risk weights, the assessments corresponding to the 2 lowest risk-weights should be referred to, and the higher of those 2 risk-weights must be applied.
        Inserted by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 4.3.8 Choosing between issuer and issue ratings

        (1) If a banking business firm invests in an instrument with an issue-specific rating, the risk-weight to be applied to the instrument must be based on that rating.
        (2) If the firm invests in an unrated instrument and the issuer of the instrument is assigned a rating that results in a lower risk-weight than the risk-weight normally applied to an unrated position, the firm may apply the lower risk-weight to the instrument but only if the claim for the instrument has the same priority as, or is senior to, the claims to which the issuer rating relates. If the instrument is junior to the claims to which the issuer rating relates, the firm must apply the risk-weight normally applied to an unrated position.
        (3) If the firm invests in an unrated instrument and the issuer of the instrument is assigned a rating that results in a higher risk-weight than the risk-weight normally applied to an unrated position, the firm must apply the higher risk-weight to the instrument if the claim for that instrument has the same priority as, or is junior to, the claims to which the issuer rating relates.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.3.9 Ratings within financial group

        A banking business firm must not use a credit risk rating for 1 entity in a financial group to determine the risk-weight for an unrated entity in the same group. If the rated entity has guaranteed the unrated entity's exposure to the firm, the guarantee may be recognised for risk-weighting purposes if it satisfies the criteria in Division 4.5.C.

        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.3.10 Using foreign currency and domestic currency ratings

        If an issuer rating is assigned to a counterparty and a banking business firm applies a risk-weight to an unrated position based on the rating of an equivalent exposure to the same counterparty:

        (a) the firm must use that counterparty’s domestic-currency rating for any exposure denominated in the currency of the counterparty’s place of residence or incorporation; and
        (b) the firm must use that counterparty’s foreign-currency rating for any exposure denominated in a foreign currency.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.3.11 Using short-term ratings

        (1) A short-term credit risk rating must be used only for short-term claims relating to banks and corporations (such as those arising from the issuance of commercial paper). The rating is taken to be issue-specific and must be used only to assign risk-weights for claims arising from a rated facility.
        (2) If a short-term rated exposure is assigned a risk-weight of 50%, an unrated short-term exposure to the same counterparty cannot be assigned a risk-weight lower than 100%.
        (3) If a short-term facility of an issuer is assigned a risk-weight of 150% based on the facility’s credit risk rating, all unrated claims of the issuer (whether long-term or short-term) must be assigned a risk-weight of 150%.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK Part 4.4 BANK Part 4.4 Risk-weighted assets approach

      • BANK Division 4.4.A BANK Division 4.4.A General

        • BANK 4.4.1 Requirement to risk-weight

          (1) A banking business firm must apply risk-weights to its on-balance-sheet and off-balance-sheet items using the risk-weighted assets approach.
          (2) Risk-weights are based on credit ratings or fixed risk-weights and are broadly aligned with the likelihood of counterparty default. A firm may use the ratings determined by an ECRA if allowed to do so by these rules.
          Amended by QFCRA RM/2015-3 (as from 1st January 2016).

        • BANK 4.4.2 Relation to CRM techniques

          If a claim or asset to which a risk-weight must be applied by a banking business firm is secured by eligible financial collateral or a guarantee (or there is mortgage indemnity insurance, or a credit derivative instrument or netting agreement), the CRM techniques in Part 4.5 may be used to reduce the firm's credit risk capital requirement.

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.3 Risk-weight to be applied

          A banking business firm must apply the risk-weight set out in this Part for a claim or asset.

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.4 Firm must assess all credit exposures

          (1) A banking business firm must assess all credit exposures (rated or unrated) to determine whether the risk-weights applied to them are appropriate. The determination must be based on each exposure's inherent risk.
          (2) If there are reasonable grounds to believe that the inherent risk of an exposure is significantly higher than that implied by the risk-weight assigned to it, the firm must consider the higher risk (and apply a higher risk-weight) in calculating the credit risk capital requirement.
          (3) A banking business firm must not rely only on a rating determined by an ECRA to assess the risks associated with an exposure. The firm must also carry out its own credit risk assessment of each exposure.
          Amended by QFCRA RM/2015-3 (as from 1st January 2016).

        • BANK 4.4.5 Commitments included in calculation

          A banking business firm must take into account all commitments in calculating its credit risk capital requirement, whether or not those commitments contain material adverse change clauses or other provisions that are intended to relieve the firm of its obligations under particular conditions.

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.6 Authority can determine risk-weights and impose requirements

          (1) Despite anything in these rules, the Regulatory Authority may determine the risk-weighted amount of a particular on-balance-sheet or off-balance-sheet item of a banking business firm if the authority considers that the firm has not risk-weighted the item appropriately. The determination must be in writing.
          (2) The authority may also impose specific capital requirements or limits on significant risk exposures, including those that the authority considers have not been adequately transferred or mitigated.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK Division 4.4.B BANK Division 4.4.B Risk-weighted assets approach — on-balance-sheet items

        • BANK 4.4.7 Calculating total risk-weighted items

          (1) A banking business firm's total risk-weighted on-balance-sheet items is the sum of the risk-weighted amounts of each of its on-balance-sheet items.
          (2) The risk-weighted amount of an on-balance-sheet item is calculated by multiplying its exposure (after taking into account any applicable CRM technique) by the applicable risk-weight in table 4.4.7A.
          (3) If column 3 of table 4.4.7A states that the risk weight is "based on ECRA rating", the applicable risk-weight for the claim or asset is that in table 4.4.7B. If a claim or asset's risk-weight is to be based on the ECRA rating and there is no such rating from an ECRA, the firm must apply the risk-weight in the last column of table 4.4.7B.
          (4) For table 4.4.7A, investment property is land, a building or part of a building (or any combination of land and building) held to earn rentals or for capital appreciation or both.
          (5) Investment property does not include property held for use in the production or supply of goods or services, for administrative purposes, or for sale in the ordinary course of business. A real estate asset owned by a banking business firm as a result of a counterparty default is treated as 'other item' and risk-weighted at 100% but only for a period of 3 years starting from the date when the firm records the asset on its books.

          Table 4.4.7A Risk-weights for on-balance-sheet items

          column 1 item column 2 description of claim or assests column 3 risk-weight %
          1 cash  
            (a) notes, gold bullion 0
            (b) cash items in the process of collection 20
          2 claims on sovereigns 0
            (a) claims on Qatar including Qatar Central Bank 0
            (b) claims on GCC sovereigns including respective central banks 0
            (c) claims on other sovereigns based on ECRA rating
          3 claims on public sector enterprises:  
            (a) claims on non-commercial public sector enterprises in Qatar 0
            (b) claims on non-commercial public sector enterprises in other GCC countries, denominated in the relevant enterprise's domestic currency 0
            (c) claims on non-commercial public sector enterprises in other GCC countries, not denominated in the relevant enterprise's domestic currency based on ECRA rating
            (d) claims on other sovereign non-commercial public sector enterprises based on ECRA rating
            (e) claims on commercial public sector enterprises based on ECRA rating
          4 claims on multilateral development banks:  
            (a) claims on multilateral development banks eligible for 0% risk-weight 0
            (b) claims on other multilateral development banks based on ECRA rating
          5 claims on banks (financial undertakings)  
            (a) claims on banks with an original maturity of more than 3 months based on ECRA rating
            (b) claims on banks with an original maturity of 3 months or less based on ECRA rating
          6 claims on securities and investment entities  
            (a) claims on securities and investment entities that are subject to capital requirements similar to banks based on ECRA rating
            (b) claims on securities and investment entities that are not subject to capital requirements similar to banks based on ECRA rating
          7 claims on corporates based on ECRA rating
          8 claims on small and medium enterprises 100
          9 claims on securitisation exposures based on ECRA rating
          10 claims secured against mortgages  
            (a) residential mortgages  
           
          (i) if the loan-to-value ratio is 0% to 80%
          35
           
          (ii) if the loan-to-value ratio is more than 80% but less than 100%
          75
           
          (iii) if the loan-to-value ratio is 100% or more
          100
            (b) commercial mortgages 100
          11 Unsettled and failed transactions — delivery-versus-payment transactions:  
            (a) 5 to 15 days 100
            (b) 16 to 30 days 625
            (c) 31 to 45 days 937.5
            (d) 46 or more days 1250
          12 Unsettled and failed transactions — non-delivery-versus-payment transactions 100
          13 investments in funds  
            (a) rated funds based on ECRA rating
            (b) unrated funds that are listed 100
            (c) unrated funds that are unlisted 150
          14 equity exposures  
            (a) equity exposures that are not deducted from capital and are listed on a recognised exchange 300
            (b) equity exposures that are not deducted from capital and are not listed on a recognised exchange 400
          15 investment property 150
          16 all other items 100

          Note for table 4.4.7A

          The Basel Committee on Banking Supervision (BCBS) publishes a list of multilateral development banks that qualify for 0% risk weight. The list was originally included in the document Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework—Comprehensive Version¸ published by the BCBS on 30 June 2006 (available at http://www.bis.org/publ/bcbs128.pdf), and has been updated by BCBS newsletters. BCBS newsletters are available at http://www.bis.org/list/bcbs_nl/index.htm. As at November 2016 the list is as follows:

          •    the African Development Bank
          •    the Asian Development Bank
          •    the Caribbean Development Bank
          •    the Council of Europe Development Bank
          •    the European Bank for Reconstruction and Development
          •    the European Investment Bank
          •    the European Investment Fund
          •    the Inter-American Development Bank
          •    the International Development Association
          •    the International Finance Facility for Immunization
          •    the Islamic Development Bank
          •    the Nordic Investment Bank
          •    the World Bank Group (comprising the International Bank for Reconstruction and Development, the International Finance Corporation and the Multilateral Investment Guarantee Agency).

          Examples of MDBs that do not qualify for 0% risk weight are:

          •    the Arab Bank for Economic Development in Africa
          •    the Asian Infrastructure Investment Bank
          •    the Black Sea Trade and Development Bank
          •    the Development Bank of Latin America
          •    the Central American Bank for Economic Integration
          •    the Development Bank of Central African States
          •    the East African Development Bank
          •    the Economic Cooperation Organization Trade and Development Bank
          •    the Eurasian Development Bank
          •    the International Finance Facility for Immunisation
          •    the International Fund for Agricultural Development
          •    the International Investment Bank
          •    the New Development Bank
          •    the OPEC Fund for International Development
          •    the West African Development Bank.

          Table 4.4.7B Risk-weights based on ratings determined by ECRAs

          item description of claim or asset AAA to AA- A+ to A- BBB+ to BBB- BB+ to BB- B+ to B- below B- unrated
          1 claims on other sovereigns 0 20 50 100 100 150 100
          2 claims on non-commercial public sector enterprises in other GCC countries, not denominated in the relevant enterprise's domestic currency 0 20 50 100 100 150 100
          3 claims on other sovereign non-commercial public sector enterprises - 20 50 100 100 100 150 100
          4 claims on commercial public sector enterprises 20 50 100 100 100 150 100
          5 claims on multilateral development banks not eligible for 0% risk-weight 20 50 50 100 100 150 50
          6 claims on banks with an original maturity of more than 3 months 20 50 50 100 100 150 50
          7 claims on banks with an original maturity of 3 months or less 20 20 20 50 50 150 20
          8 claims on securities and investment entities that are subject to capital requirements similar to banks 20 50 50 100 100 150 50
          9 claims on securities and investment entities that are not subject to capital requirements similar to banks 20 50 100 100 150 150 100
          10 claims on corporates 20 50 100 100 150 150 100
          11 securitisation exposures 50 100 100 150 150 250 150
          12 investments in rated funds 20 50 100 100 150 150 n/a

          Amended by QFCRA RM/2018-1 (as from 1st May 2018).

        • BANK 4.4.8 Specialised lending

          (1) A specialised lending exposure is risk-weighted one rating less favourable than the rating that would apply, under table 4.4.7B, to the counterparty to the transaction (or to the party to whom that counterparty has the right of recourse).
          (2) Specialised lending is a lending transaction that complies with the following requirements:
          (a) the purpose of the loan is to acquire an asset;
          (b) the cash flow generated by the collateral is the loan's exclusive (or almost exclusive) source of repayment;
          (c) the loan represents a significant liability in the borrower's capital structure;
          (d) the credit risk is determined primarily by the variability of the cash flow generated by the collateral (rather than the independent capacity of a broader commercial enterprise).
          Note Specialised lending is associated with the financing of projects where the repayment depends on the performance of the underlying collateral. There are 5 sub-classes of specialised lending:
          (a) project finance — financing industrial projects based on the projected cash flows of the project;
          (b) object finance — financing physical assets based on the projected cash flows obtained primarily through the rental or lease of the assets;
          (c) commodities finance — financing the reserves, receivables or inventories of exchange-traded commodities where the exposure is paid back based on the sale of the commodity (rather than by the borrower from independent funds);
          (d) income-producing real estate finance — financing real estate that is usually rented or leased out by the debtor to generate cash flow to repay the exposure; and
          (e) high-volatility commercial real estate finance — financing commercial real estate which demonstrates a much higher volatility of loss rates compared to other forms of specialised lending.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.9 Risk-weights for unsecured part of claim that is past due for more than 90 days

          (1) The risk-weight for the unsecured part of a claim (other than a claim secured by an eligible residential mortgage) that is past due for more than 90 days is:
          (a) 150% if the specific provisions are less than 20% of the past due claim;
          (b) 100% if the specific provisions are 20% or more, but less than 50%, of the past due claim; or
          (c) 50% if the specific provisions are 50% or more of the past due claim.
          (2) The risk-weight for the unsecured part of a claim secured by an eligible residential mortgage that is past due for more than 90 days is:
          (a) 100% if the specific provisions are less than 20% of the past due claim; or
          (b) 50% if the specific provisions are 20% or more of the past due claim.
          (3) In this rule:

          eligible residential mortgage means a mortgage on a residential property that is, or will be:
          (a) occupied by the counterparty for residential use; or
          (b) rented out (on a non-commercial basis) for residential use.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK Division 4.4.C BANK Division 4.4.C Risk-weighted assets approach — off-balance-sheet items

        • BANK 4.4.10 Calculating total risk-weighted items

          (1) A banking business firm's total risk-weighted off-balance-sheet items is the sum of the risk-weighted amounts of its market-related and non-market-related off-balance-sheet items. An off-balance-sheet item must be converted to a credit equivalent amount before it can be risk-weighted.
          (2) The risk-weighted amount of an off-balance-sheet item is calculated as follows:
          •   first, convert the notional principal amount of the item to its on-balance-sheet equivalent (credit equivalent amount).
          Note For the conversion of market-related items — see rules 4.4.11 to 4.4.13. For the conversion of non-market-related items — see rules 4.4.15 to 4.4.17.

          •   second, multiply the resulting credit equivalent amount by the risk-weight in Division 4.4.B applicable to the claim or asset.
          (3) A banking business firm must include derivatives and all market-related off-balance-sheet items (including on-balance-sheet unrealised gains on market-related off-balance-sheet items) in calculating its risk-weighted credit exposures.
          (4) A market-related item must be valued at its current market price.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.11 How to convert notional amounts — market-related items

          (1) A banking business firm must calculate the credit equivalent amount of each of its market-related items. Unless the item is covered by an eligible netting agreement, the credit equivalent amount of a market-related off-balance-sheet item is the sum of the current credit exposure and the potential future credit exposure from the item.
          (2) Current credit exposure is the absolute mark-to-market value (or replacement cost) of the item.
          (3) Potential future credit exposure (also known as ‘the add-on’) is the amount calculated by multiplying the notional principal amount of the item by the relevant credit conversion factor in table 4.4.11. The notional principal amount of an item is the reference amount used to calculate payment streams between counterparties to the item.

          Table 4.4.11 Credit conversion factors for market-related off-balance-sheet items

          column 1 item column 2 description of claim or asset column 3 credit conversion factor %
          1 interest rate contracts  
            (a) residual maturity 1 year or less 0
            (b) residual maturity > 1 year to 5 years 0.5
            (c) residual maturity > 5 years 1.5
          2 foreign exchange and gold contracts  
            (a) residual maturity 1 year or less 1
            (b) residual maturity > 1 year to 5 years 5
            (c) residual maturity > 5 years 7.5
          3 equity contracts  
            (a) residual maturity 1 year or less 6
            (b) residual maturity > 1 year to 5 years 8
            (c) residual maturity > 5 years 10
          4 precious metal contracts (other than gold)  
            (a) residual maturity 1 year or less 7
            (b) residual maturity > 1 year to 5 years 7
            (c) residual maturity > 5 years 8
          5 other commodity contracts (other than precious metals)  
            (a) residual maturity 1 year or less 10
            (b) residual maturity > 1 year to 5 years 12
            (c) residual maturity > 5 years 15
          6 other market-related contracts  
            (a) residual maturity 1 year or less 10
            (b) residual maturity > 1 year to 5 years 12
            (c) residual maturity > 5 years 15
          (4) A potential future credit exposure must be based on an effective, rather than an apparent, notional principal amount. If the stated notional principal amount of an item is leveraged or enhanced by the structure of the item, the firm must use the effective notional principal amount in calculating the potential future credit exposure.
          (5) No potential future credit exposure is calculated for a single-currency floating/floating interest rate swap. The credit exposure from such an interest rate swap must be based on mark-to-market values.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.12 Credit conversion factors for items with terms subject to reset

          (1) For an item that is structured to settle outstanding exposures after specified payment dates on which the terms are reset (that is, the mark-to-market value of the item becomes zero on the specified dates), the period up to the next reset date must be taken to be the item’s residual maturity. For an interest rate item of that kind that is taken to have a residual maturity of more than 1 year, the credit conversion factor to be applied must not be less than 0.5% even if there are reset dates of a shorter maturity.
          (2) For an item with 2 or more exchanges of principal, the credit conversion factor must be multiplied by the number of remaining exchanges under the item.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.13 Credit conversion factors for single-name swaps

          (1) The credit conversion factors for a protection buyer in a single-name credit default swap or single-name total-rate-of-return swap are set out in column 3 of table 4.4.13. The credit conversion factors for a protection seller are set out in column 4 of that table.
          (2) The protection seller in a single-name credit default swap or single-name total-rate-of-return swap is subject to the add-on factor for a closed-out single-name swap only if the protection buyer becomes insolvent while the underlying asset is still solvent. The add-on must not be more than the amount of unpaid premiums.
          (3) In this rule:

          qualifying reference obligation includes obligations arising from items relating to:

          (a) securities that are rated investment grade by at least 2 ECRAs; or
          (b) securities that are unrated (or rated investment grade by only 1 ECRA), but:
          (i) are approved by the Regulatory Authority, on application by the banking business firm, to be of comparable investment quality; and
          (ii) are issued by an issuer that has its equity included in a main index used in a recognised exchange.

          Table 4.4.13 Credit conversion factors for single-name swaps

          column 1 item column 2 type of swap column 3 protection buyer % column 4 protection seller %
          1 credit default swap with qualifying reference obligation 5 5
          2 credit default swap with non-qualifying reference obligation 10 10
          3 total-rate-of-return swap with qualifying reference obligation 5 5
          4 total-rate-of-return swap with non-qualifying reference obligation 10 10

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.14 Policies — foreign exchange rollovers

          (1) A banking business firm must have policies for entering into and monitoring rollovers on foreign exchange transactions. The policies must restrict the firm’s capacity to enter into such rollovers, and must be approved by the Regulatory Authority.
          (2) The firm must notify the Regulatory Authority if it enters into a rollover outside the approved policy. The authority may direct how the rollover is to be treated for capital adequacy purposes.
          (3) The firm must not enter into a transaction at an off-market price, unless the transaction is a historical rate rollover on a foreign exchange transaction.
          (4) A historical rate rollover on a foreign exchange transaction may be entered into at an off-market price (instead of current market price).
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.15 How to convert contracted amounts — non-market-related items

          (1) A banking business firm must calculate the credit equivalent amount of each of its non-market-related items. Unless the item is a default fund guarantee in relation to clearing through a central counterparty, the credit equivalent amount of a non-market-related off-balance-sheet item is calculated by multiplying the contracted amount of the item by the relevant credit conversion factor in table 4.4.15.
          (2) If the firm arranges a repurchase or reverse repurchase or a securities lending or borrowing transaction between a customer and a third party and provides a guarantee to the customer that the third party will perform its obligations, the firm must calculate the credit risk capital requirement as if it were the principal.

          Table 4.4.15 Credit conversion factors for non-market-related off-balance-sheet items

          column 1 item column 2 kind of item column 3 credit conversion factor %
          1 direct credit substitutes 100
          2 performance-related contingencies 50
          3 trade-related contingencies 20
          4 lending of securities, or lodging securities as collateral 100
          5 assets sold with recourse 100
          6 forward asset purchases 100
          7 partly paid shares and securities 100
          8 placements of forward deposits 100
          9 note issuance and underwriting facilities 50
          10 commitments with certain drawdown 100
          11 commitments with uncertain drawdowns (for example, undrawn formal standby facilities and credit lines) with an original maturity of 1 year or less 20
          12 commitments with uncertain drawdowns with an original maturity of more than 1 year 50
          13 commitments that can be unconditionally cancelled at any time without notice (for example, undrawn overdraft and credit card facilities for which any outstanding unused balance is subject to review at least once a year) 0
          (3) For item 4 of table 4.4.15, an exposure from lending securities, or lodging securities as collateral, may be treated as a collateralised transaction.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.16 Credit equivalent amount of undrawn commitments

          In calculating the credit equivalent amount of a non-market-related off-balance-sheet item that is an undrawn (or partly drawn) commitment, a banking business firm must use the undrawn amount of the commitment.

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.4.17 Irrevocable commitment — off-balance-sheet facilities

          For an irrevocable commitment to provide an off-balance-sheet facility, the original maturity must be taken to be the period from the commencement of the commitment until the associated facility expires.

          Example

          An irrevocable commitment with an original maturity of 6 months with an associated facility that has a nine-month term is taken to have an original maturity of 15 months.

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK Part 4.5 BANK Part 4.5 Credit risk mitigation

      • BANK Division 4.5.A BANK Division 4.5.A General

        • BANK 4.5.1 Introduction

          A banking business firm is able to obtain capital relief by using CRM techniques. CRM techniques must be viewed as complementary to, rather than a replacement for, thorough credit risk assessment.

          Note Under rule 4.4.2, if a claim or asset to which a risk-weight must be applied is secured by eligible financial collateral or guarantee (or there is a mortgage indemnity insurance, or a credit derivative instrument or netting agreement) this Part on credit risk mitigation may be used to reduce the credit risk capital requirement of the firm.

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.2 Choice of CRM techniques

          (1) CRM techniques include:
          (a) accepting collateral, standby letters of credit and guarantees;
          (b) using credit derivatives or other derivative instruments;
          (c) using netting agreements; and
          (d) purchasing insurance.
          Note Credit risk mitigation using collateral and guarantees is usually dealt with at the time credit is granted. In contrast, credit derivatives and netting agreements are often used after the credit is granted, or used to manage the firm's overall portfolio risk.
          Guidance
          1 A banking business firm should not rely excessively on collateral or guarantees to mitigate credit risk. While collateral or guarantees may provide secondary protection to the firm if the counterparty defaults, the primary consideration for credit approval should be the counterparty's repayment ability.
          2 A banking business firm that provides mortgages at high loan-to-value ratios should consider the need for alternative forms of protection against the risks of such lending, including mortgage indemnity insurance, to protect itself against the risk of a fall in the value of the property.
          (2) In choosing a CRM technique, the firm must consider:
          (a) the firm's knowledge of, and experience in using, the technique;
          (b) the cost-effectiveness of the technique;
          (c) the type and financial strength of the counterparties or issuers;
          (d) the correlation of the technique with the underlying credits;
          (e) the availability, liquidity and realisability of the technique;
          (f) the extent to which documents in common use (for example, the ISDA Master Agreement) can be adopted; and
          (g) the degree of recognition of the technique by financial services regulators.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.3 Requirements — CRM techniques

          (1) A banking business firm’s credit risk management policy must set out the conditions under which CRM techniques may be used. The policy must enable the firm to manage CRM techniques and the risks associated with their use.
          (2) The firm must analyse the protection given by CRM techniques to ensure that any residual credit risk is identified, measured, evaluated, managed and controlled or mitigated.
          (3) If the firm accepts collateral, its policy must state the types of collateral that it will accept, and the basis and procedures for valuing collateral.
          (4) If the firm uses netting agreements, it must have a netting policy that sets out its approach. The netting policy must provide for monitoring netting agreements and must enable the firm to monitor and report netted transactions on both gross and net bases.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.4 Obtaining capital relief

          (1) To obtain capital relief, the CRM technique and every document giving effect to it must be binding on all parties and enforceable in all the relevant jurisdictions.

          Example

          When accepting eligible financial collateral, a banking business firm must ensure that any necessary legal procedures have been followed, to ensure that the collateral can be enforced.

          Note Under rule 4.2.2, a firm's credit risk management policy must establish effective credit risk administration to monitor documents, legal covenants, contractual requirements, and collateral and other CRM techniques.
          (2) A banking business firm must review the enforceability of a CRM technique that it uses. The firm must have a well-founded legal basis for any conclusion about enforceability, and must carry out further reviews to ensure that the technique remains enforceable.

          Guidance

          A banking business firm should consider whether independent legal opinion should be sought on the enforceability of documents. The documents should be ready before the firm enters into a contractual obligation or releases funds.
          (3) The effects of a CRM technique must not be double-counted. The firm is not allowed to obtain capital relief if:
          (a) the risk-weight for the claim or asset is based on an issue-specific rating; and
          (b) the ECRA that determined the rating had taken the technique into consideration in doing so.
          Amended by QFCRA RM/2015-3 (as from 1st January 2016).

        • BANK 4.5.5 Standard haircuts to be applied

          (1) A banking business firm must use the standard haircuts (expressed in percentages) set out in this rule in any calculation relating to credit risk mitigation. The haircuts are applied after risk mitigation to calculate adjusted exposures and are intended to take into account possible future price fluctuations.
          (2) In table 4.5.5A:

          other issuers include banks, corporates, and public sector enterprises that are not treated as sovereigns.

          sovereign includes a multilateral development bank, and a non-commercial public sector enterprise, that has a zero per cent risk-weight.

          Table 4.5.5A Haircuts for debt securities

          column 1 item column 2 credit rating for debt securities column 3 residual maturity % column 4 sovereigns % column 5 other issuers %
          1 AAA to AA-/A-1 (long-term and short-term) <1 year 0.5 1
          >1 year, <5 years 2 4
          > 5 years 4 8
          2 A+ to BBB-/ A-2/A-3/P-3 (long-term and short-term) and unrated bank securities that are eligible financial collateral <1 year 1 2
          >1 year, < 5 years 3 6
          > 5 years 6 12
          3 BB+ to BB- (long-term) All 15 Not applicable
          4 securities issued by the State of Qatar or the Qatar Central Bank <1 year 1 Not applicable
          >1 year, < 5 years 3 Not applicable
          >5 years 6 Not applicable

          Note    Table 4.5.5A item 3, column 5: securities rated BB+ or below are eligible financial collateral only if issued by a sovereign or non-commercial public sector enterprise — see rule 4.5.7 (1) (c) (i).

          Table 4.5.5B Haircuts for other assets

          column 1 item column 2 description of assets column 3 haircut %
          1 main index equities (including convertible bonds) and gold 15
          2 other equities (including convertible bonds) listed on a recognised exchange 25
          3 units in listed trusts, undertakings for collective investments in transferable securities (UCITS), mutual funds and tracker funds highest haircut applicable to any security in which the entity can invest
          4 cash collateral denominated in the same currency as the collateralised exposure 0
          (3) If a CRM technique (other than a guarantee) and the exposure covered by it are denominated in different currencies (that is, there is a currency mismatch between them), the haircut that applies is:
          (a) if the mismatched currencies are both pegged to the same reference currency, or 1 of them is pegged to the other — 0; or
          (b) in any other case — 8%.
          (4) If there is a currency mismatch between a guarantee and the exposure covered by it, the amount of the exposure that is covered must be reduced using the following formula:

          Gx(1 — Hfx)

          where:
          G is the nominal amount of the guarantee.
          Hfx is the haircut appropriate for the currency mismatch between the credit protection and the underlying obligation, as follows:

          (a) if the guarantee is revalued every 10 business days — 8%;
          (b) if the guarantee is revalued at any longer interval — the factor H calculated using the formula in subrule (5); or
          (c) if the mismatched currencies are both pegged to the same reference currency, or if 1 of them is pegged to the other — 0.
          (5) If the guarantee is revalued at intervals longer than 10 business days, the 8% haircut must be scaled up using the following formula:



          where:
          H is the scaled-up haircut.
          N is the number of business days between revaluations.
          Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK Division 4.5.B BANK Division 4.5.B Collateral

        • BANK 4.5.6 Capital relief from collateral

          (1) A banking business firm is able to obtain capital relief by accepting collateral only if the collateral is eligible financial collateral.
          (2) Collateral may be lodged by the counterparty of the firm holding a credit exposure (or by a third party on behalf of the counterparty).
          (3) The firm must enter into a written agreement with the party lodging the collateral. The agreement must establish the firm’s direct, explicit, irrevocable and unconditional recourse to the collateral.

          Guidance

          In the case of cash collateral, the recourse may be in the form of a contractual right of set-off on credit balances. A common-law right of set-off is, on its own, insufficient to satisfy this rule.
          (4) If collateral is lodged by a third party, the third party must guarantee the counterparty’s obligation to the firm and must indemnify the firm if the counterparty fails to fulfil its obligation. The firm must ensure that the guarantee does not fail for lack of consideration.
          (5) The mechanism by which collateral is lodged must allow the firm to liquidate or take possession of the collateral in a timely way. The firm must take all steps necessary to satisfy the legal requirements applicable to its interest in the collateral.

          Guidance

          1 The firm should have clear and robust procedures for the liquidation of collateral to ensure that the legal conditions for declaring default and liquidating the collateral are observed.
          2 The firm should consider whether, in the event of default, notice to the party that lodged the collateral would be needed before the firm could have recourse to it.
          (6) There must not be a significant positive correlation between the value of the collateral and the credit quality of the borrower.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.7 Eligible financial collateral

          (1) The following are eligible financial collateral if they satisfy the criteria in subrule (2):
          (a) gold bullion;
          (b) cash;

          Note For what is included in cash collateral — see rule 4.5.8.
          (c) debt securities that are assigned, by an ECRA, a rating of:
          (i) for sovereign or non-commercial public sector enterprise securities that are eligible for zero per cent risk-weight — at least BB-;
          (ii) for short-term debt securities — at least A-3/P-3; or
          (iii) for any other securities — at least BBB—;
          (d) subject to subrule (3), debt securities that have not been assigned a rating by an ECRA if:
          (i) the securities are issued by a bank (in or outside the QFC) as senior debt and are listed on a recognised exchange;
          (ii) all rated issues of the same seniority issued by the bank have a credit rating of at least BBB- (for long-term debt instruments) or A-3/P-3 (for short-term debt instruments); and
          (iii) the firm and the holder of the collateral have no information suggesting that the securities should have a rating below BBB- or A-3/P-3;
          (e) equities (including convertible bonds) that are included in a main index;
          (f) tracker funds, mutual funds and undertakings for collective investments in transferable securities (UCITS) if:
          (i) a price for the units is publicly quoted daily; and
          (ii) the funds or UCITS are limited to investing in instruments listed in this subrule;
          (g) equities (including convertible bonds) that are not included in a main index but are listed on a recognised exchange, and funds and UCITS described in paragraph (f) that include such equities.
          (2) For collateral to be eligible financial collateral, it must be lodged for at least the life of the exposure, and must be marked-to-market at least once a month. The release of collateral must be conditional on the repayment of the exposure, but collateral may be reduced in proportion to the amount of any reduction in the exposure.
          (3) Collateral in the form of securities issued by the counterparty or a person connected to the counterparty is not eligible financial collateral.
          (4) Insurance contracts, put options, and forward sales contracts or agreements are not eligible financial collateral.
          Amended by QFCRA RM/2015-3 (as from 1st January 2016).

        • BANK 4.5.8 Forms of cash collateral

          Cash collateral, in relation to a credit exposure, means collateral in the form of:

          (a) notes and coins;
          (b) certificates of deposit, bank bills and similar instruments issued by the banking business firm holding the exposure; or
          (c) cash-funded credit-linked notes issued by a banking business firm against exposures in its banking book, if the notes satisfy the criterion for credit derivatives in rule 4.5.16(2).
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.9 Holding eligible financial collateral

          (1) Eligible financial collateral must be held by:
          (a) the banking business firm;
          (b) a branch (in or outside the QFC) of the firm;
          (c) an entity that is a member of the financial group of which the firm is a member;
          (d) an independent custodian; or
          (e) a central counterparty.
          (2) The holder of cash collateral in the form of a certificate of deposit or bank bill issued by a banking business firm must keep possession of the instrument while the collateralised exposure exists.
          (3) If the collateral is held by an independent custodian or central counterparty, the firm must take reasonable steps to ensure that the holder segregates the collateral from the holder’s own assets.
          (4) If collateral is held by a branch of a banking business firm and the branch is outside the QFC, the agreement between the firm and the party lodging the collateral must require the branch to act in accordance with the agreement.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.10 Risk-weight for cash collateral

          (1) A banking business firm may apply a zero per cent risk-weight to cash collateral if the collateral is held by the firm itself.
          (2) The firm may apply a zero per cent risk-weight to cash collateral held by another member of the financial group of which the firm is a member if the agreement between the firm and the party lodging the collateral requires the holder of the collateral to act in accordance with the agreement.
          (3) If cash collateral is held by a bank under a non-custodial arrangement, and the collateral is lodged with the firm under an agreement that establishes the firm’s irrevocable and unconditional recourse to the collateral, the exposure covered by the collateral (after any necessary haircuts for currency risk) may be assigned the risk-weight of the bank.
          (4) If cash collateral is held by an independent custodian (other than a central counterparty), the risk-weight of the holder of the collateral must be used. However, the firm may apply a zero per cent risk-weight to notes and coins held by an independent custodian.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.11 Risk-weight for claims

          (1) The secured part of a claim must be risk-weighted at whichever is the higher of 20% or the risk-weight applicable to the eligible financial collateral. However, a risk-weight lower than 20% may be applied to the secured part if rule 4.5.12 applies.

          Note Under this rule, 20% risk-weight is the minimum that can be applied to the secured part of the claim. A risk-weight of less than 20% is allowed only for some transactions — see rule 4.5.12.
          (2) The unsecured part of the claim must be weighted at the risk-weight applicable to the original counterparty.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.12 Risk-weights less than 20%

          (1) A zero per cent risk-weight may be applied to a collateralised transaction if:
          (a) there is no currency mismatch; and
          (b) any one of the following applies:
          (i) the collateral is in the form of sovereign securities that are eligible for zero per cent risk-weight;
          (ii) the collateral is in the form of cash collateral on deposit with the banking business firm; or
          (iii) if the collateral is in the form of non-commercial public sector enterprise securities:
          (A) the securities are eligible for zero per cent risk-weight; and
          (B) the market value of the collateral has been discounted by 20%.
          (2) A zero per cent risk-weight may be applied to an over the counter derivative transaction if there is no currency mismatch and the transaction is fully collateralised by cash and marked-to-market daily.
          (3) A 10% risk-weight may be applied to an over the counter derivative transaction to the extent that the transaction is collateralised by sovereign or non-commercial public sector enterprise securities that are eligible for zero per cent risk-weight.
          Amended by QFCRA RM/2015-3 (as from 1st January 2016).

        • BANK 4.5.13 BANK 4.5.13 Valuing collateral

          Collateral accepted by a banking business firm must be valued at its net realisable value, taking into account prevailing market conditions. That value must be monitored at appropriate intervals, and the collateral must be regularly revalued.

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

          • BANK 4.5.13 Guidance

            1 The net realisable value of some collateral may be readily available (for example, collateral that is marked-to-market regularly). Other collateral may be more difficult to value and may require knowledge and consideration of prevailing market conditions.
            2 The method and frequency of monitoring and revaluation depend on the nature and condition of the collateral (see rule 4.5.7 (2)). For example, securities accepted as collateral are usually marked to market daily.
            Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK Division 4.5.C BANK Division 4.5.C Guarantees

        • BANK 4.5.14 Capital relief from guarantees

          (1) Capital relief is allowed from a guarantee if the guarantor is an eligible guarantor and the guarantee satisfies the criteria in subrules (2) to (4). Before accepting a guarantee, a banking business firm must consider the legal and financial ability of the guarantor to fulfil the guarantee.
          (2) A guarantee must be a direct claim on the guarantor and must clearly state the extent of the cover. A letter of comfort is not a guarantee for the purposes of this Division.
          (3) A guarantee must be irrevocable. It must not include a term or condition:
          (a) that allows the guarantor to cancel it unilaterally; or
          (b) that increases the effective cost of cover if the credit quality of the guaranteed exposure deteriorates.
          Note The irrevocability condition does not require that the guarantee and the exposure be maturity matched. However, it does require that the agreed maturity should not be reduced by the guarantor after the banking business firm accepts the guarantee.
          (4) A guarantee must be unconditional. It must not include a term or condition (outside the direct control of the firm) that allows the guarantor not to indemnify the firm in a timely way if the counterparty defaults.
          (5) If a claim on a counterparty is secured by a guarantee, the part of the claim that is covered by the guarantee may be weighted at the risk-weight applicable to the guarantor. The unsecured part of the claim must be weighted at the risk-weight applicable to the original counterparty.

          Note This rule applies to a guarantee that provides part coverage under which the firm and the guarantor share losses on a pro rata basis.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.15 Eligible guarantors

          (1) Eligible guarantor means:
          (a) the State of Qatar or any other sovereign;
          (b) an entity that is treated as a sovereign in accordance with the Basel Accords; or
          (c) a public sector enterprise or other entity that has:
          (i) a risk-weight of 20% or lower; and
          (ii) a lower risk-weight than the counterparty.
          (2) A parent entity, subsidiary or affiliate of a counterparty may be an eligible guarantor if it has a lower risk-weight than the counterparty.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK Division 4.5.D BANK Division 4.5.D Credit derivatives

        • BANK 4.5.16 Capital relief from credit derivatives

          (1) Capital relief is allowed if a banking business firm uses an eligible credit derivative. Each of the following is an eligible credit derivative if it satisfies subrule (2):
          (a) a single-name credit-default swap;
          (b) a total-rate-of-return swap for which the firm has recorded any deterioration in the value of the underlying exposure, in addition to recording the net payments received on the swap as net income;
          (c) a cash-funded credit-linked note;
          (d) a first and second-to-default credit derivative basket product.
          (2) The credit derivative must not include a term or condition that terminates the credit protection, or increases the firm's costs for the protection, if the credit quality of the underlying exposure deteriorates.
          (3) If a claim on a counterparty is protected by a credit derivative, the part of the claim that is protected may be weighted at the risk-weight applicable to the issuer of the credit derivative. The unprotected part of the claim must be weighted at the risk-weight applicable to the original counterparty.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK Division 4.5.E BANK Division 4.5.E Netting agreements

        • BANK 4.5.17 BANK 4.5.17 Capital relief from netting agreements

          (1) A banking business firm is able to obtain capital relief from a netting agreement with a counterparty only if the agreement is an eligible netting agreement.
          (2) A banking business firm that has entered into a netting agreement must consistently net all the transactions included in the agreement. The firm must not selectively pick which transactions to net.
          (3) The following kinds of transactions may be netted:
          (a) on-balance-sheet loans and deposits, but only if:
          (i) the firm is able to determine at all times the assets and liabilities that are subject to netting under the agreement; and
          (ii) the deposits satisfy the criteria for eligible financial collateral;
          (b) securities financing transactions;

          Note Securities financing transactions are not included as part of market-related transactions.
          (c) over the counter derivative transactions.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

          • BANK 4.5.17 Guidance

            A netting agreement may include the netting of over the counter derivative transactions:

            •   across both the banking and trading books of a banking business firm (if the netted transactions satisfy the criteria in rule 4.5.23); and
            •   across different market-related products to the extent that they are recognised as market-related transactions.
            Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.18 Criteria for eligible netting agreements

          (1) To be an eligible netting agreement, a netting agreement:
          (a) must be in writing;
          (b) must create a single obligation covering all transactions and collateral included in the agreement and giving the banking business firm the following rights:
          (i) the right to terminate and close-out, in a timely way, all the transactions included in the netting agreement;
          (ii) the right to net the gains and losses on those transactions (including the value of any collateral) so that the firm either has a claim to receive, or an obligation to pay, only the net sum of the close-out values of the individual transactions;

          Note For forward contracts, swaps, options and similar derivative transactions, this right will include the positive and negative mark-to-market values of the individual transactions.
          (iii) the right to liquidate or set-off collateral if either party to the agreement fails to meet its obligations because of default, liquidation, bankruptcy or other similar circumstances;
          (c) must not be subject to a walkaway clause; and
          (d) must be supported by a written and reasoned legal opinion that complies with rules 4.5.20 to 4.5.22.
          (2) A banking business firm must not recognise a netting agreement as an eligible netting agreement if it becomes aware that a financial services regulator of the counterparty is not satisfied that the agreement is enforceable under the laws of the regulator's jurisdiction. This rule applies regardless of any legal opinion obtained by the firm.
          (3) A netting agreement is not an eligible netting agreement if there is doubt about its enforceability.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.19 Legal opinion must cover transaction

          (1) A banking business firm must ensure that a netted transaction is covered by an appropriate legal opinion.
          (2) In calculating the net sum due to or from a counterparty, the firm must exclude netted transactions for which it has not obtained a satisfactory legal opinion applicable in the relevant jurisdiction. An excluded transaction must be reported on a gross basis.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.20 Conclusion about enforceability

          (1) For rule 4.5.18 (1) (d), the legal opinion must conclude that, in the event of default, liquidation, bankruptcy or other similar circumstances of a party to the netting agreement, the banking business firm's claims and obligations are limited to the net sum calculated under the netting agreement in accordance with the applicable law.

          Guidance

          The Regulatory Authority expects the legal opinion to deal with the issue of which of the following laws applies to the netting:
          •    the law of the jurisdiction in which the counterparty is incorporated or formed (or, in the case of an individual, resides)
          •    if an overseas branch of the counterparty is involved — the law of the jurisdiction in which the branch is located
          •    the law that governs the individual transactions
          •    the law that governs any contract or agreement necessary to give effect to the netting.
          (2) In particular, the legal opinion must conclude that, in the event of insolvency or external administration of a counterparty, a liquidator or administrator of the counterparty will not be able to claim a gross amount from the banking business firm while only being liable to pay a dividend in insolvency to the firm (as separate money flows).

          Guidance

          In some countries, there are provisions for the authorities to appoint an administrator to a troubled bank. Under statutory provisions applying in those countries, the appointment of an administrator might not constitute a ground for triggering a netting agreement. Such provisions do not prevent the recognition of an affected netting agreement if the agreement can still take effect if the bank under administration does not meet its obligations as they fall due.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.21 Requirements — legal opinion

          (1) Before a banking business firm uses a legal opinion to support a netting agreement, the firm:
          (a) must ensure that the opinion is not subject to assumptions or qualifications that are unduly restrictive;
          (b) must review the assumptions about the enforceability of the agreement and must ensure that they are specific, factual and adequately explained in the opinion; and
          (c) must review and assess the assumptions, qualifications and omissions in the opinion to determine whether they give rise to any doubt about the enforceability of the agreement.
          (2) The firm must have procedures to monitor legal developments and to ensure that its netting agreements continue to be enforceable. The firm must update the legal opinions about the agreements, as necessary, to ensure that the agreements continue to be eligible.
          (3) The firm may rely on a legal opinion obtained on a group basis by another member of the financial group of which it is a member if the firm and the other member have satisfied themselves that the opinion covers a netting agreement to which the firm is a counterparty.
          (4) The firm must report a transaction on a gross basis if there is any doubt about, or any subsequent legal development affects, the enforceability of the agreement.

          Note Under rule 4.5.18 (3), a netting agreement is not an eligible netting agreement if there is doubt about its enforceability.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.22 Relying on general legal opinions

          (1) A banking business firm may rely on a general legal opinion about the enforceability of netting agreements in a particular jurisdiction if the firm is satisfied that the type of netting agreement is covered by the opinion.
          (2) The firm must satisfy itself that the netting agreement with a counterparty and the general legal opinion are applicable to each transaction and product type undertaken with the counterparty, and in all jurisdictions where those transactions are originated.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.23 Netting of positions across books

          A banking business firm may net positions across its banking and trading books only if:

          (a) the netted transactions are marked-to-market daily; and
          (b) any collateral used in the transactions satisfies the criteria for eligible financial collateral in the banking book.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.24 Monitoring and reporting of netting agreements

          (1) If directed by the Regulatory Authority, a banking business firm must demonstrate that its netting policy is consistently implemented, and that its netting agreements continue to be enforceable.
          (2) The firm must keep adequate records to support its use of netting agreements and to be able to report netted transactions on both gross and net bases.
          (3) The firm must monitor its netting agreements and must report and manage:
          (a) roll-off risks;
          (b) exposures on a net basis; and
          (c) termination risks;
          for all the transactions included in a netting agreement.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.5.25 Collateral and guarantees in netting

          (1) A banking business firm may take collateral and guarantees into account in calculating the risk-weight to be applied to the net sum under a netting agreement.
          (2) The firm may assign a risk-weight based on collateral or a guarantee only if:
          (a) the collateral or guarantee has been accepted or is otherwise subject to an enforceable agreement; and
          (b) the collateral or guarantee is available for all the individual transactions that make up the net sum of exposures calculated.
          (3) The firm must ensure that provisions for applying collateral or guarantees to netted exposures under a netting agreement comply with the requirements for eligible financial collateral and guarantees in these rules.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK Part 4.6 BANK Part 4.6 Securitisation and re-securitisation

      Amended by QFCRA RM/2017-2 (as from 1st April 2017).

      • BANK Division 4.6.A BANK Division 4.6.A General

        Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.1 Introduction

          (1) The Part sets out the framework for determining a banking business firm's minimum capital requirements to cover the firm's exposures arising from traditional and synthetic securitisations.
          (2) A firm's securitisation exposures may arise from the firm being (or acting in the capacity of) party to a securitisation.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.2 Securitisation and re-securitisation

          (1) Securitisation, in relation to a banking business firm, is the process of pooling various kinds of contractual debt or non-debt assets that generate receivables and selling their related cash flows to third party investors as securities. In a securitisation, payments to the investors depend on the performance of the underlying pool of assets, rather than on an obligation of the originator of the assets.
          (2) The underlying pool in a securitisation may include 1 or more exposures.
          (3) The securities usually take the form of bonds, notes, pass-through securities, collateralised debt obligations or even equity securities that are structured into different classes (tranches) with different payment priorities, degrees of credit risk and return characteristics.

          Note A securitisation (whether traditional or synthetic) must have at least 2 tranches (see subrules 4.6.3 (2) and (3)).
          (4) Re-securitisation is a securitisation in which at least one of the underlying assets is itself a securitisation or another re-securitisation.

          Note Exposures arising from re-tranching are not re-securitisation exposures if, after the re-tranching, the exposures act like direct tranching of a pool with no securitised assets. This means that the cash flows to and from the firm as originator could be replicated in all circumstances and conditions by an exposure to the securitisation of a pool of assets that contains no securitisation exposures.
          (5) A reference in this Part to securitisation includes re-securitisation.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.3 BANK 4.6.3 Securitisation structures

          (1) A securitisation may be a traditional securitisation or a synthetic securitisation.
          (2) In a traditional securitisation, title to the underlying assets is transferred to an SPE, and the cash flows from the underlying pool of assets are used to service at least 2 tranches. A traditional securitisation generally assumes the movement of assets off the originator's balance-sheet.
          (3) A synthetic securitisation is a securitisation with at least 2 tranches that reflect different degrees of credit risk where the credit risk of the underlying pool of exposures is transferred, in whole or in part, through the use of credit derivatives or guarantees. In a synthetic securitisation, the third party to whom the risk is transferred need not be an SPE.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.3 Guidance

            The Regulatory Authority would treat as securitisations other structures designed to finance assets that are legally transferred to a scheme by packaging them into tradeable securities secured on the assets and serviced from their related cash flows.

            Funded credit derivatives would include credit-linked notes, and unfunded credit derivatives would include credit default swaps.

            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.4 Securitisation exposures

          A securitisation exposure of a banking business firm is a risk position (whether on-balance-sheet or off-balance-sheet) held by the firm arising from a securitisation.

          Examples of sources

          •    investments in a securitisation
          •    asset-backed securities (including mortgage-backed securities)
          •    credit enhancements and liquidity facilities
          •    interest rate swaps and currency swaps
          •    credit derivatives
          •    corporate bonds, equity securities and private equity investments
          •    reserve accounts (such as cash collateral accounts) recorded as assets by a firm that is, or that acts in the capacity of, an originator.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.5 Parties to securitisation

          For purposes of calculating a banking business firm's capital requirements, the parties to a securitisation are the originator, the issuer and the investors.

          Note 1 Depending on the securitisation structure, a banking business firm may be (or act in the capacity of) originator, issuer, investor or any 1 or more of the following:

          (a) a manager of the securitisation;
          (b) a sponsor of the securitisation;
          (c) an adviser to the securitisation;
          (d) an entity to place the securities with investors;
          (e) a provider of credit enhancement;
          (f) a provider of a liquidity facility;
          (g) a servicer to carry out certain activities usually carried out by the manager of the securitisation in relation to the underlying assets.

          Note 2 A banking business firm may act as sponsor of a securitisation or similar programme involving assets of a customer. As sponsor, the firm earns fees to manage or advise on the programme, place the securities with investors, provide credit enhancement or provide a liquidity facility.

          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.6 BANK 4.6.6 Firm as originator

          A banking business firm is an originator of a securitisation if:

          (a) the firm originates, directly or indirectly, underlying assets included in the securitisation; or
          (b) the firm serves as sponsor of an asset-backed commercial paper programme (or similar programme) that acquires exposures from third parties.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.6 Guidance

            1 In relation to a programme that acquires exposures from third parties, a banking business firm would generally be considered a sponsor (and, therefore, an originator) if the firm, in fact or in substance, manages or advises the programme, places securities into the market, provides a liquidity facility or provides a credit enhancement.
            2 Acts of management would include handling related taxes, managing escrow accounts, remitting payments and obtaining insurance.
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

      • BANK Division 4.6.B BANK Division 4.6.B Securitisation process

        Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.7 Process of securitisation

          (1) The process of a securitisation is:
          (a) first, the origination of assets or credit risk;
          (b) second, the transfer of the assets or credit risk; and
          (c) third, the issuance of securities to investors.
          (2) In a securitisation, the cash flow from the pool is used to make payments on obligations to at least 2 tranches or classes of investors (typically holders of debt securities), with each tranche or class being entitled to receive payments from the pool before or after another tranche or class of investors, so that the tranches or classes bear different levels of credit risk.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.8 Special purpose entities

          (1) A special purpose entity (or SPE) is a legal entity that is created solely for a particular financial transaction or series of transactions. The SPE must not engage in any other business.
          (2) In a securitisation, an SPE typically purchases and holds the assets for the purposes of the securitisation. The SPE's payment for the pool is typically funded by debt, including through the issue of securities by the SPE.

          Guidance

          The purpose of the SPE to facilitate the securitisation, and the extent of a banking business firm's involvement in the SPE, should be clear. The SPE's activities should be limited to those necessary to accomplish that purpose.
          (3) Most securitisations require the creation of an SPE to:
          (a) hold the assets transferred by the originator;
          (b) issue securities based on the assets; and
          (c) act as intermediary between the originator and the investors.
          Note A synthetic securitisation may or may not require an SPE (see subrule 4.6.3 (3))
          (4) An SPE may take the form of a limited partnership, limited liability company, corporation, trust or collective investment fund. An SPE may also be established under a special law that allows the creation of SPEs.

          Guidance

          By its nature, an SPE is a legal shell with only the specific assets transferred by the originator (that is, the SPE has no other property in which any other party could have an interest).
          (5) An SPE must be bankruptcy-remote from the originator. It must not be consolidated with the originator for tax, accounting or legal purposes.
          (6) Any undertaking given by a banking business firm to an SPV must be stated clearly in the transaction documents for the securitisation.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

      • BANK Division 4.6.C BANK Division 4.6.C Risk management of securitisation

        Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.9 Role of governing body — securitisation

          (1) A banking business firm's governing body must oversee the firm's securitisation exposures.
          (2) The governing body:
          (a) must understand, and set the scope and purpose of, the firm's securitisations; and
          (b) must be aware of the risks and other implications associated with securitisation.
          (3) The governing body must ensure that the firm's senior management establishes and implements securitisation policies that include:
          (a) appropriate risk management systems to identify, measure, monitor, report on and control or mitigate the risks arising from the firm's involvement in securitisation; and
          (b) how the firm monitors, and reports on, the effect of securitisation on its risk profile.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.10 Relation to internal capital adequacy assessment

          A banking business firm must be able to demonstrate to the Regulatory Authority that the firm's ICAAP captures the following specific risks relating to securitisation:

          (a) credit risk, market risk, liquidity risk and reputation risk for each securitisation exposure;
          (b) potential delinquencies and losses on the exposures;
          (c) risks arising from the provision of credit enhancements and liquidity facilities; and
          (d) risks arising from guarantees provided by monoline insurers and other third parties.

          Note The due diligence requirements in rule 4.6.18 (3) require a banking business firm to have policies:
          (a) to ensure that the economic substance of each securitisation is taken into account in managing the risks arising from the firm's involvement in securitisation;
          (b) to document its systems and controls in relation to securitisation and the risks that arise from it; and
          (c) that set out the effects of securitisation on capital.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

      • BANK Division 4.6.D BANK Division 4.6.D Operational requirements for using external ratings

        Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.11 External credit rating agencies

          (1) Depending on the securitisation structure, 1 or more ECRAs may be involved in rating the securitisation. A banking business firm must use only ECRAs that have a demonstrated expertise in assessing securitisations.

          Guidance

          Expertise might be evidenced by strong market acceptance.
          (2) For the purposes of risk-weighting, an ECRA must take into account the total amount of the firm's exposure on all payments owed to it. For example, if the firm is owed principal and interest, the ECRA's assessment must have taken into account timely repayment of both principal and interest.

          Note For the use of ECRAs in general, see rule 4.3.7 and rule 4.3.7A.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.12 BANK 4.6.12 Ratings must be publicly available

          (1) A credit rating assigned by an ECRA must be publicly available. If the rating assigned to a facility is not publicly available, the facility must be treated as unrated.

          Note For the treatment of an eligible liquidity facility whose rating is not publicly available, see rule 4.6.30.
          (2) The loss and cash flow analysis for the securitisation, and the sensitivity of the rating to changes in the assumptions on which it was made, must also be publicly available.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.12 Guidance

            Information required under this rule should be published in an accessible form for free. Information that is made available only to the parties to a securitisation is not considered publicly available.

            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.13 Ratings must be applied consistently

          (1) A credit rating assigned by an ECRA must be applied consistently across all tranches of a securitisation.
          (2) A banking business firm must not use an ECRA's credit rating for 1 or more tranches and another ECRA's rating for other tranches within the same securitisation structure (whether or not those other tranches are rated by the first ECRA).

          Note Under rule 4.3.7A:
          (a) if there are 2 different assessments by ECRAs, the higher risk-weight must be applied; and
          (b) if there are 3 or more different assessments by ECRAs, the assessments corresponding to the 2 lowest risk-weights should be referred to and the higher of those 2 risk-weights must be applied.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

      • BANK Division 4.6.E BANK Division 4.6.E Calculation of risk-weighted assets

        Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.14 Operational requirements for traditional securitisation

          A banking business firm that is an originator or sponsor of a traditional securitisation may exclude, from the calculation of its risk-weighted assets, exposures relating to the securitised assets only if:

          (a) the immediate transferee of the underlying assets is an SPE, and the holders of the legal or beneficial interests in the SPE have the right to pledge or exchange those interests without restriction;
          (b) substantially all credit risk associated with the securitised assets have been transferred;
          (c) the firm has no direct or indirect control over the securitised assets;

          Guidance about control
          1 A banking business firm would be taken to maintain effective control over transferred credit risk exposures if:
          (a) the firm is able to repurchase from the transferee the transferred exposures in order to realise their benefits; or
          (b) the firm is obligated to retain the risk of the exposures.
          2 A firm that is an originator may act as servicer of the underlying assets, and the firm's retention of servicing rights would not necessarily constitute indirect control over the assets.
          (d) the securitised assets are legally isolated from the firm (through the sale of the assets or through sub-participation) so that the assets are beyond the reach of the firm and its creditors even in case of bankruptcy or insolvency;
          (e) a qualified legal counsel (whether external or in-house) has given a written reasoned opinion that paragraph (d) is satisfied;
          (f) any clean-up call complies with rule 4.6.16;
          (g) the securities issued are not obligations of the firm, so that investors have a claim only on the securitised assets and have no claim against the firm;
          (h) the securitisation does not include any term or condition that:
          (i) requires the firm to alter the underlying exposures to improve the pool's weighted average credit quality (unless the improvement is achieved by selling exposures at market prices to parties who are neither affiliated, connected or related to the firm);

          Note Affiliate, connected and related party are defined in the glossary.
          (ii) allows increases in a retained first loss position or credit enhancement; or
          (iii) increases the yield payable to parties other than the firm (for example, payments to investors and providers of credit enhancement) in response to a deterioration in the credit quality of the underlying assets; and
          (i) the securitisation does not have:
          (i) termination provisions for specific changes in tax and regulation;
          (iii) termination options or triggers (except clean-up calls that comply with rule 4.6.16); or
          (iii) early amortisation provisions that, under rule 4.6.38, would result in the securitisation not meeting the other requirements in paragraphs (a) to (h).
          Note Under rule 4.6.20, an originator that meets the requirements set out in this rule must, however, hold regulatory capital against any exposures that it retains in relation to the securitisation (including exposures arising from the provision of credit enhancements and liquidity facilities).
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.15 Operational requirements for synthetic securitisation

          In calculating its risk-weighted assets, a banking business firm that is an originator or sponsor of a synthetic securitisation may exclude securitised exposures only if:

          (a) substantially all credit risk associated with the securitised exposures have been transferred;
          (b) the CRM technique used to obtain capital relief is eligible financial collateral, an eligible credit derivative, a guarantee or an eligible netting agreement;

          Note Eligible financial collateral pledged by an SPE in a securitisation may be recognised as a CRM technique, but an SPE of a securitisation cannot be an eligible protection provider in the securitisation (see rule 4.6.32 (2)).
          (c) the securitisation does not include any terms or conditions that limit the amount of credit risk transferred, such as clauses that:
          (i) materially limit the credit protection or credit risk transference (including clauses that provide significant materiality thresholds below which credit protection is not to be triggered even if a credit event occurs and clauses that allow termination of the protection because of deterioration in the credit quality of the underlying exposures);
          (ii) require the firm to alter the underlying exposures to improve the pool's weighted average credit quality;
          (iii) increase the firm's cost of credit protection to the firm in response to a deterioration in the credit quality of the underlying exposures;
          (iv) allow increases in a retained first loss position or credit enhancement; or
          (v) increase the yield payable to parties other than the firm (for example, payments to investors and providers of credit enhancement) in response to a deterioration in the credit quality of the underlying exposures;
          (d) a qualified legal counsel (whether external or in-house) has given a written reasoned opinion that paragraph (c) is satisfied and that the contract for the transfer of the credit risk is enforceable in all relevant jurisdictions;
          (e) any clean-up call complies with rule 4.6.16; and
          (f) if the credit risk associated with the securitised exposures is transferred to an SPE:
          (i) the securities issued by the SPE are not obligations of the firm;
          (ii) the holders of the beneficial interests in the SPE have the right to pledge or exchange those interests without restriction; and
          (iii) the firm holds no more than 20% of the aggregate original amount of all securities issued by the SPE, unless:
          (A) the holdings consist entirely of securities that are rated AAA to AA- (long term) or A-1 (short term); and
          (B) all transactions with the SPE are at arm's length and on market terms and conditions.
          Note Under rule 4.6.20, an originator or sponsor that meets the requirements set out in this rule must, however, hold regulatory capital against any exposures that it retains in relation to the securitisation (including exposures arising from the provision of credit enhancements and liquidity facilities).
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.16 BANK 4.6.16 Requirements for clean-up calls — traditional and synthetic securitisations

          (1) A clean-up call is an option that permits the securitisation exposures to be called before all of the underlying exposures or securitisation exposures have been repaid.
          (2) There is no capital requirement for a securitisation that includes a clean-up call, if:
          (a) the exercise of the clean-up call is at the discretion of the originator or sponsor;
          (b) the clean-up call is not structured:
          (i) to avoid allocating losses to credit enhancements or positions held by investors; or
          (ii) to provide credit enhancement; and
          (c) the clean-up call may only be exercised:
          (i) for a traditional securitisation — when 10% or less of the original underlying pool of assets, or securities issued, remains; or
          (ii) for a synthetic securitisation — when 10% or less of the original reference portfolio value remains.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.16 Guidance

            1 For a traditional securitisation, a clean-up call might be carried out by repurchasing the remaining securitisation exposures after the balance of the pool has, or the outstanding securities have, fallen below a specified level.
            2 For a synthetic securitisation, a clean-up call might take the form of a clause that extinguishes the credit protection.
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.17 Clean-up calls that fail requirements — traditional and synthetic securitisations

          (1) This rule applies to a securitisation that includes a clean-up call if the clean-up call does not comply with all of the operational requirements in rule 4.6.16.
          (2) The originator or sponsor must calculate a capital requirement for the securitisation.

          Note If the clean-up call is exercised and found to serve as a credit enhancement, the exercise of the call must be considered as implicit support and treated in accordance with rule 4.6.21.
          (3) For a traditional securitisation, the underlying assets must be treated as if they were not securitised. No gain-on-sale of those assets may be recognised.
          (4) For a synthetic securitisation, a banking business firm that purchases protection must hold capital against the entire amount of the securitised exposures as if they did not benefit from any credit protection.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.18 Due diligence requirements

          (1) A banking business firm must not apply a risk-weight to a securitisation exposure using table 4.6.22, unless the firm meets the requirements set out in subrules (3) to (7) (the due diligence requirements).
          (2) If the firm fails to meet a due diligence requirement in relation to a securitisation exposure, the Regulatory Authority may direct the firm:
          (a) to apply a risk-weight of 1,250% to the exposure; or
          (b) to deduct the amount of the exposure from its regulatory capital.
          (3) The firm must have, in relation to securitisation, appropriate policies:
          (a) to ensure that the economic substance of each securitisation is taken into account in managing the risks arising from the firm's involvement in securitisation;
          (b) to document its systems and controls in relation to securitisation and the risks that arise from it; and
          (c) that set out the effects of securitisation on capital.
          (4) The firm must have, on an ongoing basis, a clear understanding of the risk characteristics of its individual securitisation exposures (whether on-balance-sheet or off-balance-sheet) and the risk characteristics of the pool underlying those exposures.
          (5) The firm must understand, at all times, the structural features that may materially affect the performance of its securitisation exposures (such as contractual waterfall and waterfall-related triggers, credit enhancements, liquidity facilities, market value triggers, and deal-specific definitions of default).
          (6) The firm must have continuous access to performance information about its underlying assets.

          Note Performance information may include exposure type, percentage of loans 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure, property type, occupancy, average credit score or other measures of creditworthiness, average loan-to-value ratio, and industry diversification and geographic diversification.
          (7) For re-securitisation, the firm must have not only information on the securitisation tranches (such as the issuer name and credit quality) but also the characteristics and performance of the pools underlying those tranches.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.19 Capital treatment to be based on economic substance

          (1) The capital treatment of a securitisation exposure must be determined on the basis of the economic substance, rather than the legal form, of the securitisation structure. If a banking business firm is uncertain about whether a transaction is a securitisation, the firm must consult with the Regulatory Authority.
          (2) Despite anything in these rules, the Regulatory Authority may look through the structure to the economic substance of the transaction and:
          (a) vary the capital treatment of a securitisation exposure; or
          (b) reclassify a transaction as a securitisation or not a securitisation, and impose a capital requirement or limit on the transaction.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

      • BANK Division 4.6.F BANK Division 4.6.F Capital requirements where firm is originator or sponsor

        Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.20 Retained securitisation exposures

          (1) A banking business firm that is an originator or sponsor of a securitisation might, despite having transferred the underlying assets or the credit risk to those assets, continue to be exposed (through retained securitisation exposures) in relation to the securitisation. The firm must hold regulatory capital against all of its retained securitisation exposures.
          (2) The sources of retained securitisation exposures include:
          (a) investments in the securitisation (including the investment required under subrule (3));
          (b) investments in asset-backed securities (including mortgage-backed securities);
          (c) retention of a subordinated tranche;
          (d) credit enhancements provided by the firm; and
          (e) liquidity facilities provided by the firm.
          A repurchased securitisation exposure must be treated as a retained securitisation exposure.

          Note 1 For paragraph (a), the exposure arising from investments by a banking business firm in a securitisation originated by the firm is an on-balance-sheet exposure.

          Note 2 For paragraphs (d) and (e), the exposures arising from the provision of credit enhancements and liquidity facilities by a banking business firm in relation to a securitisation originated by the firm are off-balance-sheet exposures.
          (3) A banking business firm that is an originator or sponsor of a securitisation must retain 5% of the total issuance.

          Note Under rule 3.2.29, a banking business firm must derecognise, in its calculation of CET 1, any increase in equity capital or CET 1 capital from a gain-on-sale in a securitisation transaction.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.21 Effect of giving implicit support

          A banking business firm that gives implicit support to a securitisation:

          (a) must include the underwriting exposures of the securitisation in its calculation of risk-weighted assets (as if those assets had not been securitised and had remained on its balance sheet);
          (b) must not recognise any gain-on-sale of the underlying assets; and
          (c) must disclose to investors that it has provided implicit support and the effect on regulatory capital of doing so.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.22 Treatment of on-balance-sheet retained securitisation exposures

          (1) The risk-weighted asset amount of an on-balance-sheet retained securitisation exposure is calculated by multiplying the exposure by the applicable risk-weight in table 4.6.22.

          Table 4.6.22 Risk-weights based on ECRA rating

          Note In the table, the ratings are given according to Standard & Poor's conventions. If a claim or asset is not rated by Standard & Poor's, its ratings must be mapped to the equivalent Standard & Poor's rating.

          long-term rating securitisation exposure % re-securitisation exposure %
          AAA to AA- 20 40
          A+ to A- 50 100
          BBB+ to BBB- 100 225
          BB+ to BB- 350 650
          B+ and below or unrated As directed by the Regulatory Authority, apply 1,250% risk-weight or deduct the amount of the exposure from the firm's regulatory capital (see rule 4.6.22 (2))


          short-term rating securitisation exposure % re-securitisation exposure %
          A-1 20 40
          A-2 50 100
          A-3 100 225
          Below A-3 As directed by the Regulatory Authority, apply 1,250% risk-weight or deduct the amount of the exposure from the firm's regulatory capital (see rule 4.6.22 (2))
          (2) If an exposure is to be deducted from the firm's regulatory capital, the amount of the deduction may be calculated net of any specific provision taken against the exposure.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.23 Exceptions to treatment of unrated securitisation exposures

          The rule that the treatment of unrated securitisation exposures is as directed by the Regulatory Authority (to either apply 1,250% risk-weight or deduct the amount) does not apply to:

          (a) the most senior exposure in a securitisation;
          (b) exposures:
          (i) that are in a second loss position or better in ABCP programmes; and
          (ii) that meet the requirements in rule 4.6.25; and
          (c) eligible liquidity facilities.

          Note For the treatment of the exceptions, see:
          •    rule 4.6.24 for most senior exposure
          •    rule 4.6.25 for second loss positions or better
          •    rule 4.6.30 for eligible liquidity facilities
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.24 Treatment of most senior exposure

          (1) If the most senior exposure in a securitisation is unrated and the composition of the underlying pool is known at all times, a banking business firm that holds or guarantees such an exposure may determine the risk weight by applying a "look-through" treatment. The firm need not consider any interest rate or currency swap when determining whether an exposure is the most senior in a securitisation.
          (2) In the look-through treatment, the unrated most senior position receives, subject to the Regulatory Authority's review, the average risk-weight of the underlying exposures.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.25 Treatment of second loss position in ABCP programmes

          (1) This rule applies to an unrated securitisation exposure in an ABCP programme if:
          (a) the exposure is economically in a second loss position or better and the first loss position provides significant credit protection to the second loss position;
          (b) the associated credit risk is the equivalent of investment grade or better; and
          (c) the banking business firm holding the exposure does not retain or provide the first loss position.
          (2) An unrated securitisation exposure arising from a second loss position (or better position) is subject to a risk-weight of the higher of:
          (a) 100%; and
          (b) the highest risk-weight applicable to an underlying exposure covered by the facility.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.26 Treatment of overlapping exposures

          (1) Overlapping exposures may result if a banking business firm provides 2 or more facilities (such as liquidity facilities and credit enhancements) in relation to a securitisation that can be drawn under various conditions with different triggers. In effect, the firm provides duplicate cover to the underlying exposures.
          (2) For the purposes of calculating its capital requirements, a banking business firm's exposure (exposure A) overlaps another exposure (exposure B) if in all circumstances the firm will preclude any loss to it on exposure B by fulfilling its obligations with respect to exposure A.

          Example

          If, under exposure A, a firm provides full credit support to some notes while simultaneously holding as exposure B a portion of those notes, its full credit support obligation precludes any loss from its exposure from its holding of the notes. If the firm can satisfactorily show that fulfilling its obligations with respect to exposure A will preclude a loss from its exposure B under any circumstance, there are overlapping exposures between the 2 exposures and the firm need not calculate risk-weighted assets for exposure B.
          (3) If a banking business firm has 2 or more overlapping exposures to a securitisation, the firm must, to the extent that the exposures overlap, include in its calculation of risk-weighted assets only the exposure, or portion of the exposure, producing the higher or highest risk-weighted assets amount.
          (4) If the overlapping exposures are subject to different credit conversion factors, the firm must apply the higher or highest factor to the exposures.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.27 Treatment of off-balance-sheet retained securitisation exposures

          A 100% credit conversion factor must be applied to an off-balance-sheet retained securitisation exposure unless the exposure qualifies as:

          (a) an eligible liquidity facility, or
          (b) an eligible servicer cash advance facility.

          Note 1 For risk-weighting of eligible liquidity facilities, see rules 4.6.29 and 4.6.30. For risk-weighting of eligible servicer cash advance facility, see rule 4.6.31.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.28 Liquidity facility and eligible liquidity facility

          (1) A liquidity facility, for a securitisation, is a commitment from the facility provider to provide liquid funds if:
          (a) funds are needed to meet contractual payments to investors; and
          (b) there is a delay between the date of collection of the related cash flows and the date on which the payment to the investors is due.

          Example

          Timing mismatches between cash collections from the underlying assets and the scheduled payments to the investors in certain securitisation structures may require liquidity facilities to be built into the structures.
          (2) To be an eligible liquidity facility:
          (a) the commitment to provide liquid funds must be in writing and must clearly state the circumstances under which the facility may be availed of and the limits for any drawdown;
          (b) drawdowns 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;
          (c) the facility must not cover any losses incurred in the underlying pool of exposures before a drawdown;
          (d) the facility must not be structured in such a way that drawdowns are certain;
          (e) the facility must be subject to an asset quality test that precludes it from being availed of to cover credit risk exposures that are past due for more than 90 days;
          (f) if the exposures that the facility is required to fund are ECRA-rated securities, the facility can only be used to fund securities that are rated, by an ECRA, investment grade at the time of funding;
          (g) the facility cannot be availed of after all applicable credit enhancements (whether transaction-specific or programme-wide enhancements), from which the liquidity would benefit, have been exhausted; and
          (h) the repayment of drawdowns on the facility (that is, assets acquired under a purchase agreement or loans made under a lending agreement):
          (i) must not be subordinated to any interests of any note holder in the programme (such as an ABCP programme); and
          (ii) must not be subject to deferral or waiver.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.29 Treatment of certain liquidity facilities

          (1) This rule applies in relation to a liquidity facility that is not an eligible servicer cash advance facility.
          (2) If a banking business firm that is an originator or sponsor of a securitisation also provides such a liquidity facility to the securitisation, the risk-weight of the exposure from the facility must be calculated by:
          (a) applying:
          (i) a 50% credit conversion factor (regardless of the maturity of the facility) if the facility is an eligible liquidity facility; or
          (ii) a 100% credit conversion factor if the facility is not an eligible liquidity facility; and
          (b) multiplying the resulting credit equivalent amount by the applicable risk-weight in table 4.6.22, depending on the credit rating of the firm (or by 100% if the firm is unrated).
          However, if an ECRA rating of the facility is itself used for risk-weighting the facility, a 100% credit conversion factor must be applied.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.30 Treatment of unrated eligible liquidity facility

          A banking business firm providing an eligible liquidity facility that is unrated, or that is treated as unrated, must apply to the resulting securitisation exposure the highest risk weight that would be applied to an underlying exposure covered by the facility.

          Examples when facility must be treated as unrated

          •    when the facility's rating is not publicly available (see rule 4.6.12)
          •    when the facility is provided to a particular securitisation exposure (such as a particular tranche) and the resulting mitigation is reflected in the ECRA rating of the securitisation (see rule 4.6.35 (5))
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.31 Treatment of eligible servicer cash advance facility

          (1) A servicer cash advance facility is a liquidity facility under which a servicer to a securitisation advances cash to ensure timely payment to investors.

          Note For servicer, see note 1 (g) under rule 4.6.5.
          (2) A zero percent risk-weight may be applied to an undrawn servicer cash advance facility only if the facility is an eligible servicer cash advance facility.

          Note If the servicer cash advance facility is not an eligible servicer cash advance facility, see rule 4.6.29.
          (3) To be an eligible servicer cash advance facility:
          (a) the servicer must be entitled to full reimbursement;
          (b) the servicer's right to reimbursement must be senior to other claims on cash flows from the underlying pool;
          (c) the facility is itself an eligible liquidity facility; and
          (d) the facility may be cancelled at any time, without any condition and without any need to give advance notice.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.32 Capital relief from CRM techniques obtained by firm

          (1) A banking business firm that has obtained a CRM technique (such as eligible financial collateral, an eligible credit derivative, a guarantee or an eligible netting agreement) applicable to a securitisation exposure may reduce its capital requirement for the exposure.
          (2) Collateral pledged by an SPE as part of the securitisation may be used as a CRM technique if it is eligible financial collateral. However, an SPE of a securitisation cannot be an eligible protection provider in the securitisation.

          Note For eligible financial collateral see rule 4.5.7. For eligible protection provider, see rule 4.6.35 (2).
          (3) In this rule, collateral is used to hedge the credit risk of a securitisation exposure rather than to mitigate the underlying exposures of the securitisation.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.33 Treatment of CRM techniques provided by firm

          (1) If a banking business firm provides a CRM technique to a securitisation exposure, the calculation of its risk-weighted assets for credit risk must be in accordance with Part 4.5. The firm must calculate the capital requirement as if it were an investor in the securitisation.
          (2) If a banking business firm provides a CRM technique to an unrated credit enhancement, it must treat the protection provided as if it were directly holding the unrated credit enhancement.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.34 Treatment of enhanced portions

          The capital requirement for a credit-enhanced portion of a securitisation must be calculated in accordance with the standardised approach in Part 4.3.

          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK 4.6.35 Effect of CRM techniques

          (1) If a CRM technique is provided to specific underlying exposures or the entire pool of exposures by an eligible protection provider and the credit risk mitigation is reflected in the ECRA rating assigned to a securitisation exposure, the risk-weight based on that rating must be used. To avoid double-counting, no additional capital recognition is permitted.
          (2) Eligible protection provider means:
          (a) a central counterparty;
          (b) the State of Qatar or any other sovereign;
          (c) an entity that is treated as a sovereign in accordance with the Basel Accords;
          (d) a public sector enterprise or other entity that has:
          (i) a risk-weight of 20% or lower; and
          (ii) a lower risk-weight than the party to whom the protection is provided; or
          (e) a parent entity, subsidiary or affiliate of a party to whom the protection is provided that has a lower risk-weight than the party.
          (3) If the provider of the CRM technique is not an eligible protection provider, a banking business firm must treat the exposure as unrated.
          (4) A banking business firm must not use an ECRA rating if the assessment by the ECRA is based partly on unfunded support provided by the firm itself.

          Example

          If a banking business firm buys ABCP for which it provides an unfunded securitisation exposure (such as a liquidity facility or credit enhancement) to the ABCP programme and the exposure plays a role in determining the credit assessment on the ABCP, the firm must treat the ABCP as if it were unrated.
          (5) If the CRM technique is provided solely to protect a particular securitisation exposure (for example, if the technique is provided to a tranche of the securitisation) and the protection is reflected in the ECRA rating of the securitisation, a banking business firm must treat the exposure as unrated.

          Note For the treatment of an exposure arising from a liquidity facility of the kind described in rule 4.6.35 (5), see rule 4.6.30.
          (6) Subrule (5) applies to a securitisation exposure whether it is in the firm's trading book or banking book. The capital requirement for a securitisation exposure in the trading book must not be less than the amount that would be required if the exposure were in the firm's banking book.
          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

      • BANK Division 4.6.G BANK Division 4.6.G Early amortisation provisions

        Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK Subdivision 4.6.G.1 BANK Subdivision 4.6.G.1 General

          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.36 Definitions for Division 4.6.G

            In this Division:

            excess spread, in relation to a securitisation, means finance charge collections and other income received by the SPV or trust, minus certificate interest, servicing fees, charge-offs, costs and expenses. Excess spread is also known as future margin income.

            securitisation involving revolving exposures means a securitisation in which 1 or more of the underlying exposures represents, directly or indirectly, current or future draws on a revolving credit facility (such as a credit card facility, home equity line of credit or commercial line of credit).

            uncommitted credit line is a credit line that may be cancelled at any time, without any condition and without any need to give advance notice. Any other credit line is a committed credit line.

            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.37 Early amortisation provisions

            (1) An early amortisation provision in a securitisation is a mechanism that, if triggered, allows investors to be paid out before the originally stated maturity of the securities issued. An early amortisation provision may be controlled or non-controlled.

            Note Triggers include economic triggers which are events that are economic in nature by reference to the financial performance of the transferred assets.
            (2) An early amortisation provision is a controlled early amortisation provision if:
            (a) the banking business firm concerned has appropriate capital and liquidity plans to ensure that it has sufficient capital and liquidity if the provision is triggered; and
            (b) throughout the life of the securitisation (including the amortisation period) there is the same pro-rata sharing of interest, principal, expenses, losses and recoveries based on the firm's and investors' relative shares of the receivables outstanding at the beginning of each month.
            (3) An early amortisation provision that fails to meet either requirement in subrule (2) is a non-controlled early amortisation provision.
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.38 Operational requirements for securitisations with early amortisation provisions

            (1) A securitisation involving revolving exposures that is originated or sponsored by a banking business firm is taken to fail the operational requirements set out in rule 4.6.14 (for traditional securitisations) or rule 4.6.15 (for synthetic securitisations) if the securitisation has an early amortisation provision (or a similar provision) that, if triggered, will:
            (a) subordinate the firm's senior or equal interest in the underlying revolving credit facilities to the interest of other investors;
            (b) subordinate the firm's subordinated interest to an even greater degree relative to the interests of other parties; or
            (c) increase in any other way the firm's exposure to losses associated with the underlying revolving credit facilities.
            (2) A banking business firm that is the originator or sponsor of a securitisation that does not involve revolving exposures may exclude the underlying exposures from the calculation of risk-weighted assets if:
            (a) the securitisation is a replenishment structure; and
            (b) the securitisation has an early amortisation provision that ends the ability of the firm to add new exposures.
            (3) A banking business firm that is the originator or sponsor of a securitisation involving revolving exposures may exclude the underlying exposures from the calculation of risk-weighted assets if:
            (a) the securitisation meets the operational requirements set out in rule 4.6.14 (for traditional securitisations) or rule 4.6.15 (for synthetic securitisations); and
            (b) the securitisation has an early amortisation provision of the kind described in any of the following subparagraphs:
            (i) the securitisation relates to revolving credit facilities that themselves have early amortisation features that mimic term structures (that is, where the risk on the underlying exposures does not return to the firm) and the early amortisation provision in the securitisation, if triggered, would not effectively result in subordination of the firm's interest;
            (ii) the firm securitises 1 or more revolving credit facilities and investors remain fully exposed to future drawdowns by borrowers even after an early amortisation event has occurred;
            (iii) the early amortisation provision is solely triggered by events not related to the performance of the securitised assets or of the firm (such as material changes in tax laws or regulations).
            (4) The firm must still hold regulatory capital against any securitisation exposures that it retains in relation to the securitisation.
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.39 Capital charges for securitisation involving revolving exposures with early amortisation

            (1) A banking business firm that is an originator or sponsor of a securitisation involving revolving exposures that has an early amortisation provision must calculate an additional capital charge to cover the possibility that the firm's credit risk exposure may increase if the provision is triggered. The charge must be calculated for the total exposure related to the securitisation (that is, for both drawn and undrawn balances related to the securitised exposures).

            Note For the calculation of the capital charge if the early amortisation provision is controlled, see rule 4.6.40. For the calculation of the capital charge if the early amortisation provision is non-controlled, see rule 4.6.44.
            (2) If the underlying pool of a securitisation is made up of both revolving exposures and term exposures, the firm must apply the amortisation treatment in this Division only to the portion of the underlying pool made up of those revolving exposures.
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK Subdivision 4.6.G.2 BANK Subdivision 4.6.G.2 Securitisation involving revolving exposures with controlled early amortisation

          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.40 Calculating capital charges — controlled early amortisation

            A banking business firm that is an originator or sponsor of a securitisation involving revolving exposures that has a controlled early amortisation provision must calculate a capital charge for the investors' interest (that is, against both drawn and undrawn balances related to the securitised exposures). The capital charge is the product of:

            (a) the investors' interest;
            (b) the appropriate credit conversion factor in accordance with table 4.6.42, depending on whether the securitised exposures are uncommitted retail credit lines or not; and
            (c) the risk weight for the kind of underlying exposures (as if those exposures had not been securitised).
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.41 Controlled early amortisation and uncommitted retail credit lines

            (1) For uncommitted retail credit lines (such as credit card receivables) in securitisations that have controlled early amortisation provisions that can be triggered by the excess spread falling to a specified level, a banking business firm must compare the three-month average excess spread to the point at which the bank is required to trap excess spread (the excess spread trapping point) as economically required by the structure.
            (2) If a securitisation does not require the trapping of excess spread, the excess spread trapping point for the securitisation is 4.5 percentage points more than the excess spread at which early amortisation is triggered.
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.42 Credit conversion factors

            A banking business firm that is the originator or sponsor of a securitisation must divide the securitisation's excess spread by the securitisation's excess spread trapping point to determine the appropriate segments and apply the corresponding credit conversion factor for uncommitted credit lines in accordance with table 4.6.42.

            Table 4.6.42 Credit conversion factors (CCFs) for securitisation involving revolving exposures with controlled early amortisation

            column 1 item column 2 segments column 3 CCFs for uncommitted credit lines % column 4 CCFs for committed credit lines %
                   
              Retail credit lines    
            1 133.33% of trapping point or more 0 90
            2 < 133.33% to 100% of trapping point 1 90
            3 < 100% to 75% of trapping point 2 90
            4 < 75% to 50% of trapping point 10 90
            5 < 50% to 25% of trapping point 20 90
            6 < 25% of trapping point 40 90
                   
            7 Non-retail credit lines 90 90


            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.43 Requirement to apply higher capital charge

            (1) The capital charge to be applied under this subdivision is the higher of:
            (a) the capital requirement for retained securitisation exposures in the securitisation; and
            (b) the capital requirement that would apply if the exposures had not been securitised.
            (2) The firm must also deduct from its CET1 the amount of any gain-on-sale and credit-enhancing interest-only strips arising from the securitisation.
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

        • BANK Subdivision 4.6.G.3 BANK Subdivision 4.6.G.3 Securitisation involving revolving exposures with non-controlled early amortisation

          Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.44 Calculating capital charges — non-controlled early amortisation

            A banking business firm that is an originator or sponsor of a securitisation involving revolving exposures that has a non-controlled early amortisation provision must calculate a capital charge for the investors' interest (that is, against both drawn and undrawn balances related to the securitised exposures). The capital charge is the product of:

            (a) the investors' interest;
            (b) the appropriate credit conversion factor in accordance with table 4.6.42, depending on whether the securitised exposures are uncommitted retail credit lines or not; and
            (c) the risk weight for the kind of underlying exposures (as if those exposures had not been securitised).
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.45 Non-controlled early amortisation and uncommitted retail credit lines

            (1) For uncommitted retail credit lines (such as credit card receivables) in securitisations that have non-controlled early amortisation provisions that can be triggered by the excess spread falling to a specified level, a banking business firm must compare the three-month average excess spread to the point at which the bank is required to trap excess spread (the excess spread trapping point) as economically required by the structure.
            (2) If a securitisation does not require the trapping of excess spread, the excess spread trapping point for the securitisation is 4.5 percentage points more than the excess spread at which early amortisation is triggered.
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.46 Credit conversion factors

            A banking business firm that is the originator or sponsor of a securitisation must divide the securitisation's excess spread by the securitisation's excess spread trapping point to determine the appropriate segments and apply the corresponding credit conversion factor for uncommitted credit lines in accordance with table 4.6.46.

            Table 4.6.46 Credit conversion factors (CCFs) for securitisations involving revolving exposures with non-controlled early amortisation

            column 1 item column 2 segments column 3 CCFs for uncommitted credit lines % column 4 CCFs for committed credit lines %
                   
              Retail credit lines    
            1 133.33% of trapping point or more 0 100
            2 < 133.33% to 100% of trapping point 5 100
            3 < 100% to 75% of trapping point 15 100
            4 < 75% to 50% of trapping point 50 100
            5 < 50% to 25% of trapping point 100 100
                   
            6 Non-retail credit lines 100 100


            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

          • BANK 4.6.47 Requirement to apply higher capital charge

            (1) The capital charge to be applied under this subdivision is the higher of:
            (a) the capital requirement for retained securitisation exposures in the securitisation; and
            (b) the capital requirement that would apply if the exposures had not been securitised.
            (2) The firm must also deduct from its CET1 the amount of any gain-on-sale and credit-enhancing interest-only strips arising from the securitisation.
            Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

      • BANK Division 4.6.J Treatment of STC securitisations

        Note Provisions relating to the new category of simple, transparent and comparable (STC) securitisations are being prepared. Under the Basel Committee on Banking Supervision's revised securitisation framework, the requirements for STC securitisations comes into effect on 1 January 2018.

        Inserted by QFCRA RM/2017-2 (as from 1st April 2017).

    • BANK Part 4.7 BANK Part 4.7 Provisioning

      • BANK 4.7.1 Provisioning

        Provisioning means setting aside an amount to cover expected losses on special mention credits, impaired credits and other problem assets, based on loan-loss probability. Provisioning is made before profit is earned.

        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 4.7.2 Policies — provisioning

        Depending on the nature, scale and complexity of a banking business firm’s business, and of the credit it provides, the firm’s provisioning policy must set out:

        (a) the areas of its business to which the policy applies;
        (b) whether the firm uses different approaches to those areas, and the significant differences in approach;
        (c) who is responsible for regularly monitoring its assets, to identify problem or potential problem assets, and the factors it takes into account in identifying them;
        (d) the extent to which the value of any collateral, guarantees or insurance that the firm holds affects the need for, or the level of, provisions;
        (e) the basis on which the firm makes its provisions, including the extent to which their levels are left to managerial judgement or to a committee;
        (f) the methods, debt management systems or formulae used to set the levels of provisions and the factors that must be considered in deciding whether the provisions are adequate;
        (g) the reports to enable the firm’s governing body and senior management to ensure that the firm maintains adequate provisions;
        (h) the procedures and responsibilities for arrears management and the recovery of exposures in arrears or exposures that have had provisions made against them;
        (i) the procedures for writing off and writing back provisions; and
        (j) the procedures for calculating and making provisions for contingent and other liabilities (such as contingent liabilities that have crystallised from acceptances, endorsements, guarantees, performance bonds, indemnities, irrevocable letters of credit and the confirmation of documentary credits).
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.7.3 Making provisions

        (1) A banking business firm must ensure that the firm maintains provisions that, taken together, are prudent, reasonable and adequate to absorb credit losses, given the facts and circumstances. The losses covered must include losses incurred, losses incurred but not yet reported, and losses estimated but not certain to arise, extending over the life of the individual credits that make up its credit portfolio.
        (2) The firm must also ensure that provisions and write-offs are timely and reflect realistic repayment and recovery expectations, taking into account market and macroeconomic conditions. The firm must consider all the significant factors that affect the likelihood of collecting on the transactions that make up its credit portfolio and the estimated future credit losses on those transactions.
        (3) The firm must make provisions that in total at least meet the requirements in table 4.7.3.

        Table 4.7.3 Provisioning requirements

        column 1 item column 2 category column 3 minimum provisioning requirement (% of the unsecured part of the credit)
        1 performing 0
        2 special mention 5
        3 substandard 20
        4 doubtful 50
        5 loss 100
        (4) Provisions may be general (assessed collectively against the whole of a portfolio) or specific (assessed against individual credits), or both.
        (5) The firm must take into account off-balance-sheet exposures in its categorisation of credits and in provisioning.

        Note There are 2 types of off-balance-sheet exposures: those that can be unilaterally cancelled by the firm and those that cannot. No provisioning is necessary for the former.
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 4.7.4 BANK 4.7.4 Review of levels

        The levels of provisions and write-offs must be reviewed regularly to ensure that they are consistent with identified and estimated losses.

        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.7.4 Guidance

          1 A review of a firm's write-offs can help identify whether the firm's provisioning policy results in over-provisioning or under-provisioning.
          2 The Regulatory Authority regularly assesses trends and concentrations in risk and risk build-up across financial entities in relation to problem assets. In making the assessment, the authority takes into account any observed concentration in the CRM techniques used by firms and the potential effect on the efficacy of those techniques in reducing loss. The authority would consider the adequacy of provisions for a firm (and the industry in general) in the light of the assessment.
          3 The Regulatory Authority might seek the opinion of external experts in assessing the adequacy of a firm's policies for grading and classifying its assets and the appropriateness and robustness of the levels of its provisions.
          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.7.5 No circumventing of requirements

        A banking business firm must not restructure, refinance or reclassify assets with a view to circumventing the requirements on provisioning.

        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.7.6 Authority can reclassify assets

        (1) The Regulatory Authority may at any time require a banking business firm to demonstrate that the firm’s classification of its assets, and its provisions, are adequate for prudential purposes.
        (2) The Regulatory Authority may require the firm to reclassify its assets or increase the levels of its provisions if the authority considers that the asset classifications are inaccurate, or the provisions are inadequate, for prudential purposes.

        Example

        If the Regulatory Authority considers that existing or anticipated deterioration in asset quality is of concern or if the provisions do not fully reflect expected losses, the authority may require the firm to adjust its classifications of individual assets, increase its levels of provisions or capital and, if necessary, impose other remedial measures.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.7.7 Information to governing body

        (1) A banking business firm’s governing body must obtain timely information on the condition of the firm’s assets, including the classification of assets, the levels of provisions and problem assets.
        (2) The information must include summary results of the latest asset review, comparative trends in the overall quality of problem assets, and measurements of existing or anticipated deterioration in asset quality and losses expected.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK Part 4.8 BANK Part 4.8 Transactions with related parties

      • BANK 4.8.1 Introduction

        (1) To guard against abuses in lending to related parties and to address conflicts of interest, this Part requires transactions with related parties to be at arm’s length and subject to appropriate supervision and limits.
        (2) Related-party transactions must be interpreted broadly. Related party transactions include on-balance-sheet and off-balance-sheet credit exposures, service contracts, asset purchases and sales, construction contracts, lease agreements, derivative transactions, borrowing and write-offs.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.8.2 Concept of related parties

        (1) The concept of parties being related to a banking business firm is used in these rules in relation to parties over which the firm exercises control or parties that exercise control over the firm. The concept is primarily used in relation to the requirement that the firm's transactions be at arm's length.
        (2) In contrast, the concept of parties being connected to one another (which is discussed with concentration risk in Chapter 5) is used in these rules to measure concentration risk and large exposures.
        (3) It is of course possible for connected counterparties to be related to the banking business firm holding the exposure concerned.

        Note For purposes of concentration risk, the firm's exposure to connected counterparties (whether related or not) is taken to be a single risk.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.8.3 BANK 4.8.3 Related parties

        Related parties, of a banking business firm, includes:

        (a) any other member of the firm’s corporate group;
        (b) any individual who is able to exercise significant influence over the firm;
        (c) any affiliate of the firm; and
        (d) any entity that the Regulatory Authority directs the firm to include.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.8.3 Guidance

          Related party is wider than a firm's corporate group in that it includes individuals. Related parties include the banking business firm's subsidiaries and major stock holders; members of its governing body; its senior management and key employees.

          Note Affiliate is defined in the glossary.

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.8.4 Role of governing body — related parties

        (1) A banking business firm’s governing body must ensure that the firm’s policies relating to related-party transactions are complied with and that any exceptions are reported to the appropriate level of the senior management, and, if necessary, to the governing body.
        (2) The governing body must also ensure that the firm’s senior management monitors transactions with related parties, takes appropriate steps to control or mitigate the risks from such transactions and writes off exposures to related parties only in accordance with the firm’s policies.
        (3) The governing body must approve transactions with related parties, and the write-off of related-party exposures, if such transactions or write-off exceeds specified amounts or otherwise poses any special risk.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.8.5 Policies — transactions with related parties

        (1) A banking business firm’s policy must establish:
        (a) effective systems to identify, monitor and report individual and total exposures to, and transactions with, related parties;
        (b) procedures to prevent a member of the governing body, a member of the firm’s senior management or any other person who stands to gain a benefit from a related-party transaction from being part of the process of granting and managing the transaction;
        (c) well-defined criteria for the write-off of exposures to related parties;
        (d) prudent and appropriate limits to prevent or address conflicts of interest; and
        (e) procedures for tracking and reporting exceptions to, and deviations from, limits or policies.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.8.6 BANK 4.8.6 Transactions must be arm's length

        A transaction with a related party must not be undertaken on terms more favourable to the party than a corresponding transaction with a non-related party.

        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

        • BANK 4.8.6 Guidance

          Favourable terms could relate to interest rate, credit assessment, tenor, fees, amortisation schedule and need for collateral. An exception for beneficial terms could be appropriate if it is part of an employee's remuneration package (for example, more favourable loan rates to employees).

          Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.8.7 Limits on lending to related parties

        A banking business firm must not enter into a transaction that would cause it to exceed the limits set out in table 4.8.7 unless it has the written approval of the Regulatory Authority to do so.

        Table 4.8.7 Limits on banking business firms' exposure to related parties

        column 1 item column 2 kind of exposure column 3 limit (% of total assets)
        1 exposures to a member of the governing body or senior management of the firm, or a person connected to either of them 0.5
        2 the total of exposures under item 1 3
        3 exposures to a significant shareholder of the firm (other than exposures to a shareholder that is a deposit-taker or an equivalent entity regulated in a way comparable to a deposit-taker in the QFC)) 2
        4 the total of exposures under item 3 5
        5 exposures to a related party or a party connected to the related party (other than exposures to a deposit-taker or an equivalent entity that is regulated in a way comparable to a deposit-taker in the QFC) 2
        6 the total of exposures under item 5 5

        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 4.8.8 Powers of Regulatory Authority

        (1) Despite anything in these rules, the Regulatory Authority may, in writing, set specific limits on a banking business firm’s exposures to a related party or to related parties in total.
        (2) The authority may direct such exposures to be deducted from regulatory capital when assessing capital adequacy or direct that such exposures be collateralised.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).