• IBANK Chapter 6 IBANK Chapter 6 Market Risk

    • IBANK Part 6.1 IBANK Part 6.1 General

      • IBANK Division 6.1.A IBANK Division 6.1.A Governing Body, Trading Book and Policies

        • IBANK 6.1.1 Introduction

          (1) This Chapter sets out the requirements for an Islamic banking business firm's market risk management policy to identify, measure, evaluate, manage and control or mitigate market risk. This Chapter also sets out how to calculate the firm's market risk capital requirement.
          (2) An Islamic banking business firm that operates in a market incurs risks from potential movements in market prices.
          (3) In calculating its capital requirement, an Islamic banking business firm must take into account unexpected losses that may arise from market risk.
          (4) In determining the value of an asset or liability, the firm must also make appropriate adjustments for uncertainties arising from market risk.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.2 Role of Governing Body — Market Risk

          An Islamic banking business firm's governing body must ensure that the firm's market risk management policy gives the firm a comprehensive firm-wide view of its market risk and takes into account the risk of a significant deterioration in market liquidity.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.3 Relation to Stress-Testing

          When carrying out stress-testing or review of stress scenarios, an Islamic banking business firm must take into account market risk exposures.

          Note For stress-testing and stress scenarios, see rule 1.1.17.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.4 Requirements — Capital and Management of Market Risk

          (1) An Islamic banking business firm must have capital to cover market risk from positions in its banking and trading books.
          (2) The firm must also have robust market risk measurement and risk management.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.5 Need for Trading Book

          (1) An Islamic banking business firm's trading book consists of the positions held by the firm (whether on-balance-sheet or off-balance-sheet) that must be included in the book in accordance with these rules. Other positions held by the firm must be included in its banking book.

          Note A firm is required to have policies to distinguish consistently between trading activities and banking activities — see rule 6.1.8(4).
          (2) An Islamic banking business firm must have a trading book if:
          (a) it has positions that must be included in the trading book; and
          (b) the total value of the positions described in paragraph (a) has exceeded 5% of the total of the firm's on-balance-sheet and off-balance-sheet positions at any time in the previous 12 months.
          (3) The firm must include, in the trading book, trading positions and exposures of the following kinds:
          (a) a position taken to hedge an exposure in the trading book, using Shari'a-compliant hedging instruments;
          (b) a principal broking position in a financial instrument, commodity or commodity Shari'a-compliant hedging instrument;
          (c) an exposure from a repurchase agreement, or securities or commodities lending, that is based on a position in a security or commodity included in the trading book;
          (d) an exposure from a reverse repurchase agreement, or securities and commodities borrowing, that is based on a position in a security or commodity included in the trading book;
          (e) an exposure from an unsettled transaction, a free delivery or an OTC Shari'a-compliant hedging instrument;
          (f) an exposure in the form of a fee, commission, interest, dividend or margin on an exchange-traded Shari'a-compliant hedging instrument directly related to a position included in the trading book.

          Guidance

          Whenever an Islamic banking business firm acts as principal (even in the course of an activity normally described as 'broking' or 'customer business'), the resulting positions should be included in the trading book. This applies even if the nature of the business means that the only risks being incurred by the firm are counterparty risks (that is, no market risk capital requirements apply).
          (4) The firm must also include in its trading book:
          (a) total-rate-of-return swaps (except those that have been transacted to hedge a banking book credit exposure); and
          (b) open short positions in Shari'a-compliant hedging instruments.
          (5) The firm must not include in its trading book:
          (a) positions held for liquidity management; and
          (b) loans (unless they are used to hedge a position or transaction in the trading book).
          (6) Trading position, of an Islamic banking business firm, means a position that is held:
          (a) for short-term resale;
          (b) with the intent of benefiting from actual or expected short-term price movements; or
          (c) to lock in arbitrage profits.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.6 IBANK 6.1.6 No Switching of Instruments Between Books

          (1) An Islamic banking business firm must not switch an instrument between its trading book and banking book, unless the Regulatory Authority has, in writing, allowed the firm to do so. The authority may approve a switch subject to 1 or more conditions.
          (2) The firm must not benefit from any lower regulatory capital requirement resulting from a switch approved by the authority.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 6.1.6 Guidance

            The authority will grant approval only in extraordinary cases. The authority will require the firm to publicly disclose the switch.

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.7 Policies — Market Risk Environment

          (1) An Islamic banking business firm's market risk management policy must establish:
          (a) effective systems for the accurate and timely identification, measurement, evaluation, management and control or mitigation of market risk, and reporting to the firm's governing body and senior management;
          (b) prudent and appropriate market risk limits that are consistent with the firm's risk tolerance, risk profile and capital, and with the management's ability to manage;
          (c) who is responsible for identifying, measuring and reporting market risk;
          (d) procedures for tracking and reporting exceptions to, and deviations from, limits or policies; and
          (e) procedures for including positions and exposures in the trading book.
          (2) The policy must ensure that all of the firm's transactions are identified and recorded in a timely way and that their valuations are consistent and prudent.

          Note For valuation of positions and verification of market prices and model inputs, see Division 6.1.B.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.8 Policies — Trading Book

          (1) An Islamic banking business firm that is required to have a trading book must have clearly defined policies for keeping the book up-to-date and the positions and exposures accurate.
          (2) In particular, the firm must have policies on:
          (a) what to include, or not include, in the trading book;
          (b) managing and reporting trading positions;
          (c) valuing positions, including:
          (i) clear definitions of the responsibilities of staff involved in the valuation;
          (ii) sources of market information, and review of their reliability;
          (iii) frequency of independent valuations;
          (iv) timing of closing prices;
          (v) procedures for adjusting valuations between periods;
          (vi) ad-hoc verification procedures; and
          (vii) reporting lines for the valuation function that are independent of the function that gave rise to the position.
          (3) The policies must be approved by the firm's governing body, and the firm must be able to demonstrate compliance with them if directed by the Regulatory Authority.
          (4) The firm must also have adequate policies:
          (a) to monitor compliance with the policies and distinguish consistently between trading activities and banking activities;
          (b) to deal with legal, regulatory or operational restrictions on immediate liquidation of exposures; and
          (c) to monitor the size of its trading book.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.1.B IBANK Division 6.1.B Measurement of Risk and Valuation of Positions

        • IBANK 6.1.9 Standard Method to be Used

          (1) Unless the Regulatory Authority has approved the use of an internal model by an Islamic banking business firm, market risk is, as a general rule, measured using the standard method. The standard method comprises a range of approaches that a firm may use to calculate capital charges from its trading activities.

          Note For approval of the use of internal models, see rule 3.1.6.
          (2) In the standard method, market risk capital requirement is the sum of the capital charges for:
          (a) foreign exchange risk in the trading book and banking book;
          (b) options risk in the trading book and banking book;
          (c) commodities risk in the trading book and banking book;
          (d) inventory risk in the trading book and banking book;
          (e) traded equity position risk; and
          (f) traded profit rate risk on sukuk and other Shari'a-compliant debt securities and profit-rate-related instruments.

          Note The measurements of the risks mentioned in (2) are set out in Part 6.2 to Part 6.6.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.10 IBANK 6.1.10 Valuing Positions — Mark-to-Market

          (1) An Islamic banking business firm must use the mark-to-market method to value its positions and exposures if there is a market to mark the positions and exposures to. Mark-to-market means a valuation that is based on current market value.

          Guidance
          1 The Regulatory Authority would expect an Islamic banking business firm to mark-to-market listed securities, because there is a market with observable and reliable prices for such securities.
          2 The firm should mark-to-market as much as possible. It should use the prudent side of a bid or offer unless the firm is a significant market maker that can close at mid-market.
          3 When estimating fair value, the firm should maximise the use of relevant observable inputs and avoid the use of unobservable inputs.
          (2) A position that is marked-to-market must be revalued daily, based on independently sourced current market prices.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 6.1.10 Guidance

            Because of the less liquid nature of many sukuk and equity positions held by an Islamic banking business firm, it is important for the firm to have prudent valuation practices.

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.11 IBANK 6.1.11 Valuing Positions — Mark-to-Model

          (1) If it is not possible to mark-to-market (for example, in the case of unlisted securities or where the market is inactive), an Islamic banking business firm may use the mark-to-model method to value its positions and exposures. Mark-to-model means a valuation that has to be benchmarked, extrapolated or otherwise calculated from a market input.
          (2) The firm must be able to demonstrate that its marking-to-model is prudent.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 6.1.11 Guidance

            An Islamic banking business firm should be extra conservative when marking-to-model. The Regulatory Authority will take into account the following in deciding if the firm's model is prudent:

            •   whether senior management is aware of the positions and exposures that are marked to model and whether it understands the uncertainty this might create in reporting the risk or performance of the business
            •   the extent to which market inputs are sourced from market prices
            •   the appropriateness of the assumptions used by the firm
            •   the availability of generally accepted valuation methods for particular products
            •   who developed the model
            •   whether the firm holds a secure copy of the model
            •   the existence of formal control procedures for changing the model
            •   how often the model is used to check valuations
            •   how aware is the firm's risk management function of the weaknesses of the model and how those weaknesses are reflected in the valuation output
            •   the results of comparisons between actual close out values and model outputs
            •   the firm's procedures for reviewing the model.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.12 IBANK 6.1.12 Independent Price Verification

          An Islamic banking business firm must independently verify market prices and model inputs, to check that those prices and inputs are accurate. The verification must be done at least once a month.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 6.1.12 Guidance

            1 Independent price verification is different from daily mark-to-market. The object of the verification is to regularly check the accuracy of market prices or model inputs and, thereby, eliminate inaccurate daily marks. The verification should be carried out by a unit independent of whoever marked the positions or exposures.
            2 The independent marking in the verification process should reveal any error or bias in pricing. It entails a higher standard of accuracy in that the market prices or model inputs are used to determine profit and loss figures, whereas daily marks are used primarily for management reporting in between reporting dates.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.1.13 Valuation Adjustments

          (1) An Islamic banking business firm must consider making adjustments for positions that cannot be prudently valued (such as those that have become concentrated, less liquid or stale). For example, valuation adjustment would be appropriate if pricing sources are more subjective (such as when there is only one available broker quote).
          (2) The firm must establish and maintain procedures for considering valuation adjustments. This rule applies whether:
          (a) the firm uses the mark-to-market or mark-to-model method; and
          (b) whether the valuation is done by the firm itself or a third party.
          (3) The firm must consider the following valuation adjustments:
          (a) unearned profit;
          (b) close-out costs;
          (c) operational risks;
          (d) early termination;
          (e) investing and funding costs;
          (f) future administrative costs;
          (g) model risk, if relevant;
          (h) any other adjustment that the firm considers appropriate.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Part 6.2 IBANK Part 6.2 Foreign Exchange Risk

      • IBANK 6.2.1 Relation to Market Risk

        (1) In measuring its market risk, an Islamic banking business firm must include the risk of holding or taking positions in foreign currencies, gold and silver (foreign exchange risk). Foreign exchange risk may arise from the firm's trading in the foreign exchange market and other markets; it may also arise from non-trading activities that are denominated in a foreign currency.

        Guidance
        1 If an Islamic banking business firm is exposed to profit rate risk on positions in foreign currencies, gold and silver, the firm must include the relevant profit rate positions in the calculation of profit rate risk in the trading book-see rule 6.6.2(4).
        2 Unlike Basel II, silver and gold are treated under Shari'a as foreign exchange positions (rather than as commodity positions). In Basel II, only gold is treated in that way.
        (2) If foreign currency is to be received or delivered under a binding unilateral promise, the firm must report any profit rate exposure from the other leg of the contract in accordance with Part 6.6 (profit rate risk in the trading book).
        (3) If gold or silver is to be received or delivered under a binding unilateral promise, the firm must report any foreign currency or profit rate exposure from the other leg of the contract in accordance with this Part or Part 6.6, as the case requires.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.2.2 What to Include in Foreign Exchange Risk

        (1) In calculating the capital charge for foreign exchange risk, an Islamic banking business firm must include in its exposure to each foreign currency:
        (a) the net spot position (that is, assets minus liabilities denominated in the currency, including accrued profit and other accrued income and accrued expenses);
        (b) the net position of binding unilateral promises by the firm to buy or sell currencies on a specified future date (that are not included in the spot position);

        Examples of amounts to be received or paid
        •   the principal on currency swaps not included in the spot position
        •   profit from swaps and other profit rate transactions.
        (c) irrevocable guarantees (and similar instruments) that are certain to be called and likely to be irrecoverable; and
        (d) any other items representing an exposure to risk in foreign currencies (for example a specific provision held in the currency in question where the underlying asset is held in a different currency).
        (2) The firm may also include in its currency exposure any net future income or expenses that are not yet accrued but al fully hedged. If the firm includes such income or expenses, it must do so consistently and must not select only expected future flows that reduce its position.
        (3) If the firm has deliberately taken a position to partly or totally protect itself against the adverse effect of a change in an exchange rate on its capital adequacy ratio, it may exclude the position from its currency exposure insofar as it relates to that hedge, if:
        (a) the position is of a structural and non-trading nature;
        (b) the structural position does no more than protect the firm's capital adequacy ratio;
        (c) the position cannot be traded for speculative or profit-making purposes; and
        (d) the exclusion of the position is done consistently, with the treatment of the hedge remaining the same for the life of the assets or other items.
        (4) A structural position includes:
        (a) a position arising from an instrument that satisfies the criteria for inclusion as capital under Chapter 3;
        (b) a position in relation to a net investment in a self-sustaining subsidiary, the accounting consequence of which is to reduce or eliminate what would otherwise be a movement in the foreign currency translation reserve; and
        (c) an investment in an overseas subsidiary or other entity in the same corporate group as the firm that, under these rules, is deducted from the firm's capital for capital adequacy purposes.
        (5) The firm must also include any currency exposures arising from equity, commodity and profit rate positions.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.2.3 Foreign Exchange Risk on Consolidated Basis

        (1) If an Islamic banking business firm is assessing its foreign exchange risk on a consolidated basis, and the inclusion of the currency positions of a marginal operation of the firm is technically impractical, the firm may use, as a proxy for those positions, the internal limit in each currency that the firm applies to the operation. Marginal operation, in relation to a firm, is an operation of the firm that accounts for less than 5% of the firm's total currency positions.
        (2) The absolute values of the limits must be added to the net open position in each currency, but only if the actual positions are adequately monitored against those internal limits.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.2.4 Capital Charge — Foreign Exchange Risk

        (1) For an Islamic banking business firm that does not write options, net open position in a foreign currency is the sum of:
        (a) the firm's currency exposures under rule 6.2.2 for the currency; and
        (b) the value of the options and their associated underlying assets measured using the simplified approach in Division 6.3.B.
        (2) For an Islamic banking business firm that writes options, net open position in a foreign currency is the sum of:
        (a) the firm's currency exposures under rule 6.2.2 for the currency; and
        (b) either:
        (i) the net delta-based equivalent of the firm's total book of foreign currency options (with separately calculated capital charges for gamma risk and vega risk under Division 6.3.C); or
        (ii) the value of the options and their associated underlying assets under the delta-plus method in Division 6.3.C.
        (3) The firm must calculate its overall foreign currency net open position by:
        (a) calculating the net open position in each foreign currency;
        (b) converting the nominal amount (or net present value) of each such net position into Qatari riyals at the current spot market exchange rate;
        (c) adding all short net positions and adding all long net positions calculated under paragraphs (a) and (b); and
        (d) selecting the greater of the absolute values of the 2 sums in paragraph (c).
        (4) The firm must then calculate its net position in gold and silver by:
        (a) valuing all gold and silver positions using the US dollar current spot price (regardless of maturity);
        (b) offsetting long and short positions; and
        (c) converting the absolute value of the resulting net position into Qatari riyals.
        (5) To convert the net position in gold and silver into Qatari riyals, the firm must state the position (spot plus forward) in a standard unit of measurement and then convert the net position at the current spot market exchange rate.
        (6) The capital charge for foreign exchange risk of an Islamic banking business firm is the sum of:
        (a) 8% of the firm's overall foreign currency net open position in each of the foreign currencies it holds; and
        (b) 8% of its net position in gold and silver.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.2.5 Valuing Positions — Binding Unilateral Promises

        An Islamic banking business firm must value net positions of binding unilateral promises in foreign exchange transactions, gold and silver at the current spot market exchange rates.

        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Part 6.3 IBANK Part 6.3 Options Risk

      • IBANK Division 6.3.A IBANK Division 6.3.A General

        • IBANK 6.3.1 Relation to Market Risk

          In measuring its market risk, an Islamic banking business firm must include the risk of holding or taking positions in options contracts (options risk).

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.3.2 Measuring Options Risk

          (1) An Islamic banking business firm that does not write options must use the simplified approach.
          (2) An Islamic banking business firm that writes options must use the delta-plus method.

          Note If all the written option positions are hedged by perfectly matched long positions in exactly the same options, no capital charge for options risk is required.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.3.B IBANK Division 6.3.B Simplified Approach

        • IBANK 6.3.3 IBANK 6.3.3 Using simplified Approach

          An Islamic banking business firm that does not write options must calculate capital charges in accordance with:

          (a) rule 6.3.4 for a position that is a 'long cash and long put' or 'short cash and long call' position; or
          (b) rule 6.3.5 for a position that is a 'long put' or 'long call' position.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 6.3.3 Guidance

            In the simplified approach, the position in the option and the associated underlying asset (cash or forward) is not subject to the mark-to-market method. Instead, each position is carved-out and is subject to a separately calculated capital charge for specific risk and general risk.

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.3.4 Capital Charges — 'Long Cash and Long Put' or 'Short Cash and Long Call'

          (1) For a position that is 'long cash and long put' or 'short cash and long call', the capital charge is calculated by multiplying the market value of the underlying security by the sum of the specific and general risk capital charges for the underlying, and then subtracting the amount by which the option is in-the-money (bounded at zero).

          Guidance
          1 In cases (such as foreign exchange transactions) where it is unclear which side is the underlying security, the underlying should be taken to be the asset that would be received if the option were exercised. In addition, the nominal value should be used for items if the market value of the underlying instrument could be zero (such as in caps, floors and swaptions).
          2 Some options have no specific risk (such as those having a profit rate, currency or commodity as the underlying security); other options on profit-rate-related instruments and options on equities and stock indices, however, would have specific risk.
          (2) In the simplified approach, the capital charge is:
          (a) 8% for options on currency; and
          (b) 15% for options on commodities.
          (3) For options with a residual maturity of less than 6 months, an Islamic banking business firm must use the forward price (instead of the spot price) if it is able to do so.
          (4) For options with a residual maturity of more than 6 months, the firm must compare the strike price with the forward price (instead of the current price). If the firm is unable to do this, it must take the in-the-money amount to be zero.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.3.5 Capital Charges — 'Long Put' or 'Long Call'

          (1) For a position that is 'long put' or 'long call', the capital charge is the lesser of:
          (a) the market value of the underlying security multiplied by the sum of the specific and general risk capital charges for the underlying; and
          (b) the market value of the option.
          (2) For subrule (1)(b), the book value of the option may be used instead of the market value if the position is not included in the trading book (for example, options on particular foreign exchange or commodities positions).
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.3.C IBANK Division 6.3.C Delta-Plus Method

        • IBANK 6.3.6 Using Delta-Plus Method

          (1) An Islamic banking business firm that writes options must calculate specific risk capital charges separately by multiplying the delta-equivalent value of each option by the risk-weight applicable under Part 6.5 (equity position risk) and Part 6.6 (profit rate risk in the trading book).
          (2) In calculating general risk capital charge, the firm must enter delta-weighted positions with a debt security or profit rate as the underlying into the profit rate time bands in table 6.6.8A by using a two-legged approach. Under this approach, there is 1 entry at the time the underlying contract takes effect and a second entry at the time the underlying contract matures.
          (3) For an option with a debt security as the underlying, the firm must apply a specific risk capital charge to the delta-weighted position based on the issuer's rating and in accordance with Part 6.6.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.3.7 Relation to Mark-to-Market Method

          (1) An Islamic banking business firm that writes options must include delta-weighted option positions in measuring its market risk.
          (2) The firm must report such an option as a position equal to the sum of the market values of the underlying multiplied by the sum of the absolute values of the deltas. Because delta does not cover all risks associated with option positions, the firm must calculate gamma and vega in calculating the regulatory capital charge.

          Note Gamma is the rate of change of delta with respect to a change in the price of the underlying. Vega is the sensitivity of the value of an option to a change in the volatility of the underlying.
          (3) The firm must calculate delta, gamma and vega using the pricing model used by a recognised exchange, or a proprietary options pricing model approved, in writing, by the Regulatory Authority.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.3.8 Capital Charges — Options

          (1) The capital charge for an option with equities as the underlying must be based on the delta-weighted positions included in the measurement of specific and general risks in accordance with Part 6.5. (equity position risk).
          (2) An Islamic banking business firm that writes options must calculate the capital charge for options on foreign exchange and gold and silver positions in accordance with Part 6.2 (foreign exchange risk). For delta risk, the net delta-based equivalent of the foreign currency, gold and silver options must be included in the measurement of the exposure for the respective currency, gold or silver position.
          (3) The capital charge for an option on commodities must be based on the charge calculated using the simplified approach in rule 6.4.6.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.3.9 Gamma Capital Charges

          (1) An Islamic banking business firm that writes options must calculate the capital charge for gamma risk (gamma capital charge) for each option position separately.
          (2) To calculate gamma capital charge, calculate the gamma impact of each option in accordance with the following formula:

          Gamma impact = 1/2 × gamma × VU2

          where:

          VU is:x
          (a) for a profit rate option:
          (i) if the option has a bond as the underlying — the market value of the underlying multiplied by the risk factor applicable under column 3 of table 6.6.8A; or
          (ii) if the option has a profit rate as the underlying — the market value of the underlying multiplied by the assumed changes in yield in column 4 of table 6.6.8A;
          (b) for options on equities and stock indices — the market value of the underlying multiplied by 8%;
          (c) for options on foreign exchange, gold and silver — the market value of the underlying multiplied by 8%; or
          (d) for an option on commodities — the market value of the underlying multiplied by 15%.
          (3) In calculating the gamma impact for an option mentioned in the definition of VU, the firm must treat as the same underlying:
          (a) for profit rates — each time band in column 2 of table 6.6.8A (with each position allocated to separate maturity ladders);
          (b) for equities and stock indices — each recognised exchange;
          (c) for foreign currencies, gold and silver — each currency pair, gold and silver; and
          (d) for commodities — each individual commodity of a kind described in rule 6.4.2(3)(a) or (b).
          (4) Each option on the same underlying described in subrules (2) and (3) will have a gamma impact that is positive or negative. The firm must add the individual gamma impacts, resulting in a net gamma impact for each underlying that is either positive or negative.
          (5) To calculate the firm's total gamma capital charge, exclude gamma impacts that are positive. The total gamma capital charge is the sum of the absolute values of the net negative gamma impacts.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.3.10 Vega Capital Charges

          (1) An Islamic banking business firm that writes options must calculate the capital charge for vega risk (vega capital charge) for each option position separately.
          (2) To calculate vega capital charge, the firm must multiply the vega for each option mentioned in the definition of VU in rule 6.3.9(2) by a 25% proportional shift in the option's current volatility. The results must then be summed across each underlying.
          (3) The total vega capital charge is the sum of the absolute values of the vega capital charges across each underlying.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Part 6.4 IBANK Part 6.4 Commodities Risk and Inventory Risk

      • IBANK Division 6.4.A IBANK Division 6.4.A Commodities Risk

        • IBANK 6.4.1 Relation to Market Risk

          (1) In measuring its market risk, an Islamic banking business firm must include the risk of holding or taking positions in commodities and commodities options (commodities risk).
          (2) Commodities means physical or energy products that may be traded. Commodities include precious metals (other than gold and silver), base metals, agricultural products, minerals, oil, gas and electricity.

          Guidance
          1 If an Islamic banking business firm is exposed to foreign exchange or profit rate risk from funding commodities positions, the firm must include the relevant positions in the measurement of foreign exchange risk and profit rate risk in the trading book — see rules 6.2.2(5) and 6.6.2(4), respectively.
          2 Unlike Basel II, silver and gold are treated under Shari'a as foreign exchange positions (rather than as commodity positions). In Basel II, only gold is treated in that way.
          (3) If a commodity is to be received or delivered under a binding unilateral promise, the firm must report any foreign currency, equity or profit rate exposure from the other leg of the contract in accordance with Part 6.2, Part 6.5 or Part 6.6, as the case requires.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.4.2 Measuring Commodities Risk

          (1) An Islamic banking business firm must use the simplified approach to measure commodities risk.
          (2) To calculate open positions using this approach, the firm may report short and long positions in each commodity on a net basis. Positions are reported on a net basis by offsetting them against each other in accordance with subrule (3).
          (3) Positions in the same commodity may be offset. Positions in different commodities must not be offset unless:
          (a) the commodities are deliverable against each other; or
          (b) the commodities are close substitutes for each other and a minimum correlation between price movements of 0.9 can be clearly established over at least the preceding year.
          An Islamic banking business firm must not use the correlation-based offsetting mentioned in paragraph (b) unless the Regulatory Authority has, in writing, allowed the firm to use it.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.4.3 Measuring Net Positions

          An Islamic banking business firm must first state each commodity position (spot plus forward) in terms of the standard unit of measurement for the commodity (such as barrels, kilos or grams). The firm must then convert the net position in each commodity into Qatari riyals at the current spot market exchange rates.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.4.4 What to Include in Commodities Risk

          (1) In calculating the capital charge for commodities risk, an Islamic banking business firm must include commodity Shari'a-compliant hedging instruments and off-balance-sheet positions that are affected by changes in commodity prices (such commodity swaps). The firm must include commodities risk arising from salam contracts.
          (2) Options on commodities for which the options risk is measured using the delta-plus method must also be included (with their underlying assets). Options for which the options risk is measured using the simplified approach must be excluded.
          (3) The firm must convert commodity Shari'a-compliant hedging instruments into notional commodities positions and assign them to maturities under rule 6.4.5.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.4.5 Assigning Notional Positions to Maturities

          Binding unilateral promises relating to a particular commodity must be included in the measurement of commodities risk as notional amounts in terms of the standard unit of measurement multiplied by the spot price of the commodity.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.4.6 Capital Charges — Simplified Approach

          (1) The capital charge for commodities risk of an Islamic banking business firm is the sum of:
          (a) 15% on the firm's overall net position, long or short, in each commodity; and
          (b) 3% on the firm's gross position in each commodity.
          (2) Gross position, of a firm in a commodity, is the sum of the absolute values of all short positions and all long positions of the firm, regardless of maturity.
          (3) The firm must use the current spot price to calculate its gross position in commodity Shari'a-compliant hedging instruments.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.4.B IBANK Division 6.4.B Inventory Risk

        • IBANK 6.4.7 Relation to Market Risk

          In measuring its market risk, an Islamic banking business firm must include the risk of holding assets in inventory with a view to reselling them under a murabahah contract or for leasing them under an ijarah contract (inventory risk).

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.4.8 Measuring Inventory Risk

          (1) An Islamic banking business firm must use the simplified approach to measure inventory risk.
          (2) The capital charge for inventory risk of an Islamic banking business firm is 15% of the value of the assets held by the firm in inventory with a view to resale or lease.

          Note For capital charges for inventory risk that may arise for work-in-process under istisna contracts, see rule 6.7.5 and rule 6.7.6.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Part 6.5 IBANK Part 6.5 Equity Position Risk

      • IBANK 6.5.1 IBANK 6.5.1 Relation to market risk

        (1) In measuring its market risk, an Islamic banking business firm must include the risk of holding or taking positions in equities (equity position risk).

        Note For the treatment of options with equities as the underlying, see rule 6.3.8(1). Under that rule, this Part on equity position risk applies to the option, but the capital charge must be based on the delta-weighted positions included in the measurement of specific and general risks.
        (2) If equities are to be received or delivered under a binding unilateral promise, the firm must report any foreign currency or profit rate exposure from the other leg of the contract in accordance with Part 6.2 or Part 6.6, as the case requires.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.5.1 Guidance

          If an Islamic banking business firm is exposed to profit rate risk on equity positions, the firm must include the relevant profit rate positions in the calculation of profit rate risk in the trading book — see rule 6.6.2(4).

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.5.2 Measuring Equity Position Risk

        (1) The measurement of equity position risk in the trading book applies to short and long positions in all instruments that exhibit market behaviour similar to equities.

        Examples of instruments with equity-like behaviour
        •   common shares (whether voting or non-voting)
        •   investments in Islamic collective investment schemes
        •   convertible securities and commitments to buy or sell equity securities
        •   convertible sukuk that trade like equities.
        (2) An Islamic banking business firm may report short and long positions in instruments relating to the same issuer on a net basis.
        (3) The firm must calculate the long or short position in the equity market on a market-by-market basis. That is, the firm must make a separate capital calculation for each exchange in which it holds equities (whether or not a recognised exchange).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.5.3 What to Include in Equity Position Risk

        (1) In calculating the capital charge for equity position risk, an Islamic banking business firm must include equity Shari'a-compliant hedging instruments and off-balance-sheet positions that are affected by changes in equity prices.
        (2) To calculate the charges for equity position risk for equity Shari'a-compliant hedging instruments and other off-balance-sheet positions, the firm must convert positions into notional equity positions, so that:
        (a) equity Shari'a-compliant hedging instruments and off-balance-sheet positions relating to individual equities are reported at current market prices;
        (b) equity Shari'a-compliant hedging instruments and off-balance-sheet positions relating to stock indices are reported as the mark-to-market value of the notional underlying equity portfolio; and
        (c) equity swaps are treated as 2 notional positions.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.5.4 Charges for Specific and General Risks

        (1) The capital charge for equity position risk consists of 2 separately calculated charges:
        (a) a charge for the specific risk of holding a long or short position in an individual equity; and
        (b) a charge for the general risk of holding a long or short position in the market as a whole.
        (2) The capital charge for specific risk is 8% on the gross position of an Islamic banking business firm in equities listed on a recognised exchange and 12% on the gross position of the firm in other equities. Gross position, of a firm in an equity market, is the sum of the absolute values of all short equity positions and all long equity positions of the firm.
        (3) The capital charge for general risk is 8% on the net position of an Islamic banking business firm. Net position, of a firm in an equity market, is the difference between long equity positions and short equity positions of the firm.
        (4) Equity position is the net of short and long exposures to an individual company. It is measured on the gross position across the company (rather than individual transactions).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.5.5 Offsetting Positions

        (1) If an Islamic banking business firm takes a position in depository receipts against an opposite position in the underlying equity (whether or not listed in the same country where the receipts were issued), it may offset the positions only if any costs on conversion are taken into account in full.
        (2) The firm may offset matched positions in an identical equity or stock index in each market, resulting in a single net long or short position to which the specific and general risk capital charges are to be applied. For this purpose, a future in an equity may be offset against an opposite physical position in the same equity.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.5.6 IBANK 6.5.6 Charges for Index Contracts

        (1) For an index contract on an index that an Islamic banking business firm considers diversified, the firm must apply a general risk capital charge of 8%, and a specific risk capital charge of 2%, to the net long or short position in the contract.
        (2) For any other index contract, the firm must apply a general risk capital charge of 8%, and a specific risk capital charge of 4%, to the net long or short position in the contract.
        (3) If required to do so by the Regulatory Authority, the firm must demonstrate why the firm considers an index to be a diversified index.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.5.6 Guidance

          An Islamic banking business firm should test diversification against the following criteria used by the European Banking Authority:

          •   The index must have a minimum number of equities. There must be an absolute threshold below which the index cannot be considered sufficiently diversified to ignore the specific risk completely.
          •   None of the equities must significantly influence the volatility of the index. Equities must not represent more than a certain percentage of the total index value.
          •   The index must have equities diversified from a geographical perspective.
          •   The index must represent equities that are diversified from an economic perspective. Different 'industries' must be represented in the index.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Part 6.6 IBANK Part 6.6 Profit Rate Risk in the Trading Book

      • IBANK Division 6.6.A IBANK Division 6.6.A General

        • IBANK 6.6.1 Relation to Market Risk

          In measuring its market risk, an Islamic banking business firm must include the risk of holding or taking positions in sukuk and other Shari'a-compliant debt securities and profit-rate-related instruments that are held in the trading book (profit rate risk in the trading book).

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.6.2 What to Include in Profit Rate Risk

          (1) The measurement of profit rate risk in the trading book applies to all fixed-rate and floating-rate debt securities and other profit-rate-related instruments that exhibit market behaviour similar to debt securities.

          Examples
          •   fixed-rate and floating-rate sukuk
          •   non-convertible preference shares
          •   convertible sukuk that trade like debt securities.
          (2) A debt security that is the subj ect of a repurchase or securities lending agreement is taken to be owned by the lender of the security.
          (3) In calculating the capital charge for profit rate risk in the trading book, an Islamic banking business firm must include profit rate exposures arising from binding unilateral promises in foreign exchange transactions and forward sales and purchases of commodities and equities.
          (4) The firm must also include any profit rate exposures arising from foreign exchange, commodity and equity positions.

          Note For profit rate exposures arising from binding unilateral promises, transactions or exposures in:
          •   foreign currencies, see rule 6.2.1
          •   commodities, see rule 6.4.1
          •   equities, see rule 6.5.1.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.6.3 Capital Charge — Profit Rate Risk

          The capital charge for profit rate risk in the trading book consists of 2 separately calculated charges:

          (a) a charge for the specific risk of holding a long or short position in an individual instrument; and
          (b) a charge for the general risk of holding a long or short position in the market as a whole.

          Note 1 The capital charge for general risk is for the risk of loss arising from changes in market profit rates.

          Note 2 To determine the capital charge for Shari'a-compliant hedging instrument, see rule 6.6.12.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.6.B IBANK Division 6.6.B Specific Risk

        • IBANK 6.6.4 Calculating specific Risk Capital Charge

          (1) The capital charge for specific risk arising from an on-balance-sheet or off-balance-sheet profit-rate position held in an Islamic banking business firm's trading book is calculated by multiplying the market value of the debt security by the applicable charge set out in column 5 of table 6.6.4 for the category and residual maturity of the instrument.
          (2) The firm can only offset matched long and short positions (including positions in Shari'a-compliant hedging instruments) in identical instruments with exactly the same issuer, profit rate, currency and maturity.

          Table 6.6.4 Specific risk capital charges

          column 1
          item
          column 2
          category
          column 3
          external credit rating
          column 4
          residual maturity
          column 5
          specific risk capital charge %
          1 government AAA to AA-   0.00
          A+ to BBB- 6 months or less

          more than 6 months and up to and including 24 months

          more than 24 months
          0.25

          1.00

          1.60
          BB+ to B- or unrated   8.00
          Below B-   12.00
          2 qualifying   6 months or less

          more than 6 months and up to and including 24 months

          more than 24 months
          0.25

          1.00

          1.60
          3 other BB+ to BB- or unrated

          Below BB-
            8.00

          12.00
          (3) In column 2 of table 6.6.4:

          government, as a category, includes all forms of government paper such as bonds, treasury bills and other short-term instruments.

          Note Financial instruments issued by the State of Qatar (whether denominated in Qatari riyals or not), or by other member states of the GCC, are risk-weighted at zero per cent.

          qualifying, as a category, includes:
          (a) securities issued by public sector enterprises and multilateral development banks;

          Note For a list of multilateral development banks that qualify for 0% risk weight, and examples of other multilateral development banks that do not, see the note following table 4.4.7A.
          (b) instruments rated investment grade by at least 2 ECRAs;
          (c) instruments rated investment grade by 1 ECRA and 1 other credit rating agency that is not an ECRA; and
          (d) unrated instruments, but only if:
          (i) the firm has no reason to suspect that the particular instrument would have a rating less than investment grade if it were rated; and
          (ii) the issuer of the instrument is rated investment grade and is regulated in its home jurisdiction in a way comparable to deposit-takers in the QFC.

          Guidance

          In deciding whether an issuer is regulated in a comparable way, the firm must look, in particular, at the home jurisdiction's risk-based capital requirements and consolidated supervision.

          other, as a category, includes:
          (a) instruments issued or fully guaranteed by the central government or central bank of a state that is a member of the OECD;
          (b) instruments fully collateralised by instruments described in paragraph (a); and
          (c) instruments issued or fully guaranteed by the central government or central bank of a state that is not a member of the OECD, but only if:
          (i) the instruments have a residual maturity of 1 year or less;
          (ii) the instruments are denominated in the local currency of the issuer; and
          (iii) the firm's holdings in such instruments are funded by liabilities in the same currency.
          (4) In column 3 of table 6.6.4, external credit rating means a long-term rating issued by an ECRA for the purpose of risk-weighting claims on rated counterparties and exposures.
          Amended from QFCRA RM/2018-2 (as from 1st May 2018).

        • IBANK 6.6.5 Instruments that have no Specific Risk Capital Charge

          (1) Profit rate swaps, cross-currency swaps and binding unilateral promises in foreign exchange transactions are exempt from specific risk capital charges. However, a specific risk capital charge must be calculated if the underlying is a debt security or an index representing a basket of debt securities.
          (2) Forward contracts and binding unilateral promises (other than those in foreign exchange transactions) are exempt from specific risk capital charges if:
          (a) the Islamic banking business firm has a right to substitute cash settlement for physical delivery under the contract; and
          (b) the price on settlement is calculated with reference to a general market price indicator.
          (3) A contract or promise that is exempt under subrule (2) must not be offset against specific securities (including those securities that make up the market index).
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.6.C IBANK Division 6.6.C General Risk

        • IBANK 6.6.6 Measuring General Risk

          (1) General risk is measured using the maturity method. In that method, positions are allocated to a maturity ladder before the capital charge is calculated.
          (2) The firm must add the absolute values of the individual net positions within each time band, whether long or short. The sum of the absolute values is the firm's gross position.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.6.7 Maturity Method

          (1) In the maturity method, long or short positions in debt securities, Shari'a-compliant hedging instruments and other sources of profit rate exposures are allocated to the time bands in table 6.6.8A (and then to the zones in table 6.6.8B) based on residual maturity and profit rate.
          (2) An Islamic banking business firm must allocate:
          (a) positions in fixed-rate instruments according to their residual term to maturity; and
          (b) positions in floating-rate instruments according to the residual term to the next re-pricing date.
          (3) The firm may offset:
          (a) long and short positions (whether actual or notional) in identical instruments with exactly the same issuer, profit rate, currency and maturity; and
          (b) matched swaps and binding unilateral promises that satisfy the criteria in rule 6.6.13.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.6.8 Steps in Calculating General Risk Capital Charge

          The steps to calculate the general risk capital charge are:

          Step 1

          Weight the positions in each time band by the risk factor corresponding to those positions in table 6.6.8A.

          Table 6.6.8A Time Bands and risk factors

          column 1
          item
          column 2
          time band
          column 3
          risk factor %
          column 4
          assumed changes in yield %
          1 1 month or less 0.00 1.00
          2 more than 1 and up to 3 months 0.20 1.00
          3 more than 3 and up to 6 months 0.40 1.00
          4 more than 6 and up to 12 months 0.70 1.00
          5 more than 1 and up to 2 years 1.25 0.90
          6 more than 2 and up to 3 years 1.75 0.80
          7 more than 3 and up to 4 years 2.25 0.75
          8 more than 4 and up to 5 years 2.75 0.75
          9 more than 5 and up to 7 years 3.25 0.70
          10 more than 7 and up to 10 years 3.75 0.65
          11 more than 10 and up to 15 years 4.50 0.60
          12 more than 15 years and up to 20 years 5.25 0.60
          13 more than 20 years 6.00 0.60

          Step 2

          Offset the weighted long and short positions within each time band.

          Example

          If the sum of the weighted long positions in a time band is QR100 million and the sum of the weighted short positions in the band is QR90 million, you offset the positions to come up with a matched position of QR90 million and unmatched position of QR10 million.

          Step 3

          For each time band, apply a 10% capital charge (vertical disallowance) on the matched position calculated in step 2.

          Example

          Continuing on from the example in step 2, apply the 10% on the QR90 million matched position to come up with a QR9 million vertical disallowance for the time band.

          Step 4

          For the unmatched positions calculated in step 2, carry out 2 further rounds of offsetting using the zones (made up of time bands) in table 6.6.8B and apply the appropriate capital charge, as follows:

          (a) first between the remaining unmatched positions within each of 3 zones and subject to a charge (expressed as a percentage) as follows:
          (i) matched weighted positions within zone 1 x 40%;
          (ii) matched weighted positions within zone 2 x 30%;
          (iii) matched weighted positions within zone 3 x 30%;
          (b) subsequently between the remaining unmatched positions across the 3 different zones (in the order set out below) and subject to a capital charge as follows:
          (i) matched weighted positions between zones 1 and 2 x 40%;
          (ii) matched weighted positions between zones 2 and 3 x 40%;
          (iii) matched weighted positions between zones 1 and 3 x 100%.

          The absolute value of the net amount remaining is the net position.

          Table 6.6.8B Zones for profit rate

          column 1
          item
          column 2
          one
          column 3
          time bands
          1 zone 1 0– 1 month
          1– 3 months 3 – 6 months 6 – 12 months
          2 zone 2 1– 2 years
          2– 3 years
          3– 4 years
          3 zone 3 4– 5 years
          5– 7 years
          7 – 10 years
          10 – 15 years
          15 – 20 years
          more than 20 years

          Step 5

          Calculate the horizontal allowance by adding the charges from paragraphs (a) and (b) of step 4.

          Step 6

          Calculate the general risk capital charge as the sum of:

          (a) the net position calculated from steps 1 to 4;
          (b) the vertical disallowance from step 3;
          (c) the horizontal disallowance from steps 4 and 5; and
          (d) the net charge for positions in options, where appropriate, calculated in accordance with Part 6.3.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.6.9 Positions in Currencies

          (1) An Islamic banking business firm must use separate maturity ladders for positions in each currency, with capital charges calculated separately for each currency and then summed. Positions in different currencies are not to be offset.
          (2) If the firm's position in a currency is less than 5% of the value of the firm's banking book assets, that currency is taken to be a residual currency and the firm may use a single maturity ladder for all residual currencies (instead of having to use separate maturity ladders for each currency). The firm must enter, into each appropriate time band, the net long or short position for residual currencies.
          (3) The firm must apply, with no further offsets, the risk factor in column 3 of table 6.6.8A to the position in each time band for residual currencies.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.6.10 Binding Unilateral Promises

          (1) An Islamic banking business firm must treat a binding unilateral promise on bank or corporate debt as a long position or a short position in the underlying debt security. A binding unilateral promise that is not on bank or corporate debt must be treated as a long position or a short position in a notional government security.
          (2) If a range of instruments may be delivered to fulfil a contract, the firm may choose the deliverable security to be allocated to the maturity ladder. The firm must, however, take account of any conversion factor specified by the exchange where the instrument must be delivered.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.6.11 Swaps

          (1) An Islamic banking business firm must treat a swap as 2 notional positions in government securities with maturities. Both legs of the swap must be reported at their market values.
          (2) For swaps that pay or receive a fixed or floating profit rate against some other reference price (for example, a stock index), the firm must:
          (a) enter the profit rate component into the appropriate maturity category; and
          (b) include any equity component in the measurement of equity risk.
          (3) Each leg of a cross-currency swap must be reported in the maturity ladder for the currency concerned. The capital charge for any foreign exchange risk arising from the swaps must be calculated in accordance with rules 6.2.2 to 6.2.5.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.6.12 Shari'a-Compliant Hedging Instruments

          (1) In the measurement of profit rate risk in the trading book, an Islamic banking business firm must include profit rate Shari'a-compliant hedging instruments and off-balance-sheet instruments in the trading book if those instruments react to changes in profit rates.
          (2) The firm must convert Shari'a-compliant hedging instruments into positions in the relevant underlying to enable the firm to calculate specific and general risk capital charges. To determine the capital charges, the value of the positions must be the market value of the underlying or notional underlying.
          (3) Positions in Shari'a-compliant hedging instruments are subject to charges for general risk in the same way as cash positions. However, matched positions are exempt from the charges if the positions satisfy the criteria in rule 6.6.13 or 6.6.14.
          (4) Positions in Shari'a-compliant hedging instruments must be allocated to a maturity ladder and treated in accordance with this rule and the maturity method.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.6.13 Criteria for Matching Shari'a-Compliant Hedging Instrument Positions

          (1) An Islamic banking business firm may offset a matched position in Shari'a-compliant hedging instruments if the positions relate to the same underlying instruments, have the same nominal value and are denominated in the same currency.
          (2) For swaps and binding unilateral promises:
          (a) the reference rate (for floating-rate positions) must be identical and the profit rate must differ by no more than 15 basis points; and
          (b) the next profit-fixing date (or, for fixed-profit-rate positions or binding unilateral promises, the residual maturity) must comply with the following requirements:
          (i) if either instrument has a profit-fixing date or residual maturity up to and including 1 month in the future, the dates or residual maturities must be the same for both instruments;
          (ii) if either instrument has a profit-fixing date or residual maturity more than 1 month, but no more than 1 year, in the future, the dates or residual maturities must be within 7 days of each other;
          (iii) if either instrument has a profit-fixing date or residual maturity more than 1 year in the future, the dates or residual maturities must be within 30 days of each other.

          Note 1 For paragraph (a), the separate legs of different swaps may be 'matched' subject to these same conditions.

          Note 2 For paragraph (b), spot or cash positions in the same currency may be offset subject to these same conditions.
          (3) An Islamic banking business firm that writes options may offset the delta-equivalent values of options (including the delta-equivalent value of legs arising out of the treatment of caps and floors in accordance with rule 6.3.6).
          (4) However, for offsetting between a matched position in a binding unilateral promise and its underlying, rule 6.6.14 applies.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.6.14 Criteria for Offsetting Shari'a-Compliant Hedging Instrument Positions

          (1) An Islamic banking business firm may offset long and short positions (whether actual or notional) in identical instruments with exactly the same issuer, profit rate, currency and maturity.
          (2) The firm may offset a matched position in a binding unilateral promise and its corresponding underlying. The net position must be reported.
          (3) The firm may offset positions in a binding unilateral promise with a range of deliverable instruments and the corresponding underlying only if:
          (a) there is a readily identifiable underlying security; and
          (b) the price of that security and the price of the binding unilateral promise move in close alignment.
          (4) The firm must treat each leg of a cross-currency swap or binding unilateral promise in foreign exchange transaction as a notional position in the relevant instrument, and must include the position in the calculation for each currency.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Part 6.7 IBANK Part 6.7 Market Risk Capital Charges for Islamic Financial Contracts

      • IBANK Division 6.7.A IBANK Division 6.7.A General

        • IBANK 6.7.1 Introduction

          This Part describes and sets out the market risk capital charges applicable to the main kinds of Islamic financial contracts.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.7.2 Capital Charges for Hybrid Contracts

          If an Islamic banking product or financial instrument is structured using a combination of Islamic financial contracts, and it is not clear from this Part how to calculate the capital charge for the product or instrument, the firm must not use a capital charge unless the charge has been approved by the Regulatory Authority.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.7.B IBANK Division 6.7.B Sale-Based Contracts

        • IBANK 6.7.3 Treatment of Murabahah and Related Contracts

          (1) An Islamic banking business firm is exposed to market risk under a murabahah contract when the asset is available for sale and on firm's balance sheet.
          (2) The capital charge for a murabahah contract is 15% on the position. There is no capital charge for a binding MPO contract or a CMT.

          Note In the case of a CMT where the firm holds on to the commodity for a longer period than normal (for example, following the customer's refusal to honour its commitment to buy) the commodity is subject to a capital charge of 15%.
          (3) Bai bithaman ajil and musawamah contracts are treated in the same way as murabahah contracts.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.7.4 Treatment of Salam and Related Contracts

          Under a salam contract, an Islamic banking business firm is exposed to market risk after the firm has paid the purchase price to the seller and before the purchased commodity is sold and delivered to a buyer.

          Table 6.7.4A Market risk capital charge for salam without parallel salam

          stage of contract capital charge
          firm has paid purchase price to salam customer (seller) 15% on the long position of salam exposures
          firm has received purchased commodity but has not sold and delivered the commodity to a buyer

          Table 6.7.4B Market risk capital charge for salam with parallel salam

          stage of contract capital charge
          firm has paid purchase price to salam customer (seller) 15% on the net position (that is, after netting of salam exposures against parallel salam exposures)

          plus

          3% on the gross position (that is, the sum of the salam exposures and parallel salam exposures)
          firm has received purchased commodity but has not sold and delivered the commodity to a buyer
          Note The parallel salam does not extinguish the requirement for capital from the first salam contract.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.7.5 Treatment of Istisna without Parallel Istisna

          (1) If an Islamic banking business firm is the seller under an istisna without parallel istisna contract, the firm is exposed to market risk when there is unbilled work-in-process inventory. The capital charge for the contract is 1.6% of the firm's unbilled work-in-process inventory.
          (2) If an Islamic banking business firm is the buyer under an istisna without parallel istisna contract, the firm is exposed to market risk as it makes progress payments to the supplier. The capital charge for the contract is 15% of the work-in-process inventory.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.7.6 Treatment of Istisna with Parallel Istisna

          (1) There is no capital charge for an istisna with parallel istisna contract if there is no provision in the parallel istisna contract that allows the seller to increase or vary the selling price. Also, there is no capital charge if there is a written undertaking given to the firm that the contractor's performance (including work-in-process) is the responsibility of the ultimate counterparty.
          (2) However, there is a capital charge of 1.6% of the firm's unbilled work-in-process inventory if:
          (a) there is a provision in the parallel istisna contract that allows the seller to increase or vary the selling price; or
          (b) there is no written undertaking that the contractor's performance is the responsibility of the ultimate counterparty.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.7.C IBANK Division 6.7.C Lease-Based Contracts

        • IBANK 6.7.7 Treatment of Ijarah and Related Contracts

          There is no market risk capital charge for ijarah contracts, but ijarah contracts are subject to the credit risk capital requirements under rule 4.5.6.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.7.D IBANK Division 6.7.D Equity-Based Contracts

        • IBANK 6.7.8 Treatment of Diminishing Musharakah

          (1) The capital charge for a diminishing musharakah contract depends on the category of the enterprise or asset to which the contract relates.
          (2) If the contract is in relation to a private commercial enterprise to undertake trading activities in foreign exchange, shares or commodities, the capital charge depends on the underlying asset as set out in Chapter 6.
          (3) If the contract is in relation to a joint ownership of real estate or movable assets through musharakah with murabahah subcontract, the capital charge is 15% (that is, the charge for the murabahah subcontract, as set out in rule 6.7.3).
          (4) There is no capital charge if the contract is in relation to a joint ownership of real estate or movable assets through musharakah with ijarah subcontract, because there is no charge for the ijarah subcontract under rule 6.7.7.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 6.7.9 Treatment of Mudarabah

          (1) The capital charge for a mudarabah contract depends on the category of the enterprise or asset to which the contract relates.
          (2) If the contract is in relation to a private commercial enterprise to undertake trading activities in foreign exchange, shares or commodities, the capital charge depends on the underlying asset as set out in Chapter 6.
          (3) If the contract is in relation to a placement in the interbank market, there is no capital charge except if the funds are invested in foreign exchange. The capital charge for a mudarabah contract where the funds are invested in foreign exchange is that calculated in accordance with Part 6.2 (foreign exchange risk).
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.7.E IBANK Division 6.7.E Loan-Based Contracts

        • IBANK 6.7.10 Treatment of Qard

          There is no capital charge for a qard contract except if the loan is provided in a foreign currency or in the form of a commodity. For qard-based financing in a foreign currency or commodity, the capital charge is that calculated in accordance with Part 6.2 (foreign exchange risk) or Part 6.4 (commodities risk), as the case requires.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 6.7.F IBANK Division 6.7.F Service-Based Contracts

        • IBANK 6.7.11 Treatment of Wakalah

          (1) If a wakalah contract is in relation to a private commercial enterprise to undertake trading activities in foreign exchange, shares or commodities, the capital charge depends on the underlying asset as set out in Chapter 6.
          (2) If the contract is in relation to a placement in the interbank market, there is no capital charge except if the funds are invested in foreign exchange. The capital charge for a wakalah contract where the funds are invested in foreign exchange is that calculated in accordance with Part 6.2 (foreign exchange risk).
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).