• 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).