• 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).