• IBANK Part 10.2 IBANK Part 10.2 Securitisation and re-securitisation

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

    • IBANK Division 10.2.A IBANK Division 10.2.A General

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

      • IBANK 10.2.1 Securitisation

        (1) Securitisation, in relation to an Islamic banking business firm, is the process of creating and issuing sukuk or tranches of sukuk. In securitisation:
        (a) payments of the principal and profits are derived from the cash flows generated by the securitised assets (that is, by the assets underlying the sukuk); and
        (b) legal or beneficial ownership to the underlying assets is transferred to the investors in the form of sukuk.
        A reference to securitisation includes re-securitisation.
        (2) The structure of a securitisation must be Shari'a-compliant.

        Note Under rule 10.1.2 (3), the assets that are the subject of sukuk (and the specific project or investment activity where the assets are) must also be Shari'a-compliant.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.2 Parties to securitisation

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

        Note 1 Depending on the securitisation structure, an Islamic banking business firm may be (or act in the capacity of) originator, issuer, investor or any 1 or more of the following:
        (a) a manager of the sukuk issuance;
        (b) a sponsor of the sukuk issuance;
        (c) an adviser to the sukuk issuance;
        (d) an entity to place the securities with investors;
        (e) a provider of credit enhancement;
        (f) a provider of a liquidity facility;
        (g) a servicer to carry out certain activities usually carried out by the manager of the sukuk issuance in relation to the underlying assets.
        Note 2 An Islamic banking business firm may act as sponsor of a sukuk issuance or similar programme involving assets of a customer. As sponsor, the firm earns fees to manage or advise on the programme, place the securities with investors, provide credit enhancement or provide a liquidity facility.

        Note 3 Depending on the securitisation structure, a servicer (instead of the manager of the sukuk or issuer) may carry out the following activities:
        (a) handling related taxes;
        (b) managing escrow accounts;
        (c) remitting payments;
        (d) obtaining takaful;
        (e) maintaining the underlying assets on behalf of the lessor (sukuk holders) in ijarah or IMB sukuk.
        Note 4 The originator of a sukuk issuance may act as servicer of the underlying assets.
        (2) The contractual terms of the sukuk issuance determine the rights of the sukuk holders to the securitised assets.

        Note For the rights of sukuk-holders, see rule 10.2.10 (Effects of true sale on sukuk holders).
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.3 IBANK 10.2.3 Firm acting as originator

        An Islamic banking business firm that acts as originator of a sukuk issuance must transfer (through an SPE) the ownership of assets held by it to sukuk holders.

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

        • IBANK 10.2.3 Guidance

          1 As an originator, an Islamic banking business firm may obtain either or both of the following benefits:
          (a) increased liquidity, since a relatively illiquid asset (such as an asset held as lessor in an ijarah or IMB contract) is converted into cash paid by the investors;
          (b) reduced capital requirements, insofar as the securitisation permits the firm to exclude, from the calculation of its risk-weighted assets, exposures relating to the underlying assets.
          2 To obtain the benefit of reduced capital requirements, the firm must ensure that the securitisation structure enables it to derecognise, from its balance sheet, the underlying assets. For the criteria for derecognition, see rule 10.2.26.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.4 IBANK 10.2.4 Firm acting as issuer

        An Islamic banking business firm may act as issuer of sukuk.

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

        • IBANK 10.2.4 Guidance

          1 An Islamic banking business firm may act as issuer of asset-backed sukuk by packaging assets into a pool and transferring legal and beneficial ownership of the assets to sukuk holders by true sale under rule 10.2.8.
          2 An Islamic banking business firm may act as issuer of asset-based sukuk by packaging assets into a pool and transferring only beneficial ownership of the assets to sukuk holders because there is some obstacle to the transfer of legal ownership. Such an obstacle would, for example, exist if the assets were purchased by the firm from the central government of a state and the transfer of full ownership would require special legislation.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.5 IBANK 10.2.5 Collateral security structure

        (1) A collateral security structure may be used in some sukuk, such as those based on project financing. The security interest arising from the structure must be perfected (or perfectible) and that interest must be the only claim on the collateral.

        Note In this rule, collateral:
        (a) arises from the structure (for example, the asset or project that is the subject of financing in a joint venture between the SPE and another party); and
        (b) is used to mitigate the underlying exposures of the securitisation.
        (2) The collateral security structure must be supported by a written and reasoned opinion of a qualified legal counsel. The legal opinion must conclude that the security interest is perfected (or perfectible) and that there are no prior or subsequent claims on the collateral.
        (3) The legal opinion must address:
        (a) the nature of the security interest;
        (b) the enforceability of the security interest against third parties;
        (c) perfection requirements (such as notices and registration); and
        (d) the effects of the issuer's bankruptcy on perfection.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.5 Guidance

          The Regulatory Authority expects the legal opinion to consider that, in many jurisdictions:

          •    rahn (mortgage or other pledge of assets) is possessory in nature so as to make perfection a particularly difficult issue
          •    bankruptcy laws, the concept of perfection and the priorities in the distribution of assets are not well developed.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK Division 10.2.B IBANK Division 10.2.B Securitisation process

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

      • IBANK 10.2.6 Sukuk securitisation

        The process of a sukuk securitisation is:

        (a) first, the origination of assets;
        (b) second, the transfer of the assets to an SPE which is created to issue the securities and manage the assets on behalf of the sukuk holders; and
        (c) third, the issuance of the sukuk to investors.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.7 Special purpose entities

        (1) A special purpose entity (or SPE) is a legal entity that is created solely for a particular financial transaction or series of transactions.
        (2) An SPE may take the form of a limited partnership, limited liability company, corporation, trust or collective investment fund. An SPE may also be established under a special law that allows the creation of SPEs.
        (3) Most sukuk securitisations require the creation of an SPE to:
        (a) hold the assets transferred by the originator;
        (b) issue sukuk based on the assets; and
        (c) act as intermediary between the originator and the sukuk holders.

        Guidance
        1 In conventional securitisations, the SPE must not have any other business. In a sukuk securitisation, the SPE can be organised, for example, as a mudarabah, musharakah or wakalah, but the requirement for the SPE to have no other business continues to apply.
        2 By its nature, an SPE is a legal shell with only the specific assets transferred by the originator (that is, the SPE has no other property in which any other party could have an interest). The transferred assets are effectively owned, legally or through a trust, by the sukuk holders.
        (4) An SPE must be bankruptcy-remote from the originator. It must not be consolidated with the originator for tax, accounting or legal purposes.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.8 Criteria for true sale

        (1) For asset-backed sukuk, ownership of the underlying assets must be transferred to the sukuk holders (or to an SPE for their benefit) by a true sale under Shari'a.
        (2) The 4 main criteria for a true sale are:
        (a) the transfer must be such that:
        (i) it cannot be re-characterised by a court or other body as a secured loan; or
        (ii) it cannot be avoided in a bankruptcy or insolvency proceeding involving the originator of the assets;

        Example

        The sale should not be a fraudulent transfer in anticipation of bankruptcy or a preference payment
        (b) the bankruptcy or insolvency of the originator must not affect the assets transferred and the issuer of the sukuk must be able to enforce collection and other rights against the source of the income without any hindrance resulting from the bankruptcy or insolvency of the originator;
        (c) the transfer must be perfectible at the election of the issuer; and
        (d) the sale must be free and clear of all prior overriding liens.
        (3) The transfer of assets must be evidenced by a written contract for their sale to the sukuk holders.

        Note For the covenants and declarations that must be included in the transaction documents, see rule 10.2.27.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.9 Effects of true sale on originator

        For asset-backed sukuk, the effects of a true sale on the originator include:

        (a) derecognition, from the originator's balance sheet, of the assets sold, so that the assets become bankruptcy-remote (and therefore not subject to claw back by a liquidator in the event of the originator's liquidation); and
        (b) the originator ceasing to have any financial liability to the sukuk holders in relation to the assets.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.10 Effects of true sale on sukuk holders

        For asset-backed sukuk, the effects of a true sale on sukuk holders include:

        (a) giving the holders a legally recognised ownership interest over the underlying assets;
        (b) giving the holders realisable security over the underlying assets;
        (c) giving the holders a right to payments of the principal and profits;
        (d) insulating the holders from exposure to any financial problems of the originator;
        (e) exposing the holders (as owners) to losses in the event of impairment of the assets; and
        (f) in case of a default of the sukuk (for example, because ijarah lessees of the assets fail to pay what is due), giving the holders a claim to the assets (but not to the originator).

        Note In contrast to rule 10.2.10 (f), recourse to the originator is possible in some asset-based sukuk (see rule 10.2.14 (2) (b) (iii))
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.11 Prohibition against advanced undertaking to repurchase

        (1) If a sukuk issuance satisfies the criteria for a true sale of the assets, the risks to the sukuk holders of the payments of the principal and profits must depend on the performance of the underlying assets and not on any other mechanism such as a repurchase undertaking.

        Note In a sukuk securitisation, the applicable risks are those of the underlying assets, and these will, in principle, be reflected in any credit rating issued by an ECRA.
        (2) The mudarib (investment manager), sharik (partner) or wakeel (agent) must not undertake in advance to repurchase the underlying assets at maturity for their nominal or par value.
        (3) A repurchase undertaking to cover risks arising from mudarabah sukuk, musharakah sukuk or wakalah sukuk may be built into the structure of the sukuk only if the mudarib, sharik or wakeel undertakes to repurchase the assets at maturity for:
        (a) their net value;
        (b) their market value;
        (c) their fair value; or
        (d) a price to be agreed at the time of repurchase.
        (4) However, the originator (as lessee) of a securitisation of a pool of ijarah assets may undertake to purchase the assets at maturity for their nominal or par value, but only if the originator is not also a mudarib, sharik or wakeel in relation to the securitisation.
        (5) In this rule:

        repurchase undertaking means a unilateral binding promise, made by the originator to the issuer or trustee, to purchase the sukuk assets at a future date or on the occurrence of certain events (such as maturity of the sukuk or exercise of early redemption right by sukuk holders).
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK Division 10.2.C IBANK Division 10.2.C Risk management of securitisation

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

      • IBANK 10.2.12 Role of governing body — securitisation

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

      • IBANK 10.2.13 Policies — Shari'a compliance

        An Islamic banking business firm must establish and implement policies to ensure that the firm's offer documents for sukuk are sufficiently clear and precise to eliminate the risk of gharar or any other activity prohibited by Shari'a.

        Note Under rule 7.2.1 an Islamic banking business firm must establish and implement policies to ensure that its business is conducted in accordance with Shari'a. The policies must include effective and comprehensive procedures so that the firm complies with Shari'a (in general and in relation to the requirements for Islamic financial contracts) and with the fatwas, rulings and guidelines issued by its Shari'a supervisory board.

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

      • IBANK 10.2.14 Risk management of complex sukuk

        (1) For the issuance of complex sukuk structured in the form of convertible sukuk or hybrid sukuk, an Islamic banking business firm must evaluate:
        (a) the risks underlying the issuance;
        (b) the nature of the contracts or structures being combined; and
        (c) any legal risks applicable to the structure.

        Example of legal risk

        risk arising from the interaction between a Shari'a contract and civil law
        (2) Other issues that the firm must evaluate include:
        (a) whether the underlying assets comply with Shari'a;
        (b) the recourse available to holders:
        (i) against the underlying assets;
        (ii) against an obligor such as the issuer or a guarantor; or
        (iii) for asset-based sukuk — against the assets or obligors in subparagraph (i) or (ii), or against the originator (who retained legal title to the assets); and
        (c) valuation and provisioning required (if necessary) for tranches held by the firm.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.15 Relation to internal capital adequacy assessment

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

        (a) credit risk, market risk, liquidity risk and reputation risk for each securitisation exposure;
        (b) potential delinquencies and losses on the exposures;
        (c) risks arising from the provision of credit enhancements and liquidity facilities; and
        (d) risks arising from guarantees provided by monoline insurers and other third parties.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK Division 10.2.D IBANK Division 10.2.D Credit enhancement

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

      • IBANK 10.2.16 Credit enhancement

        (1) Credit enhancement, of sukuk, is the raising of the credit quality of the sukuk above that of the underlying assets. The mechanisms for credit enhancement include:
        (a) over-collateralisation;
        (b) excess spread;
        (c) cash collateral; and
        (d) takaful protection.
        (2) The purpose of credit enhancement is for the sukuk to obtain higher credit rating from ECRAs (and thereby reduce both the credit risk to the sukuk holders and the funding cost of the securitisation for the originator).

        Note For the use of ECRAs, see rules 4.3.7 and 4.3.8 and Division 10.2.E.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.17 Providing credit enhancement

        (1) Credit enhancement in a sukuk structure may be provided:
        (a) internally, through an issuer-provided credit enhancement structure such as an excess spread reserve, over-collateralisation or a cash collateral account; or
        (b) externally, through a third-party guarantee credit enhancement structure such as takaful or a cash collateral account.
        (2) In an issuer-provided credit enhancement, the issuer would provide credit enhancement by assuming part of the credit risk of the underlying assets.
        (3) In a third-party guarantee credit enhancement, a party (the guarantor) other than the issuer assumes (indefinitely or for a fixed period) all or part of the credit risk. The guarantor must not have a right of recourse to the originator.
        (4) Unless the terms of the guarantee provide otherwise, a claim must first be made on the underlying assets before any claim is made against the guarantor.

        Note For the treatment of credit enhancement provided by sukuk structure, see rule 10.4.5.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.18 Credit enhancement — over-collateralisation

        An originator may retain a small equity participation in a pool of securitised assets to provide over-collateralisation.

        Example

        The originator of a securitisation of a pool of ijarah lease assets might securitise 90% of the pool and retain 10% as an equity position (that is, a residual claim). The sukuk holders would be entitled to income based on 90% of the rental income from the pool, and the originator would be entitled to income based on the remaining 10%.

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

      • IBANK 10.2.19 Credit enhancement — excess spread

        (1) Excess spread is the difference between:
        (a) the expected periodic net income from the securitised assets; and
        (b) the periodic amounts payable to the sukuk holders.
        (2) Excess spread may be built into a sukuk structure by the issuer retaining a percentage of the periodic net income if the net income is in excess of the target level of the periodic payments to the sukuk holders. The issuer must keep any amount retained in an excess spread reserve.
        (3) If the net income for a period falls below the level required to meet the target level of the payments to the sukuk holders, the issuer may release an amount from the excess spread reserve to make good, in whole or in part, the shortfall.
        (4) The issuer must not establish an excess spread reserve unless:
        (a) the reserve is disclosed in the transaction documents;
        (b) a summary of the policies for transferring funds to and from the reserve is included in the transaction documents; and
        (c) the firm's governing body has approved the basis for computing the amounts to be transferred to and from the reserve.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.20 Credit enhancement — cash collateral account

        (1) Cash collateral account is a segregated trust account that is funded when a new series of sukuk is issued. The purpose of the account is to cover any shortfall (when the excess spread falls below zero) in the payment of coupons, principal or servicing expenses.
        (2) The account may be funded:
        (a) by the issuer; or
        (b) more commonly, by the originator or another third party through qard.
        (3) The pooling and servicing agreements of the sukuk issuance must state the amount of the cash collateral based on a specified percentage of the sukuk issued.
        (4) The amount in the account may be invested in high-rated sukuk to generate profits.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.21 Credit enhancement — takaful protection

        A third party may provide takaful protection to sukuk holders against losses due to defaults or rating downgrades of sukuk.

        Example of default

        In ijarah sukuk, non-payment of rentals or redemption price by the lessee (originator).

        Note Takaful protection against losses due to defaults or downgrades is permitted, because it is not a credit default swap in any way. The takaful participants have an insurable interest in the form of their credit exposures.

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

    • IBANK Division 10.2.E IBANK Division 10.2.E External ratings

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

      • IBANK 10.2.22 External credit rating agencies

        (1) Depending on the securitisation structure, 1 or more ECRAs may be involved in rating the sukuk securitisation. An Islamic banking business firm must use only ECRAs to risk-weight securitisation exposures.

        Note For the use of ECRAs in general, see rules 4.3.7 and rule 4.3.8.
        (2) Because investors are not concerned with the credit strength of the originator or issuer in a sukuk securitisation, an ECRA that is rating the sukuk must assess the quality of the underlying pool of assets and the robustness of the structure. In assigning a rating, the ECRA must consider:
        (a) the quality of the asset portfolio;
        (b) the solvency of the originator or the issuer;
        (c) the perfection of the legal structure;
        (d) the tax risks;
        (e) the title to the securitised assets;
        (f) the risks of set-off and prepayment;
        (g) the nature and structure of the sukuk.

        Note A change in the rating for a sukuk issue may be due to deterioration in the performance of the collateral, heavy utilisation of credit enhancement or downgrade of a supporting rating (for example, a takaful company that was underwriting takaful on the pool of the assets).
        (3) For asset-based sukuk (where only beneficial ownership of the underlying assets is transferred), the rating will depend on a combined view of:
        (a) the strength of the rating of the originator or issuer; and
        (b) the quality of the asset pool.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.23 IBANK 10.2.23 Ratings must be publicly available

        (1) A credit rating assigned by an ECRA must be publicly available.
        (2) The loss and cash flow analysis for the securitisation, and the sensitivity of the rating to changes in the assumptions on which it was made, must also be publicly available.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.23 Guidance

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

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

      • IBANK 10.2.24 Ratings must be applied consistently

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

        Note Under rule 4.3.8:
        (a) if there are 2 different assessments by ECRAs, the higher risk-weight must be applied; and
        (b) if there are 3 or more different assessments by ECRAs, the assessments corresponding to the 2 lowest risk-weights should be referred to and the higher of those 2 risk-weights must be applied.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.25 Effect of ratings of issuer and issue

        If the issuer of sukuk is rated (but the issue is not), any eligible collateral may be used for credit risk mitigation. If the issue is rated, collateral included as part of the sukuk structure must not be used for credit risk mitigation.

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

    • IBANK Division 10.2.F IBANK Division 10.2.F Risk transference, bankruptcy remoteness and credit risk assessment

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

      • IBANK 10.2.26 Recognition of risk transference (asset derecognition criteria)

        The originator of a sukuk issuance may exclude, from the calculation of its risk-weighted assets, exposures relating to the securitised assets only if:

        (a) the immediate transferee of the underlying assets is an SPE, and the holders of the legal or beneficial interests in the SPE have the right to pledge or exchange such interests without restriction;
        (b) substantially all credit risks (and price risk, if any) associated with the securitised assets have been transferred;
        (c) the originator has no direct or indirect control over the securitised assets;
        (d) the securitised assets are bankruptcy-remote from the originator;
        (e) the securitised assets held by the issuer cannot be consolidated with the assets of the originator or the issuer's parent in case of bankruptcy of any of them;
        (f) a qualified legal counsel (whether external or in-house) has given a written reasoned opinion that paragraphs (c) to (e) are satisfied;
        (g) clean-up calls:
        (i) must be at the discretion of the issuer;
        (ii) must not provide credit enhancement; and
        (iii) may be exercised only when 10% or less of the purchase consideration for the securitised assets remains to be paid; and

        Note A clean-up call is an option that permits the securitisation exposures to be called before all of the underlying exposures or securitisation exposures have been repaid.
        (h) sukuk holders have a claim only on the securitised assets, and have no claim against the originator.

        Note Under rule 10.4.1, an originator that meets the requirements set out in this rule must, however, hold regulatory capital against any exposures that it retains in relation to the securitisation (including exposures arising from the provision of credit enhancements and liquidity facilities).
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.27 Conditions for bankruptcy remoteness

        (1) The conditions for bankruptcy remoteness include those set out in subrules (2) to (5).
        (2) If the issuer becomes bankrupt, the issuer's assets are to be distributed in accordance with the law or a court order (rather than in accordance with the contractual arrangements involving the issuer).
        (3) The transaction documents for the sale of the underlying assets to the sukuk holders must include:
        (a) separateness covenants to ensure:
        (i) bankruptcy remoteness of the issuer's assets; and
        (ii) non-consolidation of the securitised assets held by the issuer with the assets of the originator or the issuer's parent in case of bankruptcy of any of them;
        (b) non-competition declarations under which the investors and the issuer agree that neither will compete against the other in filing for bankruptcy; and
        (c) bankruptcy declarations under which the originator, investors, providers of credit enhancements, providers of liquidity facilities and other parties agree not to initiate involuntary bankruptcy proceedings against the issuer.
        (4) The issuer must declare, in its constitutional documents and in the transaction documents, not to initiate voluntary bankruptcy proceedings.
        (5) The covenants and declarations in this rule must be supported by a written and reasoned opinion of a qualified legal counsel. The legal opinion must conclude that the covenants and declarations are enforceable.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.28 Need for credit risk assessment

        (1) An Islamic banking business firm must carry out credit risk assessment of its securitisation exposures in accordance with this rule. This rule applies to securitisation exposures in the firm's banking book and trading book.
        (2) The firm must, on an ongoing basis, have a clear understanding of the nature and features of each securitisation exposure (including the risk characteristics of the assets underlying the exposure). This requirement applies whether the exposure is on-balance-sheet or off-balance-sheet.
        (3) Because payments of the principal and profits to sukuk holders depend on the performance of the underlying assets, the firm must assess the performance of the sukuk on an ongoing basis.

        Note To properly assess the performance of sukuk, the firm must have on-going and timely access to performance information about the underlying assets. The information should include exposure type, percentage of financing 30, 60 and 90 days past due, default rates, prepayment rates, financings in foreclosure, property type, occupancy, average credit score, progress of underlying project, average financing-to-value ratio, industry diversification and geographic diversification.
        (4) The firm must, at all times, understand the sukuk's structural features that may materially affect the performance of its securitisation exposures (such as credit enhancements, liquidity facilities, triggers, and deal-specific definitions of default).
        (5) While the firm may rely on external credit risk assessments, it must ensure that external assessments do not substitute for the firm's own due diligence and credit risk assessment.

        Note For the use of ECRAs, see rules 4.3.7 and 4.3.8 and Division 10.2.E.
        (6) If the firm fails to comply with this rule in relation to a securitisation exposure, the Regulatory Authority may direct the firm:
        (a) to apply a risk-weight of 1,250% to the exposure; or
        (b) to deduct the amount of the exposure from its regulatory capital.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.2.29 Capital treatment to be based on economic substance

        (1) The capital treatment of a securitisation exposure must be determined on the basis of the economic substance, rather than the legal form, of the securitisation structure. If an Islamic banking business firm is uncertain about whether a transaction is a securitisation, the firm must consult with the Regulatory Authority.
        (2) Despite anything in these rules, the Regulatory Authority may look through the structure to the economic substance of the transaction and:
        (a) vary the capital treatment of a securitisation exposure; or
        (b) reclassify a transaction as a securitisation and impose a capital requirement or limit on the transaction.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).