• 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.


      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).