• 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).