• IBANK Part 10.4 IBANK Part 10.4 Capital requirements where firm is originator or issuer

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

    • IBANK 10.4.1 Retained securitisation exposures

      (1) An Islamic banking business firm that acts as originator of a sukuk issuance may, despite having transferred the underlying assets, continue to be exposed (through retained securitisation exposures) in relation to the securitisation. The firm must hold regulatory capital against all of its retained securitisation exposures.
      (2) The sources of retained securitisation exposures include:
      (a) investments in the securitisation (including the investment required under subrule (3));
      (b) credit enhancements provided by the firm; and
      (c) liquidity facilities provided by the firm.
      A repurchased securitisation exposure must be treated as a retained securitisation exposure.

      Note 1 For paragraph (a), the exposure arising from investments by an Islamic banking business firm in a securitisation originated by the firm is an on-balance sheet exposure.

      Note 2 For paragraphs (b) and (c), the exposures arising from the provision of credit enhancements and liquidity facilities by an Islamic banking business firm in relation to a securitisation originated by the firm are off-balance sheet exposures.
      (3) An Islamic banking business firm that acts as originator of a sukuk issuance must retain 5% of the total issuance.
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.4.2 Treatment of on-balance sheet retained securitisation exposures

      (1) The risk-weighted asset amount of an on-balance sheet retained securitisation exposure is calculated by multiplying the exposure by the applicable risk-weight in table 10.4.2.

      Table 10.4.2 Risk-weights based on ECRA rating

      Note In the table, the ratings are given according to Standard & Poor's conventions. If a claim or asset is not rated by Standard & Poor's, its ratings must be mapped to the equivalent Standard & Poor's rating.

      long-term rating securitisation exposure % re-securitisation exposure %
      AAA to AA- 20 40
      A+ to A- 50 100
      BBB+ to BBB- 100 225
      BB+ to BB- 350 650
      B+ and below or unrated As directed by the Regulatory Authority, apply 1,250% risk-weight or deduct the amount of the exposure from the firm's regulatory capital (see rule 10.4.2 (2))


      short-term rating securitisation exposure % re-securitisation exposure %
      A-1 20 40
      A-2 50 100
      A-3 100 225
      Below A-3 As directed by the Regulatory Authority, apply 1,250% risk-weight or deduct the amount of the exposure from the firm's regulatory capital (see rule 10.4.2 (2))
      (2) If an exposure is to be deducted from the firm's regulatory capital, the amount of the deduction may be calculated net of any specific provision taken against the exposure.
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.4.3 Treatment of off-balance sheet retained securitisation exposures

      For off-balance-sheet retained securitisation exposures, an Islamic banking business firm must apply the relevant credit conversion factor, then must multiply the resulting credit equivalent amount by the applicable risk-weight in table 10.4.2.

      Note For the treatment of off-balance sheet exposures arising from:

      (a) a credit enhancement provided by the firm, see rule 10.4.4;
      (b) a credit enhancement provided by sukuk structure, see rule 10.4.5; and
      (c) a liquidity facility provided by the firm, see rule 10.4.6.
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.4.4 Treatment of credit enhancement provided by firm that is also originator or issuer

      If an Islamic banking business firm that is the originator or issuer of a sukuk issuance also provides credit enhancement in relation to the sukuk, the risk-weight of the exposure from the enhancement must be calculated as if the firm were an investor in the sukuk securitisation, so that:

      (a) if the enhancement is provided in relation to an asset-backed sukuk issuance (that is, an issuance where there is transfer of both legal and beneficial ownership over the assets) — the firm must treat the enhancement provided based on the risk of the underlying assets; or
      (b) if the enhancement is provided in relation to an asset-based sukuk issuance (that is, an issuance where there is transfer of only beneficial ownership over the assets) — the firm must treat the enhancement provided based on the ECRA rating of the firm as originator.
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.4.5 Treatment of credit enhancement provided by structure

      (1) An exposure in a credit enhancement structure must be risk-weighted as set out in table 10.4.5.

      Table 10.4.5 Risk-weights for exposures arising from structure

      Note In the table, the ratings are given according to Standard & Poor's conventions. If a claim or asset is not rated by Standard & Poor's, its ratings must be mapped to the equivalent Standard & Poor's rating.

      AAA to AA- A+ to A- BBB+ to BBB- BB+ to BB- B+ and below or unrated
      20 50 100 350 As directed by the Regulatory Authority, apply 1,250% risk-weight or deduct the amount of the exposure from the firm's regulatory capital (see rule 10.4.5 (2))
      (2) If an exposure is to be deducted from the firm's regulatory capital, the amount of the deduction may be calculated net of any specific provision taken against the exposure.
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.4.6 Treatment of liquidity facility provided by firm that is also originator or issuer

      (1) If an Islamic banking business firm that is the originator or issuer of a sukuk issuance also provides a liquidity facility in relation to the sukuk, the risk-weight of the exposure from the facility (other than an eligible servicer cash advance facility) must be calculated by:
      (a) applying:
      (i) a 50% credit conversion factor (regardless of the maturity of the liquidity facility) if the facility provided is an eligible liquidity facility; or
      (ii) a 100% credit conversion factor if the facility provided is not an eligible liquidity facility; and
      (b) multiplying the resulting credit equivalent amount by the applicable risk-weight in table 10.4.2, depending on the credit rating of the firm (or by 100% if the firm is unrated).
      However, if an ECRA rating of the facility is itself used for risk-weighting the facility, a 100% credit conversion factor must be applied.

      Note For eligible liquidity facility, see rule 10.4.6 (4).
      (2) For an eligible servicer cash advance facility, a zero percent risk-weight must be applied. Eligible servicer cash advance facility is a liquidity facility under which the servicer grants, to the SPE, an advance (through an interest-free loan or qard) to ensure timely payment to sukuk holders.

      Note Shari'a requires that a servicer cash advance facility must remain separate from the sukuk undertaking and that the separation must be properly documented. For servicer, see note 1 (g) and note 3 under rule 10.2.2.
      (3) Liquidity facility, for sukuk, is a commitment from the facility provider to provide liquid funds if:
      (a) funds are needed to meet contractual payments to sukuk holders; and
      (b) there is a delay between the date of collection of the related cash flows and the date on which the payment to the sukuk holders is due.
      Example

      Timing mismatches between cash collections from the underlying assets (such as ijarah rentals) and the scheduled payments to the sukuk holders in certain sukuk structures may require liquidity facilities to be built into the structures.
      (4) To be an eligible liquidity facility:
      (a) the commitment to provide liquid funds must be in writing and must clearly state the circumstances under which the facility may be availed of and the limits for any draw down;
      (b) drawdowns must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements;
      (c) the facility must not cover any losses incurred in the underlying pool of exposures before a drawdown;
      (d) the facility must not be structured in such a way that drawdowns are certain;
      (e) the facility must be subject to an asset quality test that precludes it from being availed of to cover credit risk exposures that are past due for more than 90 days;
      (f) if the exposures that the facility is required to fund are ECRA-rated securities, the facility can only be used to fund securities that are rated, by an ECRA, investment grade at the time of funding; and
      (g) the facility cannot be availed of after all applicable credit enhancements (whether transaction-specific or programme-wide enhancements), from which the liquidity would benefit, have been exhausted.
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).