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.

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).