• IFR 5. IFR 5. MANAGING PROFIT SHARING INVESTMENT ACCOUNTS

    • IFR 5.1 IFR 5.1 Application

      • IFR 5.1.1 IFR 5.1.1

        This IFR 5 applies to an Authorised Person which conducts the Regulated Activity of Managing a Profit Sharing Investment Account (PSIA).

        • Guidance

          (i) A PSIA does not constitute a Deposit, owing to the fact that a PSIA is managed in relation to property of any kind, and the risk of loss of capital remains with the client and is limited to the amount contributed to the PSIA by that client. Accordingly, an Authorised Person should take great care to ensure that a PSIA is not represented as a deposit, either directly or indirectly. The Regulator may conclude that the Authorised Person is accepting a deposit instead of Managing a PSIA in certain circumstances, for example, where the Authorised Person attaches to the investment account characteristics or facilities that are generally regarded to be those of a Deposit or current account such as providing:
          (A) an explicit or implicit guarantee to the client against the risk of loss of capital; or
          (B) a cheque book, an ATM card or a debit card.
          (ii) The prudential Category for Islamic Financial Institutions and other Authorised Persons (acting through an Islamic Window) undertaking the Regulated Activity of Managing PSIAs (which may be either a Restricted PSIA or an Unrestricted PSIA) is determined in accordance with PRU Rule 1.3. An Authorised Person which Manages PSIAs (whether as an Islamic Financial Institution or through an Islamic Window) must comply with the requirements in PRU in relation to specific prudential requirements relating to Trading Book and Non-Trading Book activities, including Credit Risk, Market Risk, Liquidity Risk and Group Risk.

    • IFR 5.2 IFR 5.2 Additional disclosure requirements for PSIAs

      • IFR 5.2.1

        An Authorised Person must, prior to Managing a PSIA, provide written notice to the client that the client alone will bear any losses arising from the PSIA, which are limited to the amount of that client's contribution to the PSIA, unless there is negligence, misconduct or breach of contract on the part of the Authorised Person in Managing the PSIA in which case the losses caused by such negligence, misconduct or breach of contract shall be borne by the Authorised Person.

      • Client Agreement

        • IFR 5.2.2

          In addition to matters referred to in COBS 3.3, an Authorised Person must ensure that the following information is included in the Client Agreement relating to a PSIA:

          (a) how and by whom the funds of the client will be managed and invested including details of its policy on diversification of the portfolio;
          (b) the basis for the allocation of profit between the Authorised Person and the client;
          (c) confirmation of the client's investment objectives including details of any restrictions requested by the client, as agreed between the client and the Authorised Person;
          (d) a summary of the policies and procedures for valuation of assets or portfolio;
          (e) a summary of policies and procedures for the transfer of funds to and from the Profit Equalisation Reserve or Investment Risk Reserve accounts, if applicable;
          (f) particulars of the management of the PSIA and of any third party to whom the Authorised Person has or will delegate or outsource the management of the PSIA, including:
          (i) the name of the third party;
          (ii) the regulatory status of the third party; and
          (iii) details of the arrangement.
          (g) details of early withdrawal, redemption or other exit arrangement and any costs to a client as a result thereof;
          (h) details of segregation of the funds of the client from the funds of the Authorised Person and from any claims by the creditors of the Authorised Person;
          (i) details of whether funds from one PSIA will be commingled with the funds of another PSIA; and
          (j) details of any applicable charges and the basis upon which such charges will be calculated including, any deductions of fees that may be made by the Authorised Person from the profits of the PSIA.
          Amended on (3 February, 2020).

      • Periodic Statements

        • IFR 5.2.3

          (a) COBS 5.11 applies to an Authorised Person as if the Authorised Person is an Investment Manager in respect of those clients who are PSIA holders.
          (b) In addition to the requirements of COBS 5.11, an Authorised Person must ensure that a periodic statement provided to a client contains the following information:
          (i) details of the performance of the client's investment;
          (ii) the allocation of profit between the Authorised Person and the client; and
          (iii) where applicable, details of changes to the investment strategies that may affect the client's account or portfolio.
          Amended on (3 February, 2020).

      • Additional matters to be included in the policy and procedures manual

        • IFR 5.2.4 IFR 5.2.4

          Where an Authorised Person Manages a PSIA, its Islamic Financial Business policy and procedures manual must address the following additional matters:

          (a) the basis upon which a PSIA will be deemed restricted (a Restricted PSIA) or unrestricted (an Unrestricted PSIA);
          (b) the basis for allocation of profit or loss to the PSIA;
          (c) the basis for allocation of expenses to the PSIA;
          (d) the manner in which an Authorised Person's own funds, funds of Restricted PSIAs and funds from Unrestricted PSIAs are to be controlled;
          (e) the manner in which the funds of each PSIA holder (whether a Restricted PSIA or Unrestricted PSIA) will be managed;
          (f) the manner in which it will determine priority for investment of the Authorised Person's own funds and the funds of holders of Unrestricted PSIAs;
          (g) how provisions and reserves against equity and assets are to be applied; and
          (h) the manner in which losses incurred as a result of the misconduct, negligence or breach of contract for which the Authorised Person is responsible will be dealt with.

          • Guidance

            For the purposes of IFR 5.2.4, the policy and procedures manual should include procedures to ensure that the Authorised Person manages the accounts of PSIA holders in accordance with their instructions.

    • IFR 5.3 IFR 5.3 Funds of PSIA holders

      • IFR 5.3.1

        Unless clearly expressed in the contract between an Authorised Person and a PSIA holder, the Authorised Person may not use funds provided by a PSIA holder to fund its own corporate activities.

    • IFR 5.4 IFR 5.4 Prudential requirements

      • Application and Interpretation

        • IFR 5.4.1

          (a) This IFR 5 applies when calculating Credit Risk or Market Risk in respect of Islamic Contracts invested in or held by an Authorised Person Managing a PSIA, which is an Unrestricted PSIA.
          (b) In IFR 5.4.1(a), the Islamic Contracts referred to are contracts which are funded by amounts invested in the relevant Unrestricted PSIA.
          (c) In this IFR 5, the term "investing in or holding Islamic Contracts" means investing in or holding as principal.

      • Initial and ongoing capital requirements

        • Guidance

          (i) An Authorised Person undertaking Islamic Financial Business is required to meet initial and ongoing Capital Requirements in accordance with the Rules in Part 3 of Chapter 3 of PRU.
          (ii) In accordance with the Rules in Part 4 of chapter 3 of PRU, an Authorised Person undertaking Islamic Financial Business is required to ensure that only the eligible components of capital are included in the calculation of capital.
          (iii) In accordance with PRU Rule 3.12.9, an Authorised Person undertaking Islamic Financial Business is required to exclude from T2 Capital any amount by which the total of the Profit Equalisation Reserve and the Investment Risk Reserve exceeds the Displaced Commercial Risk Capital Requirement.
          (iv) For the purpose of calculating Capital Requirements, an Authorised Person undertaking Islamic Financial Business or otherwise investing in or holding Islamic Contracts should give due importance to the economic substance of the transaction contemplated by an Islamic Contract, in addition to the legal and Shari'a form of the Islamic Contract.
          Amended on (3 February, 2020).

      • Systems and controls in relation to PSIAs

        • Guidance

          The requirements in IFR 5.4.2 and 5.4.3 below are in addition to and not in replacement of the requirements in GEN 3.

        • IFR 5.4.2

          An Authorised Person Managing a PSIA must ensure that its senior management establishes and maintains systems and controls that ensure that the Authorised Person is financially sound and able at all times to satisfy the specific prudential requirements arising out of Managing PSIAs.

        • IFR 5.4.3

          (a) In addition to IFR 5.2.4, an Authorised Person Managing a PSIA must set out in a written policy how it proposes to organise and control the activities that arise from Managing a PSIA and ensure that the activities undertaken by it in Managing a PSIA are conducted in accordance with Shari'a.
          (b) The policy must as a minimum address, where appropriate, the following matters:
          (i) how the interests of that Authorised Person's shareholders and its PSIA holders are safeguarded;
          (ii) how the Authorised Person will limit the exposure of PSIA holders to the Authorised Person;
          (iii) a description of the controls to ensure that the funds of the PSIA are invested in accordance with the investment guidelines agreed in the PSIA Investment Contract;
          (iv) the basis for allocating profits and losses to the PSIA holders;
          (v) the policy for making provisions and reserves and, in respect of PSIAs, to whom these provisions and reserves revert in the event of a write-off or recovery;
          (vi) the Authorised Person's policy on the prioritisation of investment of own funds and those of Unrestricted PSIA holders;
          (vii) how liquidity mismatch will be monitored;
          (viii) the basis for allocating expenses to PSIA holders; and
          (ix) how the Authorised Person will monitor the value of its own assets and the assets of PSIA holders.

      • Displaced commercial risk

        • IFR 5.4.4 IFR 5.4.4

          An Authorised Person Managing a PSIA, which is an Unrestricted PSIA, must calculate a Displaced Commercial Risk Capital Requirement in respect of its PSIA business.

          • Guidance

            (i) An Authorised Person Managing a PSIA, on an unrestricted basis is subject to a unique type of risk referred to as Displaced Commercial Risk. This risk reflects the fact that an Authorised Person may find itself under commercial pressure to pay a rate of return to its PSIA holders which is sufficient to induce those investors to maintain the investment of their funds in an Unrestricted PSIA managed by the Authorised Person, rather than withdrawing those funds from the Unrestricted PSIA and investing them elsewhere. If this "required" rate of return is higher than that which would be payable under the normal terms of the PSIA Investment Contract, the Authorised Person may be under pressure to forgo some of the share of profit which would normally have been attributed to an Authorised Person and, by extension, be available for distribution to its shareholders (e.g. part of the Mudarib's share of the profits of a Mudaraba). Failure to do this might result in a volume of withdrawals of funds by investors large enough to jeopardise the Authorised Person's commercial position (or, in an extreme case, its solvency). Thus, part of the commercial risk attached to the returns attributable to the PSIA is, in effect, transferred to the shareholders of the Authorised Person or the Authorised Person's own capital. It also reflects situations whereby an investor may be permitted to exit an investment in a particular asset pool at par where the fair value of such assets is lower than their carrying amounts resulting in the Authorised Person absorbing the loss arising as a result of such shortfall.
            (ii) In an Unrestricted PSIA, the PSIA holder authorises the Authorised Person to invest the PSIA holder's funds in a manner which the Authorised Person deems appropriate without specifying any restrictions as to where, how or for what purpose the funds should be invested, provided that they are invested in a manner that complies with Shari'a. Under this arrangement, the Authorised Person can commingle the PSIA holder's funds with its own funds or with other funds which the Authorised Person has the right to invest on an unrestricted basis (i.e. funds from other Unrestricted PSIAs). The PSIA holders and the Authorised Person generally participate in the returns on the invested funds.
            (iii) In a Restricted PSIA, the PSIA holder imposes certain restrictions as to where, how and for what purpose the funds are to be invested. Further, the Authorised Person may be restricted from commingling its own funds with the restricted PSIA funds for the purposes of investment. In addition, there may be other restrictions that the PSIA holders may impose. In other words, the funds provided by holders of Restricted PSIAs are managed by the Authorised Person which does not have the right to use or dispose of the investments in which those funds are made except within the conditions of the relevant PSIA Investment Contract.
            (iv) An Authorised Person undertaking Islamic Financial Business is also exposed to fiduciary risk which arises where the terms of the relevant PSIA Investment Contract between the Authorised Person and the PSIA holder are breached and where the Authorised Person does not act in compliance with Shari'a.
            (v) An Authorised Person (whether acting as an Islamic Financial Institution or through an Islamic Window) is required to apply the Capital Requirements specified in PRU Chapter 3 to any Islamic Financial Business it carries on.

        • IFR 5.4.5

          (a) An Authorised Person's Displaced Commercial Risk Capital Requirement is based on 35% of the sum of CRCOM and the Market Risk capital requirement of assets funded by Unrestricted PSIA holders and is calculated using the following formula:
               PSIACOM = PSIACOMcredit + PSIACOMmarket x 35%.
          (b) PSIACOM is the Displaced Commercial Risk Capital Requirement;
          (c) PSIACOMcredit is the Credit Risk capital requirement for assets funded by Unrestricted PSIA holders and is calculated in accordance with PRU Section 4.8; and
          (d) PSIACOMmarket is the Market Risk capital requirement for assets funded by Unrestricted PSIA holders and is calculated in accordance with PRU Chapter 5.
          Amended on (3 February, 2020).

      • Credit risk and counterparty risk for Islamic contracts

        • IFR 5.4.6

          (a) An Authorised Person Managing a PSIA, which is an Unrestricted PSIA, must calculate its PSIAComcredit in relation to all Islamic Contracts financed by Unrestricted PSIAs in the manner prescribed in this IFR 5.
          (b) An Authorised Person must, when undertaking the calculation in IFR 5.4.6(a), apply an appropriate risk weighting for the relevant Islamic Contract.

        • IFR 5.4.7 IFR 5.4.7

          (a) In this IFR 5:
          (i) "E" represents the Exposure determined by an Authorised Person as applicable to an Islamic Contract; and
          (ii) "CRW" represents the risk weighting or capital charge assessed by an Authorised Person as appropriate to that Islamic Contract.
          (b) Where an Islamic Contract is in the Non-Trading Book, an Authorised Person must determine the PSIACOMcredit for that contract by applying the following formula:
          PSIACOMcredit = E x CRW x 10%.
          (c) Where an Islamic Contract is in the Trading Book, an Authorised Person must determine the PSIACOMcredit for that contract in accordance with the methodology in PRU Rules A4.7 and A4.8 as appropriate.
          (d) An Authorised Person must calculate its PSIACOMcredit of all contracts by:
          (i) identifying all Islamic Contracts to which this section applies;
          (ii) valuing the underlying investment or asset of each Islamic Contract and reducing the value of any such investment or asset in the manner stipulated in Rule 4.9of PRU, the result of which constitutes "E" for that Islamic Contract;
          (iii) determining the risk weighting or capital charge appropriate to each contract, which will constitute the CRW for that contract in accordance with PRU Rules 4.10, 4.11 and 4.12;
          (iv) applying the respective formula in IFR 5.4.7(b) or (c) to determine of PSIACOMcredit in respect of each contract; and
          (v) summing the PSIACOMcredit of each contract to determine the PSIACOMcredit applicable to the Authorised Person.

          • Guidance

            (i) The Regulator considers that this Guidance will assist an Authorised Person in applying the appropriate risk weighting or capital charge to each Islamic Contract for the purpose of IFR 5.4.7. Accordingly, the Regulator expects an Authorised Person managing PSIAs, which are Unrestricted PSIAs to pay due regard to this Guidance.
            (ii) The rules in this IFR 5 and this Guidance are also relevant to an Authorised Person which invests in or holds Islamic Contracts, when calculating CRCOM for Islamic Contracts under PRU Rule 4.
            (iii) Table 2 contains Guidance on how an Authorised Person (whether acting as an Islamic Financial Institution or through an Islamic Window) Managing a PSIA, which is an Unrestricted PSIA should apply risk weightings for Islamic Contracts in respect of calculating relevant E and CRW for its PSIACOMcredit component of the PSIACOM.

            Table 2
            1.
            Islamic Contract type
            2.
            Underlying investment or asset
            3.
            CRW
            Binding Murabaha for the Purchase Orderer (MPO) Asset with an Authorised Person before purchase by the Counterparty Apply the appropriate percentage from the second column in the table in PRU Rule A4.6.5
            Accounts receivable for the contract, i.e. amounts due from the Counterparty less any provision for doubtful debts CRW in accordance with PRU Chapter 4
            Murabaha and Non-binding Murabaha for the Purchase Orderer (MPO) Accounts receivable for the contract, i.e. amounts due from the Counterparty less any provision for doubtful debts CRW in accordance with PRU Chapter 4
            Mudaraba and Musharaka Where the underlying investment meets the requirements for inclusion in the Trading Book Market Risk Capital Requirement for the exposure associated with the underlying investment determined in accordance with PRU Chapter 5
            Investment in commercial enterprise to undertake business ventures other than trading activities (or other than those which meet the requirements for inclusion in the Trading Book) CRW of 400% on the exposure
            Investment in real estate assets and other movable assets, using underlying Ijarah and Murabaha contracts CRW of the lessee for the underlying Ijarah contracts or the CRW of the counterparty of the underlying Murabaha contract, in accordance with PRU App4
            Ijarah/Ijarah Muntahia Bittamleek Asset with an Authorised Person available for lease before purchase by the Counterparty — for both contracts with both binding or non- binding promise to lease Apply the appropriate percentage from the second column in the table in PRU Rule A4.6.5
            Residential real estate where the lessee has the right to purchase property at the end of the lease and the lessor has a legally enforceable first charge over the property Apply the appropriate percentage in accordance with PRU Rule 4.12.17
            Total estimated value of lease receivables for the whole duration of the Ijarah, less any recovery value of the leased asset CRW of Ijarah lessee, in accordance with PRU Rule 4.12
            Full recourse Istisna'a — with or without parallel Istisna'a and limited / non-recourse Istisna'a with/without parallel Istisna'a Net balance of the work-in-progress CRW of the Istisna'a buyer, in accordance with PRU Rule 4.12
            Total amount receivable from the counterparty, pursuant to contract billings CRW of Istisna'a buyer, in accordance with PRU Rule 4.12
            Salam and parallel Salam Value of the underlying asset receivable for the Salam contract CRW in accordance with PRU Rule 4.12
            Assets acquired 100%
            Balance in relevant accounts receivable CRW in accordance with PRU Rule 4.12
            Kefala The amount of the guarantee CRW in accordance with PRU Rule 4.12
            Sukuk held in the Non-Trading Book Receivables from the Sukuk structure, including the principal and any returns associated with it, arising from any of the following as underlying contracts:
             
            ● Salam
            ● Istisna'a
            ● Ijarah
            ● Murabaha
            ● Mudaraba
            ● Musharaka
            CRW applicable to underlying Ijarah, Salam or Murabaha contracts, in accordance with PRU Rule 4.12

            If the Sukuk provides recourse to the issuer, CRW applicable to the issuer or CRW applicable to underlying contracts of the Sukuk is in accordance with PRU Rule 4.12 whichever is higher
              Usufructs/services CRW applicable to underlying service provider or usufruct owner, in accordance with PRU Rule 4.12. If the Sukuk provides recourse to the issuer, CRW applicable to the issuer or CRW applicable to underlying service provider or usufruct owner in accordance with PRU App4, whichever is higher
              Leased assets The higher of CRW of the underlying leased assets and that of the issuer
              Investment agency (Wakala) The higher of CRW of the underlying assets and that of the issuer
              Muzara'a (share of produce of the land) Musaqa (share of produce of the trees) Mugarasa (share in the land and the trees) 100%
              Mixture of tangible and intangible assets The higher of CRW of the underlying assets and that of the issuer
              Where the underlying investment meets the requirements for inclusion in the Trading Book Market Risk Capital Requirement for the exposure associated with the underlying investment determined in accordance with Chapter 5 of PRU
            Bai' Bithaman Ajil Residential and commercial properties Plant and equipment Motor vehicles Shares Land CRW in accordance with PRU Chapter 4
            Arboun Where an Authorised Person has made the purchase deposit CRW in accordance with PRU Chapter 4
            Where an Authorised Person has received the purchase deposit No CRW is applicable
            Where the contract would meet the requirements for inclusion in the Trading Book Market Risk Capital Requirement for the exposure associated with the underlying investment determined in accordance with PRU Chapter 5
            (iv) Where an Islamic Contract is not listed in Table 2, an Authorised Person should consult with the Regulator, on a case-by-case basis, to determine the:
            (A) contract type and the underlying investments or assets to calculate the E; and
            (B) appropriate risk weighting or the capital charge for such contract to calculate the CRW.
            (v) In some cases, as stipulated in the relevant parts of column 3 of Table 2, the calculation of capital requirement should be carried out as prescribed in PRU Rule A4.6.5 and in accordance with PRU Chapter 5.
            (vi) In determining the E of a Binding Murabaha for the Purchase Orderer (MPO), as per PRU Rule A4.6.5, E should equal the total acquisition cost of the asset (purchase price and other direct costs) less market value of the asset (net of any haircut) less any security deposit provided.
            (vii) In determining the E of Ijarah / Ijarah Munthia Bittamleek contract, as per PRU Rule A4.6.5, E should equal the total acquisition cost of the asset (purchase price and other direct costs) less the market value of the asset (net of any haircut), less any Arboun (earnest money deposit received from the potential lessee).
            (viii) In addition to paragraph 7 above, in the case of an Ijarah Muntahia Bittamleek contract, the exposure may be reduced by the recovery value of the leased asset, only in cases where there is a reasonable basis to conclude that the leased asset can be repossessed and effectively redeployed as a leased asset to another Counterparty. This is important because the asset leased under the Ijarah Muntahia Bittamleek contract is usually customised equipment or large pieces of equipment which are integrated with other assets of the lessee and hence are unsuitable for repossession and releasing to another lessee.
            (ix) In determining the E of an Istisna'a contract, the exposures arising from such a contract should not be netted off against exposures arising from a Parallel Istisna'a contract entered into by an Authorised Person for procuring the underlying investment for the Istisna'a contract.
            (x) In determining the E of a Salam contract, the exposures arising from such a contract should not be netted off against exposures arising from a Parallel Salam contract entered into by an Authorised Person for procuring the underlying asset for the Salam contract.
            (xi) Off-balance sheet exposures for import or export financing contracts based on Murabaha, where the underlying goods or shipment are collateralised and insured, should attract a 20% CCF to an Authorised Person that issues or confirms the letter of credit.
            (xii) Where Mudaraba and Musharaka contracts are used to invest in commercial enterprise to undertake business ventures other than trading activities (or other than those which meet the requirements for inclusion in the Trading Book), the E is measured as the amount invested in the commercial enterprise less any specific provisions. If there is a guarantee and such guarantor is not connected to the commercial enterprise, then the CRW for the guarantor will be applied for risk weighting for the amount of any such guarantee.
            (xiii) In addition to the relevant Rules prescribed in PRU Chapter 4 and PRU App4, an Authorised Person may consider the following types of collateral as eligible collateral for Credit Risk management:
            (A) Hamish Jiddiyyah (security deposit) only for agreements to purchase or lease preceded by a binding promise;
            (B) Arboun where earnest money deposit held after a contract is established as collateral to guarantee contract performance; and
            (C) in Mudaraba investment in project finance, an Authorised Person may use the collateralisation of the progress payments made by the ultimate customers to mitigate the exposures of unsatisfactory performance by the Mudarib.
            (xiv) Where an Authorised Person places funds under a Mudaraba contract, subject to a Shari'a compliant guarantee from a third party and such a guarantee relates only to the Mudaraba capital, the capital amount should be risk-weighted at CRW of the guarantor provided that the CRW of that guarantor is lower than the CRW of the Mudarib (as a Counterparty). Otherwise, the CRW of the Mudarib will apply.
            (xv) An Authorised Person placing liquid funds with a central bank or another financial institution on a short-term Mudaraba basis in order to obtain a return on those funds, may apply the CRW applicable to the Mudarib (as a Counterparty), provided the Mudarib effectively treats the liquid funds placement as its liability, although normally such placements are not treated as liabilities of the Mudarib.
            Amended on (3 February, 2020).

      • Market risk

        • IFR 5.4.8

          An Authorised Person Managing a PSIA, which is an Unrestricted PSIA, must calculate its PSIACOMmarket in relation to all underlying Islamic Contracts in the manner prescribed in PRU Chapter 5, except as may be provided in IFR 5.4.9 to 5.4.17.

        • IFR 5.4.9

          An Authorised Person must treat Sukuk held in its Trading Book as equity for the purpose of calculating its Equity Risk Capital Requirement and determine the same in accordance with PRU Rule 5.5.1.

        • IFR 5.4.10

          Where investments are made using Musharaka or Mudaraba contracts with commodities as the underlying assets, an Authorised Person must calculate its Commodities Risk Capital Requirement in accordance with PRU Rule 5.7.1.

        • IFR 5.4.11

          An Authorised Person which is exposed to the risk of foreign currencies and gold under any Islamic Contract, must calculate its Foreign Exchange Risk Capital Requirement in accordance with PRU Rule 5.6.2.

        • IFR 5.4.12

          An Authorised Person which is exposed to commodities including precious metals but excluding gold under any Islamic Contract, must calculate its Commodities Risk Capital Requirement in accordance with PRU Rule 5.7.

        • IFR 5.4.13

          (a) Commodities held by an Authorised Person for selling or leasing when executing a Murabaha, non-binding MPO, Salam or parallel Salam contract must be included in the calculation of its Commodities Risk Capital Requirement.
          (b) Where an Authorised Person executes Salam and parallel Salam contracts, the resultant long and short positions may be set off for calculating the net open position, provided that the positions are in the same commodity, regardless of how its Commodities Risk Capital Requirement is calculated.

        • IFR 5.4.14

          Where an Authorised Person executes Musharaka or Mudaraba contracts for investing in entities or investment vehicles that trade in foreign exchange, equities or commodities, it must include the relevant underlying assets in the calculation of its Market Risk Capital Requirement in accordance with PRU Chapter 5.

      • Concentration risk

        • Guidance

          (i) This IFR 5 sets specific Large Exposure limits for assets financed by PSIAs, which are Unrestricted PSIAs. The Regulator uses these limits to provide constraints on the amount of Concentration Risk to which an Authorised Person is subject in respect of its PSIA holdings. In assessing PSIA Large Exposures, an Authorised Person may take advantage of the exemptions and partial exemptions set out in Rule A4.11 of PRU.
          (ii) An Authorised Person has a Large Exposure where its PSIA holders' credit Exposure to a single Counterparty or issuer, or group of Closely Related or Connected Counterparties, is large in relation to the Authorised Person's Capital Resources. Where Exposure to a Counterparty or issuer is large, PSIA holders risk a large loss should the Counterparty default.
          (iii) Exposures arising from assets that are financed by an Authorised Person's own funds are dealt with in PRU Rule 4.15.

      • Exposure limits

        • IFR 5.4.15 IFR 5.4.15

          An Authorised Person Managing a PSIA, which is an Unrestricted PSIA, must not have an Exposure to a Counterparty, Connected Counterparty, group of Closely Related Counterparties or to a group of Connected Counterparties that exceeds any one of the following percentages of its Capital Resources:

          (a) 25% if financed by its Capital Resources or Unrestricted PSIAs; or
          (b) 40% if financed by an aggregate of its own Capital Resources and Unrestricted PSIAs.
          Amended on (3 February, 2020).

          • Guidance

            In accordance with PRU Rule 4.15.5, the aggregate of an Authorised Person's Exposure to a Counterparty or to a group of Closely Related Counterparties may not exceed 25% of the Authorised Person's Capital Resources.

        • IFR 5.4.16

          The sum of an Authorised Person's non-exempt Large Exposures must not exceed 800% of its Capital Resources for Exposures funded by the Authorised Person's Capital Resources and Unrestricted PSIAs.

        • IFR 5.4.17

          An Authorised Person must:

          (a) monitor and control its Exposures funded by PSIAs, which are Unrestricted PSIAs, on a daily basis to ensure they remain within the concentration risk limits specified in IFR 5.4.15; and
          (b) if a breach occurs, notify the Regulator immediately and confirm it in writing.