36.As part of the finalization of Basel III, the BCBS introduced a materiality threshold, and provided an option for any bank whose aggregate notional amount of non-centrally cleared derivatives is less than or equal to 100 billion euro to choose to set its CVA capital equal to 100% of its capital for counterparty credit risk.

37.To implement this option in the UAE, the Central Bank has established a materiality threshold of 400 billion AED. Banks with an aggregate notional amount of covered transactions less than or equal to 400 billion AED may choose to set CVA RWA equal to the bank’s RWA for counterparty credit risk as calculated under the Central Bank’s CCR Standards. The Central Bank has determined that this threshold is appropriate for the UAE, and is comparable to the 100 Billion Euro threshold included in Basel.

38.If a bank chooses this CDS, it must be applied to all of the bank’s covered transactions, as required under the BCBS framework. In addition, a bank adopting this simple approach may not recognize the risk-reducing effects of CVA hedges.

39.The Central Bank may prohibit a bank from using this simple alternative if the Central bank determines that CVA risk resulting from the bank’s derivative positions and SFTs materially contributes to the bank’s overall risk, and therefore warrants a more sophisticated approach.