10.1

LFIs may account for the presence of CRM when determining the appropriate level of provisions, but only to the extent permitted as per these standards. The haircuts applied to collateral are only for the purpose of computing the provision amount; these haircuts have no impact on the legal rights of the LFI with respect to any collateral.
 

10.2

The measurement of CRM must be based on realistic and documented assumptions supported by robust data, in particular for collateral valuation and discounted cash flows. The approach must include at a minimum the eligibility of collateral, recovery cash flows, time to recovery, the cost of recovery and the discounting method. The Credit Risk Management Function must review and form an opinion on the adequacy of the associated provisions from a risk perspective and escalate as appropriate.
 

 

10.3

Where LFIs take into account discounted future cash flows, these must be measured in a conservative manner. For Facilities to Wholesale Obligors in Stage 3 this must be done on a case-by-case basis and only to the extent as set out in the below Articles 10.4 to 10.6.
 

10.4

Future cash flows of high certainty can be considered as forms of risk mitigation provided they meet the requirements herein. All cash flows used for risk mitigation must be discounted to the present and formally validated by external auditors, and hold a formal independent legal opinion to confirm the right of enforcement and ability to obtain those cash flows.
 

10.5

Future rental income under a formal lease agreement, and with the rental income assigned to the LFI from commercial real estate under lien is permitted to be used as risk mitigation when computing the required provision. Other cash flows from defined and distinct sources may be considered within the principles articulated in Article 9.23.
 

10.6

To be eligible for CRM, the future cash flows must not be from the same source as the cash flows expected when the Obligor failed to fulfil its Repayment obligation, unless legal certainty can be established regarding the recovery of such cash flows.
 

Collateral
 

10.7

Collateral is eligible for risk mitigation if the LFI holds the first right of legally enforceable lien and if the collateral meets the minimum requirements presented herein. LFIs must implement processes and systems to identify, store, measure and monitor all collateral and guarantees linked to each financial instrument generating Credit Risk. LFIs must implement rigorous collateral management and valuation policies to ensure a fair assessment of CRM. They must also analyse and report concentration in some types of collateral and their associated Credit Risk, to Senior Management and the Board, as necessary.
 

10.8

The value of the eligible collateral must be based on the net realizable value, market conditions and haircuts reflective of all material uncertainties, including but not limited to liquidation uncertainty, legal uncertainty, valuation uncertainty, costs associated with the liquidation of collateral and time value of money. At a minimum, LFIs must employ the haircuts in the table below for Stage 3 accounts. All items labelled as N/A in the table must be evaluated, documented and concluded upon on a case-by-case basis. This evaluation must rely on the principles above and specific provisions must be computed accordingly. The column labelled ‘up to 24 months’ also applies to Stage 1 and 2 as per Article 9.20.
 

10.9

For Stage 3 classifications made prior to the issuance of these standards, the months should be counted from the date of issuance of these standards and not the original date of Stage 3 classification. In addition, collateral haircuts already applied by the LFI must be retained if they are higher than those specified in the table below. In other words, the LFI may not reduce the haircuts it has already applied prior to issuance of these standards. If the haircuts are lower than those specified below, they must be adjusted to meet these values.
 

Table 4: Minimum collateral haircuts
 

* For Stage 1 and 2, LFIs are expected to have a framework to compute adequate haircuts based on the Risk Profile of their portfolios. The haircuts in the column labelled ‘up to 24 months’ must be applied as minimum floor.
 

** In some circumstances, the haircut can be capped at the values corresponding to ‘from 49 to 60 months’, as per the table above, if the LFI has (i) a formal legal claim with respect to the liquidation of the specific collateral registered with the court, and (ii) an internal legal opinion confirming that the outcome of the legal process is likely to be in the favour of the LFI (i.e. greater chance of recovery than not).
 

10.10

For Islamic LFIs, the collateral must be compliant with Shari’ah rules and principles.
 

10.11

For some collateral types, the valuation method is subject to the following conditions:
 

10.12

Any collateral held in foreign jurisdictions and booked in UAE is also subject to all the above requirements. In addition, to be eligible the following is required: