This paper compares two methods for calculating credit equivalent amounts (CEA) of derivatives - original exposure method and current exposure method - using data from four UAE banks. It finds that the current exposure method generates lower CEAs than the original method. Calculating CEA for National Bank of Abu Dhabi using both methods, the current method yields a CEA that is 1.25% of total notional value versus 1.93% for the original method. Overall, the current method provides a better approach for UAE banks to calculate capital requirements for derivatives.
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Dokumen tersebut membahas tentang internship pelajar pendidikan khas di SMK Rosli Dhoby, Sibu, Sarawak selama sebulan. Ia menjelaskan tentang program pendidikan khas di sekolah tersebut dan pengalaman pelajar selama menjalani praktikal sebagai guru pembantu, termasuk melakukan pemerhatian di kelas-kelas pendidikan khas dan berpartisipasi dalam aktivitas penanaman bunga bersama murid-murid.
This document provides an analysis report of Abu Dhabi Commercial Bank (ADCB) across multiple sections. It begins with background information on ADCB, including its establishment, services offered, and key financial improvements over time. Financial highlights and ratios are presented for 2014, including growth in total assets, improvements in non-performing loans, and capital adequacy above regulatory requirements. Profitability increased through loan growth and higher net interest income while expenses decreased. Overall, the summary provides an overview of ADCB's financial position and performance in 2014 across key metrics like assets, capital, liquidity, and profitability.
Counterparty credit risk (CCR) refers to the risk that a counterparty will default on financial contracts before fulfilling their obligations. CCR is managed through tools like netting, collateralization, and hedging. Key CCR indicators include exposure at default and expected positive exposure. Basel II introduced capital requirements for CCR based on these indicators. Basel III added a new CVA capital charge to account for mark-to-market losses from CCR not covered by Basel II. However, market failures like moral hazard and free-rider problems can still limit the effectiveness of CCR management.
The document provides a summary of recent amendments, announcements, and notifications related to financial reporting in India.
1) The Ministry of Corporate Affairs revised Schedule VI to the Companies Act 1956 pertaining to the preparation of balance sheets and profit and loss accounts. This revised schedule is applicable for financial years beginning on or after April 1, 2011.
2) The Reserve Bank of India issued new guidelines for calculating risk weights and credit conversion factors for off-balance sheet items of NBFCs. These guidelines are applicable from financial years beginning April 1, 2012.
3) The Ministry of Corporate Affairs made amendments to Accounting Standard 11 related to the treatment of exchange differences on long-term foreign currency items.
The impending margin provisions, though come with a host of challenges, promises sustainable success for firms that refine internal operations and rewire their strategy.
The blog provide some key insights on the subject – as to how to compute EIR for fixed or floating rate instruments, how to compute EIR for products which involves both interest income and fee income, what are the challenges which banks might face while computing EIR, what are the operational simplifications which banks might consider while computing EIR.
The document proposes an additional investment of Company K's treasury funds into fixed income securities like bonds and sukuks. It discusses various benchmarks to guide investment decisions and evaluate performance. A sample portfolio of 48 sukuk securities is presented that meets the proposed investment guidelines, including criteria for country, sector, and credit rating exposure. The sample portfolio aims to generate returns above Company K's US dollar cost of funding plus 200 basis points while maintaining a relatively low risk profile.
IDFC Overnight Fund_Key information memorandumIDFCJUBI
The document provides a key information memorandum for the IDFC Overnight Fund, an open-ended debt scheme investing in overnight securities. The fund seeks to generate short term optimal returns in line with overnight rates and high liquidity by predominantly investing in money market and debt instruments with a maturity of 1 day. It aims to offer an investment avenue for short term savings. The fund carries risks associated with investing in debt markets like market risk, liquidity risk and credit risk which it manages through strategies like increasing allocation to money market securities in rising interest rate scenarios.
IDFC Overnight Fund_Key information memorandumJubiIDFCDebt
The document provides key information about the IDFC Overnight Fund, an open-ended debt scheme investing in overnight securities. It summarizes the investment objective as generating short term optimal returns in line with overnight rates and high liquidity. The asset allocation includes debt and money market securities with residual maturity of 1 business day between 0-100%. It also outlines the plans and options available, minimum investment amounts, risk factors and expenses associated with the scheme.
Counterparty Credit RISK | Evolution of standardised approachGRATeam
In this Article, we have made a focus on the new standard methodology (SA-CCR) for computing the EAD related to Counterparty Credit Risk portfolios. The implementation of a SA-CCR approach will become increasingly important for the Banks given the publication of the finalised Basel III reforms; in which it will require from financial institutions to compute an output floor to compare their level of RWAs between Internal and Standard approaches.
The document discusses the evolution of the standardized approach for determining counterparty exposure at default (EAD) under regulatory capital requirements. It provides context on counterparty credit risk and the need for a standardized EAD methodology. It then summarizes the key aspects of the new standardized approach for measuring counterparty credit risk exposures (SA-CCR), including how it calculates the replacement cost and potential future exposure in a more risk-sensitive manner compared to previous standard approaches. The document aims to concisely outline the main components and calculations of the SA-CCR as defined by the Basel Committee on Banking Supervision.
Mercer Capital's Bank Watch | July 2023 | Bank Impairment TestingMercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
IDFC Corporate Bond Fund_Key information memorandumJubiIDFCDebt
1. The document is a Key Information Memorandum for the IDFC Corporate Bond Fund, an open-ended debt scheme that predominantly invests in AA+ and above rated corporate bonds.
2. The fund seeks to provide steady income and capital appreciation by investing primarily in AA+ and above rated corporate debt securities across maturities.
3. The fund faces risks associated with investing in debt markets like market risk, liquidity or marketability risk, and credit risk. The fund aims to manage these risks through strategies like increasing allocation to money market securities in rising interest rate scenarios and focusing on securities with adequate liquidity.
IDFC Corporate Bond Fund_Key information memorandumIDFCJUBI
1. The document is a Key Information Memorandum for the IDFC Corporate Bond Fund, an open-ended debt scheme that predominantly invests in AA+ and above rated corporate bonds.
2. The fund seeks to provide steady income and capital appreciation by investing primarily in AA+ and above rated corporate debt securities across maturities. It aims to allocate assets among various fixed income instruments to optimize returns based on prevailing market conditions.
3. The fund faces risks associated with investing in debt markets like market risk, liquidity risk, and credit risk. It aims to manage these risks through strategies like increasing allocation to money market securities in rising interest rate scenarios and investing in securities with adequate liquidity.
IDFC Corporate Bond Fund_Key information memorandumTesssttest
The document provides a key information memorandum for the IDFC Corporate Bond Fund, an open-ended debt scheme that predominantly invests in AA+ and above rated corporate bonds. The fund seeks to generate medium to long term optimal returns through investments in high quality corporate bonds. It aims to provide steady income and capital appreciation. The fund allocates 80-100% of its assets to corporate bonds rated AA+/equivalent and above and 0-20% to other debt securities including government bonds and money market instruments. The fund invests using a strategy focused on credit spreads among available corporate bonds and aims to optimize returns through allocation across fixed income instruments.
The Challenges and Opportunities of IFRSNeha Sharma
The Ministry of Corporate Affairs (MCA) has drawn up a revised roadmap for companies for implementation of the Indian Accounting Standards (Ind AS) converged with the International Financial Reporting Standards (IFRS) for companies other than banking companies, insurance companies and NBFCs.
By 1st December 2015, BCBS-IOSCO rules mean that all eligible financial and non-financial counterparties must be able to exchange bilateral Variation Margin (VM) and Initial Margin (IM) with their OTC derivatives counterparties. The consequences of this extend far beyond methodology, requiring a re-evaluation of the whole end to end workflow.
The document discusses the Discounted Cash Flow (DCF) method for valuing investments. It covers key aspects of DCF including forecasting cash flows over different periods, calculating the weighted average cost of capital, and discounting future cash flows to determine present value. It also explains the differences between the debt-free and leveraged/equity DCF methods in terms of adjusting for a company's capital structure.
Amwal Capital Partners for Sohn Invesment ConferenceRanim Diab
This document discusses a potential merger arbitrage opportunity in the Middle East and North Africa (MENA) region involving the merger of two banks - Kuwait Finance House (KFH) and Ahli United Bank (AUB). Some key points:
- KFH and AUB, one of the largest Islamic banks in MENA and a regional bank based in Bahrain, respectively, have agreed to a merger. KFH shareholders will own around 65% of the combined entity.
- The merger aims to increase AUB's presence in Kuwait, where a third of its assets are, and achieve geographical complementarity. It also allows the shareholders, which include sovereign wealth funds, to improve their return on equity targets
IDFC Hybrid Equity Fund_Key information memorandumJubiIdfcHybrid
The document provides a key information memorandum for the IDFC Hybrid Equity Fund, an open-ended hybrid scheme that invests predominantly in equity and equity-related instruments. The fund seeks to generate long-term capital appreciation through equity exposure and current income through debt securities and money market instruments. It aims to allocate 65-80% of assets to equities and equity-related instruments and 20-35% to debt and money market instruments. The fund carries market risks associated with both equity and debt investments. It employs various strategies like diversification and derivatives to manage risks.
IDFC Hybrid Equity Fund_Key information memorandumIDFCJUBI
This document provides a summary of the IDFC Hybrid Equity Fund, an open-ended hybrid scheme that invests predominantly in equity and equity-related instruments. The fund seeks to generate long-term capital appreciation through equity exposure and current income through debt securities and money market instruments. It aims to allocate 65-80% to equities and equity-related instruments and 20-35% to debt and money market instruments including government bonds. The fund carries market, liquidity, credit, and investment risks and employs strategies like diversifying market caps and sectors for equity allocation and duration management for debt allocation to mitigate risks.
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1) The Ministry of Corporate Affairs revised Schedule VI to the Companies Act 1956 pertaining to the preparation of balance sheets and profit and loss accounts. This revised schedule is applicable for financial years beginning on or after April 1, 2011.
2) The Reserve Bank of India issued new guidelines for calculating risk weights and credit conversion factors for off-balance sheet items of NBFCs. These guidelines are applicable from financial years beginning April 1, 2012.
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The document proposes an additional investment of Company K's treasury funds into fixed income securities like bonds and sukuks. It discusses various benchmarks to guide investment decisions and evaluate performance. A sample portfolio of 48 sukuk securities is presented that meets the proposed investment guidelines, including criteria for country, sector, and credit rating exposure. The sample portfolio aims to generate returns above Company K's US dollar cost of funding plus 200 basis points while maintaining a relatively low risk profile.
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The document provides a key information memorandum for the IDFC Overnight Fund, an open-ended debt scheme investing in overnight securities. The fund seeks to generate short term optimal returns in line with overnight rates and high liquidity by predominantly investing in money market and debt instruments with a maturity of 1 day. It aims to offer an investment avenue for short term savings. The fund carries risks associated with investing in debt markets like market risk, liquidity risk and credit risk which it manages through strategies like increasing allocation to money market securities in rising interest rate scenarios.
IDFC Overnight Fund_Key information memorandumJubiIDFCDebt
The document provides key information about the IDFC Overnight Fund, an open-ended debt scheme investing in overnight securities. It summarizes the investment objective as generating short term optimal returns in line with overnight rates and high liquidity. The asset allocation includes debt and money market securities with residual maturity of 1 business day between 0-100%. It also outlines the plans and options available, minimum investment amounts, risk factors and expenses associated with the scheme.
Counterparty Credit RISK | Evolution of standardised approachGRATeam
In this Article, we have made a focus on the new standard methodology (SA-CCR) for computing the EAD related to Counterparty Credit Risk portfolios. The implementation of a SA-CCR approach will become increasingly important for the Banks given the publication of the finalised Basel III reforms; in which it will require from financial institutions to compute an output floor to compare their level of RWAs between Internal and Standard approaches.
The document discusses the evolution of the standardized approach for determining counterparty exposure at default (EAD) under regulatory capital requirements. It provides context on counterparty credit risk and the need for a standardized EAD methodology. It then summarizes the key aspects of the new standardized approach for measuring counterparty credit risk exposures (SA-CCR), including how it calculates the replacement cost and potential future exposure in a more risk-sensitive manner compared to previous standard approaches. The document aims to concisely outline the main components and calculations of the SA-CCR as defined by the Basel Committee on Banking Supervision.
Mercer Capital's Bank Watch | July 2023 | Bank Impairment TestingMercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
IDFC Corporate Bond Fund_Key information memorandumJubiIDFCDebt
1. The document is a Key Information Memorandum for the IDFC Corporate Bond Fund, an open-ended debt scheme that predominantly invests in AA+ and above rated corporate bonds.
2. The fund seeks to provide steady income and capital appreciation by investing primarily in AA+ and above rated corporate debt securities across maturities.
3. The fund faces risks associated with investing in debt markets like market risk, liquidity or marketability risk, and credit risk. The fund aims to manage these risks through strategies like increasing allocation to money market securities in rising interest rate scenarios and focusing on securities with adequate liquidity.
IDFC Corporate Bond Fund_Key information memorandumIDFCJUBI
1. The document is a Key Information Memorandum for the IDFC Corporate Bond Fund, an open-ended debt scheme that predominantly invests in AA+ and above rated corporate bonds.
2. The fund seeks to provide steady income and capital appreciation by investing primarily in AA+ and above rated corporate debt securities across maturities. It aims to allocate assets among various fixed income instruments to optimize returns based on prevailing market conditions.
3. The fund faces risks associated with investing in debt markets like market risk, liquidity risk, and credit risk. It aims to manage these risks through strategies like increasing allocation to money market securities in rising interest rate scenarios and investing in securities with adequate liquidity.
IDFC Corporate Bond Fund_Key information memorandumTesssttest
The document provides a key information memorandum for the IDFC Corporate Bond Fund, an open-ended debt scheme that predominantly invests in AA+ and above rated corporate bonds. The fund seeks to generate medium to long term optimal returns through investments in high quality corporate bonds. It aims to provide steady income and capital appreciation. The fund allocates 80-100% of its assets to corporate bonds rated AA+/equivalent and above and 0-20% to other debt securities including government bonds and money market instruments. The fund invests using a strategy focused on credit spreads among available corporate bonds and aims to optimize returns through allocation across fixed income instruments.
The Challenges and Opportunities of IFRSNeha Sharma
The Ministry of Corporate Affairs (MCA) has drawn up a revised roadmap for companies for implementation of the Indian Accounting Standards (Ind AS) converged with the International Financial Reporting Standards (IFRS) for companies other than banking companies, insurance companies and NBFCs.
By 1st December 2015, BCBS-IOSCO rules mean that all eligible financial and non-financial counterparties must be able to exchange bilateral Variation Margin (VM) and Initial Margin (IM) with their OTC derivatives counterparties. The consequences of this extend far beyond methodology, requiring a re-evaluation of the whole end to end workflow.
The document discusses the Discounted Cash Flow (DCF) method for valuing investments. It covers key aspects of DCF including forecasting cash flows over different periods, calculating the weighted average cost of capital, and discounting future cash flows to determine present value. It also explains the differences between the debt-free and leveraged/equity DCF methods in terms of adjusting for a company's capital structure.
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This document discusses a potential merger arbitrage opportunity in the Middle East and North Africa (MENA) region involving the merger of two banks - Kuwait Finance House (KFH) and Ahli United Bank (AUB). Some key points:
- KFH and AUB, one of the largest Islamic banks in MENA and a regional bank based in Bahrain, respectively, have agreed to a merger. KFH shareholders will own around 65% of the combined entity.
- The merger aims to increase AUB's presence in Kuwait, where a third of its assets are, and achieve geographical complementarity. It also allows the shareholders, which include sovereign wealth funds, to improve their return on equity targets
IDFC Hybrid Equity Fund_Key information memorandumJubiIdfcHybrid
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IDFC Hybrid Equity Fund_Key information memorandumIDFCJUBI
This document provides a summary of the IDFC Hybrid Equity Fund, an open-ended hybrid scheme that invests predominantly in equity and equity-related instruments. The fund seeks to generate long-term capital appreciation through equity exposure and current income through debt securities and money market instruments. It aims to allocate 65-80% to equities and equity-related instruments and 20-35% to debt and money market instruments including government bonds. The fund carries market, liquidity, credit, and investment risks and employs strategies like diversifying market caps and sectors for equity allocation and duration management for debt allocation to mitigate risks.
Similar to Calculating the Credit Equivalent Amount of Derivatives Products for the UAE Banks (20)
IDFC Hybrid Equity Fund_Key information memorandum
Calculating the Credit Equivalent Amount of Derivatives Products for the UAE Banks
1. March 2015
Calculating the Credit Equivalent Amount of Derivatives
Products for the UAE Banks Using the Original Exposure and
Current Exposure Methods
Tamer Halawani Montes
(Previous Risk Analyst at Deutsche Bank and JP Morgan)
Abstract
This paper show that calculating the credit equivalent amount (CEA) for derivatives contracts
within the UAE big banks using the Current Exposure Method will generate less exposure than using
the Original Exposure Method. The observation from the data taken in this paper lead us to conclude
that it is better for banks in UAE to calculate their credit equivalent amount using the Current
Exposure Method
Introduction and Objective
1 Overview of the GCC Markets (UAE) and the Status of Derivatives
The financial services sector in MENA has high profit margins, access to cheap cost of funds and low
international credit exposure. Improving business activity and domestic confidence is accelerating
lending growth in the region. The banks are well capitalized, maintaining capital adequacy ratios that
meet or are above the Basel III requirements with low levels of non-performing loans. A rise in public
sector spending, and improved consumer and business activity, particularly in the UAE and Saudi
Arabia, are expected to support lending growth in MENA. Credit ratings agency Moody’s forecasts
credit growth of 7%–10% in 2015. Stability in local real estate markets would help banks lower their
provisioning expenses and drive profitability. With 60–90% of banks’ funding sourced from deposits,
the credit strength is likely to be retained in 2015
In a research study conducted on the UAE financial markets for derivatives, the following points
were observed regarding the market for derivatives instrument:
1) Recognised need for increased risk management across the region has led to the
development of conventional and Islamic derivatives market across the GCC
2) Development hindered by lack of legislation/regulation/ISDA netting opinions
3) Unsophisticated market. Most common types of derivative products are:
2. Margin Trading
Cross-currency/Commodity/Interest Rate (Profit Rate) Swaps
Equity swaps
Total return swaps
4) Licensing requirements: Derivatives trading is a “commercial banking activity”;
counterparties must be licensed by the relevant regulatory body unless all conduct with
regard to derivative transactions is conducted outside relevant jurisdiction
5) Conducting KYC: Verify that counterparties have power and authority to enter into
derivative transactions
6) Dubai Court of Cassation relied on international banking practices to hold that currency
futures trading does not violate the Commercial Transactions Code for impermissible risk or
uncertainty; emphasis on counterparty being a professional licensed investor
7) Three Abu Dhabi court decisions in which foreign currency derivatives were invalidated for
speculation
8) If a derivative transaction is purely speculative or “excessively uncertain” there is
considerable risk that UAE courts (especially Abu Dhabi) will adopt conservative approach
where Limited guidance from Civil Code and case law means it is difficult to predict with
certainty how the UAE courts will interpret a derivative transaction and its enforceability in
UAE
9) No legalisation addressing close-out netting and no ISDA netting opinions
According to researchers conducted by MARKAZ (Kuwait Financial Centre S.A.K) on the Derivatives
market in the GCC countries it reveals that GCC market structure is still incomplete with inadequate
growth of debt market and absence of derivatives market
2 Risk Exposures for Derivatives
In order to for banks to reports the risk exposure for Basel reporting requirement, the bank
(1) will need to multiply the book value, on the reporting day, of every item of assets and
obligations, as appeared on the financial statement, with the risk weights. If the assets and
obligations are in foreign currencies, they shall be converted into the local currency (UAE Dirham)
(2) Multiply each asset with the relevant risk weights
(3) In case of the obligations in the form of financial derivative the banks shall calculate the credit
equivalent amount (CEA) with current exposure method or original exposure method, then, multiply
the outcome with the risk weights of each type of asset
In this paper we will only examine calculating the credit equivalent amount (CEA), we will also
calculate some ratios such as Derivatives Exposure (the one shown as part of the bank’s assets
“referred to as the positive mark-to-market”) over the bank’s total assets, derivatives outstanding
notional over bank’s total assets, credit equivalent amount (CEA) over bank’s total assets and
compare the ratios between the banks we examined
Literature Review
The literature on risk disclosures and calculating the credit equivalent amount by banks is relatively
broad. Below are some main guidelines that we will be using in our calculations based on previous
literature reviews:
The calculation of credit equivalent amount (CEA) for financial derivatives can be performed under
two methods; 1) Original Exposure Method and 2) Current Exposure Method.
3. (1) Original Exposure Method
In case of full conditions contract without netting agreement Credit equivalent amount (CEA) of
current credit exposure can be calculated as follow:
CEA = Σ (Notional Amount * CCF)
Or equal to the sum of the product of notional amount1 of exchange rate derivatives and
interest rate derivative of such counterparty and relevant Credit Conversion Factor (CCF)
Credit Conversion Factor (CCF) of Exchange Rate
and Interest Rate Derivatives under Original
Exposure Method for full conditions contract
without netting agreement Maturity
Exchange Rate
Derivative
Interest Rate Derivative
Less than 14 days 0 0
Less than 1 year 0.02 0.005
Over 1 year to 2 years 0.05 0.01
Every additional year 0.03 0.01
(2) Current Exposure Method
Under the current exposure method, computation of credit equivalent exposure for interest rate
and exchange rate related contracts is based on the summation of the following two elements:
i) The replacement costs (obtained by marking-to-market) of all contracts with positive
value (zero for contracts with negative replacement costs); and
ii) ii) The amount of potential future exposure calculated by multiplying the national value
of each contract by an “add-on” factor.
Credit exposure = positive MTM + (NP x “add-on” factor (%))
where:
MTM is Mark-to-Market
NP is National Principal
In certain cases, credit exposures arising from interest rate and exchange rate related contracts may
already be reflected on balance sheet. For example, banking institutions may have recorded current
credit exposures to counterparties (such as mark to market values) under foreign exchange and
interest rate related contracts on the balance sheet as ‘other assets’ or ‘sundry debtors’. To avoid
double counting, such exposures should be excluded from the on-balance sheet exposures and
treated as off-balance sheet exposures
Credit conversion faction of
financial derivative under Current
Exposure Method
FX & Gold Interest
Rate
Equity Precious
Metals
Other
Commodities
Less than 14 days 0 0 0.06 0.07 0.10
Less than 1 year 0.01 0 0.06 0.07 0.10
Over 1 year to 5 years 0.05 0.005 0.08 0.07 0.12
Over 5 years 0.075 0.015 0.10 0.08 0.15
While according to the standardized method the CCF is calculated according to the below table
4. Data and Methodology
The top banks in the UUAE we investigate for the year 2014 (Year End) are as follows:
1. Abu Dhabi Commercial Bank (ADCB)
2. National Bank of Abu Dhabi (NBAD)
3. Emirates NBD
4. First Gulf Banks
Our source of data is derived from publicly disclosed regulatory report information on minimum
regulatory capital requirements and the info that was found in the annual reports of the above
banks
Below we will be showing the snapshots related to the derivatives notional amounts and exposures
for the four banks
7. First Gulf Bank
In this section we will chose one of these banks and do the full calculation for the credit equivalent
amount (CEA), in our case we chose to calculate it for National Bank of Abu Dhabi (NBAD) as per the
following:
Calculating the credit equivalent amount CEA according to the Original Exposure Method
Less than 3 Months between 3m - 1 year 1 - 3 years 3 - 5 Years over 5 years Total
Total Notional 369,185,701,000 290,935,429,000 203,193,034,000 120,821,339,000 118,304,031,000 1,102,439,534,000
FX Derivatives 155,335,717,000 109,026,703,000 20,061,938,029 2,577,829,000 964,023,000 287,966,210,029
IR Derivatives 213,849,984,000 181,908,726,000 183,131,095,971 118,243,510,000 117,340,008,000 814,473,323,971
FX CCf 3,106,714,340 2,180,534,060 1,003,096,901 360,896,060 163,883,910 6,815,125,271
IR CCF 1,069,249,920 909,543,630 1,831,310,960 4,729,740,400 5,867,000,400 14,406,845,310
Total Exposure 4,175,964,260 3,090,077,690 2,834,407,861 5,090,636,460 6,030,884,310 21,221,970,581
CEA / Total Notional Size 1.93%
2% * 109,026,703,000 10% * 1,003,096,901
Notional Amount by Term to Maturity (UAE Dirham)
We calculated the CCF based on the following schedule to conclude that the credit equivalent
amount is 21,221,970,581 UAE Dirham or 1.93% of the Total Derivatives Notional Size
Credit Conversion Factor (CCF) of Exchange Rate and
Interest Rate Derivatives under Original Exposure Method
for full conditions contract without netting agreement
Maturity
Exchange Rate
Derivative
Interest Rate Derivative
Less than 14 days 0 0
Less than 1 year 0.02 0.005
Over 1 year to 2 years 0.05 0.01
Every additional year 0.03 0.01
8. Calculating the credit equivalent amount CEA according to the Current Exposure Method
Under this method we will need to know the Positive Market Value to reach the figure of CEA of the
derivatives exposure (review the section of the Literature review)
Off course under this method the CCF are different than the first method (the original exposure)
Less than 3 Months between 3m - 1 year 1 - 3 years 3 - 5 Years over 5 years Total
Total Notional 369,185,701,000 290,935,429,000 203,193,034,000 120,821,339,000 118,304,031,000 1,102,439,534,000
FX Derivatives 155,335,717,000 109,026,703,000 20,061,938,029 2,577,829,000 964,023,000 287,966,210,029
IR Derivatives 213,849,984,000 181,908,726,000 183,131,095,971 118,243,510,000 117,340,008,000 814,473,323,971
FX CCf 1,553,357,170 1,090,267,030 401,238,761 51,556,580 19,280,460 3,115,700,001
IR CCF 0 0 915,655,480 591,217,550 1,760,100,120 3,266,973,150
Total Exposure 1,553,357,170 1,090,267,030 1,316,894,240 642,774,130 1,779,380,580 6,382,673,150
Positive Market Value 7,422,828,000
CEA = Positive Market
Value +Total Notional
size of Derivatives
13,805,501,150
CEA / Total Notional Size 1.25%
Notional Amount by Term to Maturity (UAE Dirham)
We calculated the CEA under this method to conclude that the credit equivalent amount is
13,805,501,150 UAE Dirham or 1.25% of the Total Derivatives Notional Size, hence under this
method the CEA is lower than the previous method
Results
Since there is no space to do all the calculations here, the results of all the calculations for all the
banks are shown in below:
Bank Name ADCB NBAD EMIRATES NBD First Gulf Bank
Total Assets 204,019,463,000 376,098,712,000 363,020,991,000 212,168,501,000
Derivatives Positive Market Value 4,288,506,000 7,422,828,000 1,310,455,000 1,526,250,000
Derivatives Notional size 294,969,979,000 1,102,439,534,000 288,723,438,000 98,544,062,000
Derivatives Market Value / Assets 2.10% 1.97% 0.36% 0.72%
Derivatives Notional size / Assets 144.58% 293.13% 79.53% 46.45%
Credit Equivalent Amount
(Original Method) only FX & Rates
2,329,052,458 21,221,970,581 7,100,413,010 2,160,817,930
Credit Eqivalent Amount (Current
Method) All Asset Classes
569,468,375 13,805,501,150 4,020,140,515 2,478,570,099
CEA (Original Method) /
Derivatives Size
0.79% 1.93% 2.46% 2.19%
CEA (Current Method) /
Derivatives Size
0.19% 1.25% 1.39% 2.52%
CEA (Current Method) / Total
Assets
0.28% 3.67% 1.11% 1.17%
9. Conclusion
The Largest bank among these four banks in terms of total assets is NBAD, also NBAD has the biggest
Positive Market Value for Derivatives and the biggest notional size of derivatives
But when looking at each bank Assets (on balance sheets items) we will find that ADCB has the
biggest % of On-Balance sheet derivatives among them, while NBAD Derivatives notional size of
contracts is even exceeding the total assets of the bank (293%) which is almost 3 times as the size of
their total assets.
If banks are only holding Rates and FX derivatives it would be better for them to use the Current
Exposure Method to calculate their Credit Equivalent amount as it would come back with lower
figure hence they will need to hold less capital against it
Finally ADCB credit equivalent amount of their derivatives compared to their total assets is the
lowest (0.28%) and that is because 94% of their derivatives contracts have maturity of less than 1
year and they focus their derivatives on two asset classes (FX and Rates) since these two asset
classes would require less Credit conversion Factor (CCF)
References
- Basel Committee on Banking Supervision International Convergence of Capital Measurement
and Capital Standards, a Revised Framework Updated November 2005.
http://www.bis.org/publ/bcbs118.pdf
- Derivatives and Risk Management Made Simple –JP Morgan Bank Research
- Credit Risk – Estimation Techniques, Crisil global research and analytics
- Hirtle B. (2003): What Market Risk Capital Reporting Tells Us About Bank Risk, Federal
Reserve Bank of New York, Economic Policy Review, September 2003
- National Bank of Abu Dhabi Annual Review 2014
- Abu Dhabi Commercial Bank Annual Review 2014
- First Gulf Bank Annual Review 2014
- Emirates NBD Annual review 2014
- Berkowitz, Christoffersen, and Pelletier (2009). “Evaluating Value-at-Risk Models with Desk-
Level Data” Management Science, Articles in Advance, pp. 1–15.
http://erm.ncsu.edu/az/erm/i/chan/library/pelletier-research-partners-2009.pd
- Gulf Banks' Capital Positions Compare Well With Those Of Global Banks, Standard & Poor's,
June 2012
- Guideline for Calculation of Credit Risk for Commercial Banks, Central Bank of Thailand Study
- MENA - Alternative Investment Strategy 2015, Al-Masah Capital Research Study
- The Relationship between Overcoming New Investors’ Fear in Investing in Derivatives in
Stock Markets; And Revitalizing Stock Markets to Support Economies in the GCC, Ahmad
Adel Mustafa, March 2014
- An Update on Worldwide Derivatives and Related Regulatory Initiatives, K& L Gates, Natalie
Boyd, 2014