CMA Issues New Rules for Capital Adequacy

Al Salmi: Compliance with Capital Adequacy Rules  key instrument for risk management

HE Sheikh Abullah Salim Al Salmi, Executive President of the Capital Market Authority  has issued an administrative decision  on the new  rules for capital adequacy  for the companies operating in securities, to enhance their ar risk management in the capital market such as market volatility risks, settlement risk, credit risk, operation risks and  liquidity risk through robust requirements  and control systems.

On the importance of the these rules HE the Executive President said, compliance with  capital adequacy requirements is the safety valve for the licensed companies and is a key instrument for risk management as well as being a message from the company to its clients of its ability to discharge the obligations toward them which would enhance the level of confidence between them.

HE added that due to the importance of such requirement to control capital adequacy for the financial institutions such as banks, insurance companies and  the companies operating in securities the regulators   of such institutions worldwide  regulate the same  through monitoring capital adequacy of the companies and their ability to encounter the risks for the stability of the financial system.

HE pointed out that  the new capital adequacy requirement were issued after thorough review of the requirement which were applied for more than 10 years in view of the new concepts of risk management and complex processes of stock markets as well as the advances in technology and operating systems of the licensed companies.

The new requirements observe the  element of capital adequacy which are related to the level of risks the companies are exposed to as well as the consolidated financial statements of the companies to ensure better valuation of the levels of risks relating to the assets of subsidiaries and their financial obligations. They also take into account the liquidity risks of the portfolios of licensed companies and the  securities held as collateral  for margin financing.  Exposure ratios were reduced for their relative importance in curbing the risks the companies are exposed to  by increasing the hedging ratio in the capital buffer from 25% to 50% of the annual expenses, also for subordinated loans at the same ratio while reducing the percentage for real estate assets, profits and commissions as well as ownership in profitable  companies not listed on the Market due to their reduced level of risks.

HE concluded that the companies must apply  the capital adequacy requirements soundly and monitor the capital adequacy to ensure early intervention in the event of any default which would expose the company.

The new requirements  require the companies to maintain  100% adequacy and continuous monitoring systems to ensure maintaining the required ratio. The routine capital adequacy report is obligatory on monthly bases in 10 working days from the end  of each month.  CMA may require additions reports on capital adequacy signed by a member of the top management and the compliance officer.

Where the capital adequacy falls below 100% the company shall top it up within 30 days and shall adopt the  recovery plan determined by the Executive President of CMA .

CMA urged the licensed companies  to take the required actions to  transform capital adequacy calculation through the electronic system linked to the internal systems of the company in not more than six months form the date of the decision.