12.1 Banks' exposures to the UAE Federal Government, the Central Bank of the UAE, and exposures to other foreign sovereigns rated at least AA- and their central banks are exempted from the large exposure limit.

12.2 A Banks' aggregate exposure to the Emirates Governments, meaning the exposure to all of the Emirates Governments combined and inclusive of exposures to their non-commercial public sector entities, is subject to an aggregate limit of 150% of Tier 1 capital. Exposures directly to the Emirates Governments are not restricted at individual level, but exposures to their non-commercial entities are restricted at individual level to 25% of Tier 1 capital.

12.3 Exposures to the commercial entities of UAE Federal and Emirates Governments are subject to an individual limit of 25% and an aggregate limit of 100% of Tier 1 capital.

12.4 A commercial public sector entity that is selfsustainable, meaning, at a minimum, that it is profitable and can service its debt from its own resources without a need for any implicit or explicit government support, can be considered as a counterparty separate from its government parent subject to Central Bank approval. This public sector entity, and the Group Of Connected Counterparties it belongs to, is then subject to the general large exposure limit, but not to the aggregate limits described in Article 12.2 and 12.3.

12.5 Exposures or parts thereof guaranteed by, or secured by instruments issued by, the counterparties listed in Article 12.1 are exempted from the large exposure limit to the extent that the eligibility criteria for the recognition of credit risk mitigation are met.

12.6 Where two or more entities that are outside the scope of the exemption described in Article 12.1 are controlled by or economically dependent on an entity that falls within the scope of Article 12.1, but are otherwise not connected, those entities need not be deemed to constitute a Group Of Connected Counterparties.

12.7 While the exposures described in Article 12.1 are exempted from the large exposure limit, these exposures must nevertheless be reported if these exposures meet the criteria for definition as a large exposure.

12.8 Where an exposure to an exempted entity is hedged by a credit derivative, an exposure to the provider of the credit protection must nevertheless be recognised in accordance with Articles 9.1 and 11.7 of this regulation.

12.9 Non-commercial public sector entities of the UAE Federal Government are subject to the general large exposure limit as set out in Article 3.1 of this regulation, with the exception of those ‘treated as sovereign' under the credit risk standards.

12.10 The Central Bank may, on an exceptional, temporary and case-by-case basis, increase the aggregate limit set out in Article 12.2. Such an exception will detail the new maximum permissible limits, and the risk-weight add-on applicable to the amounts by which the normal limits as set out in Article 12.2 are exceeded.

12.11 The exemption set out in Article 12.1 also applies to multilateral development banks for which a 0% risk weight applies under the Central Bank's credit risk standards.

13.1 Intraday interbank exposures are exempted from the large exposure framework.

13.2 Any other interbank exposures are subject to the large exposure limit set out in Article 3 of this regulation.

13.3 Banks incorporated in the UAE must limit the aggregate exposure to their foreign branches to 30% of Tier 1 capital, where those branches are located in a jurisdiction which requires them to hold capital in that jurisdiction. The exposure value is equal to the sum of all of the branch's liabilities where the head office is the counterparty, including the dotation capital. The denominator is the entity's Tier 1 capital.

14.1 For covered bonds, an exposure to the issuing Bank must be assigned equal to 100% of the nominal value of the Bank's covered bond holding, or, where the covered bond satisfies the conditions set out in Article 14.2 below, an exposure to the issuing Bank of at least 20% of the nominal value of the Bank's covered bond holding.

14.2 To be eligible to be assigned an exposure of less than 100%, a covered bond must satisfy all of the following conditions:

14.2.1 It must meet the definition of a covered bond: Covered bonds are bonds issued by a bank or mortgage institution and are subject by law to specific supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.

14.2.2 The pool of underlying assets must consist exclusively of:

14.2.2.1 Claims on, or guaranteed by, sovereigns, their central banks, public sector entities or multilateral development banks;

14.2.2.2 Claims secured by mortgages on residential real estate that would qualify for a 35% or lower risk weight under the standardized approach for credit risk and having a loan-to-value ratio of 80% or lower; and/or

14.2.2.3 Claims secured by commercial real estate that would qualify for the 100% or lower risk-weight under the standardized approach for credit risk and with a loan-to-value of 60% or lower.

14.2.3 The nominal value of the pool of assets assigned to the covered bond by its issuer should exceed its nominal outstanding value by at least 10%. This requirement can be met also in jurisdictions where the former 10% is not required by law, however in that case the issuing bank needs to regularly publicly disclose that their covered pool meets the 10% requirement in practice.

This 10% additional collateral may also include substitution assets, such as cash or short term secure assets, and derivatives entered into to hedge risks arising in the covered bond programme.

14.2.4 The requirements regarding maximum loan-to-value ratio for residential and commercial real estate referred to in Article 14.2.2 must be met following an objective market value of the collateral and frequent revaluation of the collateral.

15.1 Banks must consider exposures even when a structure lies between the Bank and the exposures, that is, even when the Bank invests in structures through an entity which itself has exposures to assets (hereafter referred to as the "underlying assets"). Banks must assign the exposure amount, i.e. the amount invested in a particular structure, to specific counterparties following the approach described below. Such structures include funds, securitisations and other structures with underlying assets.

15.2 A Bank may assign the exposure amount to the structure itself, defined as a distinct counterparty, if it can demonstrate that the Bank's exposure amount to each underlying asset of the structure is smaller than 0.25% of its Tier 1 capital, considering only those exposures to underlying assets that result from the investment in the structure itself and using the exposure value calculated according to Article 15.8 and 15.9. This condition is always considered fulfilled whenever a Bank's whole investment in a structure is less than 0.25% of the Bank's Tier 1 capital. In this case, a Bank is not required to look through the structure to identify the underlying assets.

15.3 A Bank must look through the structure to identify those underlying assets for which the underlying exposure value is equal to or above 0.25% of its Tier 1 capital. In this case, the counterparty corresponding to each of the underlying assets must be identified so that these underlying exposures can be added to any other direct or indirect exposure to the same counterparty. The Bank's exposure amount to the underlying assets that are below 0.25% of the Bank's Tier 1 capital may be assigned to the structure itself (ie partial look- through is permitted).

15.4 If a Bank is unable to identify the underlying assets of a structure:

15.4.1 Where the total amount of its exposure is less than 0.25% of its Tier 1 capital, the total exposure amount of the Bank's investment must be assigned to the structure;

15.4.2 In other cases, the total exposure amount of the Bank's investment must be assigned to “The Unknown Client”.

15.5 The Bank must aggregate all unknown exposures as if they related to a single counterparty, referred to as “The Unknown Client”, to which the large exposure limit applies.

15.6 Banks must not circumvent the large exposure limit by investing in multiple structures with identical underlying assets that represent individually immaterial transactions.

15.7 If the look-through approach does not need to be applied, a Bank's exposure to the structure must be the nominal amount invested in the structure.

15.8 When the look-through approach is required in accordance with this Article, the exposure value assigned to the counterparty is equal to the pro rata share that the Bank holds in the structure multiplied by the value of the underlying asset in the structure. Thus, a Bank holding a 1% share of a structure that invests in 20 assets each with a value of 5 must assign an exposure of 0.05 to each of the counterparties. These exposures to these counterparties must be added to any other direct or indirect exposures the Bank has to these counterparties.

15.9 When the look-through approach is required in accordance with this Article, the exposure value to a counterparty is measured for each tranche within the structure, assuming a pro rata distribution of losses amongst investors in a single tranche. To compute the exposure value to the underlying asset, a Bank must:

(1) First, consider the lower of (a) the value of the tranche in which the Bank invests, and, (b) the nominal value of each underlying asset included in the underlying portfolio of assets

(2) Second, apply the pro rata share of the Bank's investment in the tranche to the value determined in the first step above.

15.10 Banks must identify third parties that may constitute an additional risk factor inherent in a structure itself rather than in the underlying assets. Such a third party could be a risk factor for more than one structure that a Bank invests in. Examples of such third parties include the originator, fund manager, liquidity provider, and protection provider. There may be multiple such common risk factors, all of which must be recognised separately.

15.11 Based on the common risk factor identified in accordance with Article 15.10, a Bank must form a distinct Group Of Connected Counterparties that is subject to the large exposure limit.

15.12 Banks must assess whether the exposure to the common risk factor is also an exposure to the entity representing that common risk factor. In the case of a credit protection provider, this will be the case, however it may not be the case for the originator or fund manager where the structures can operate independently. If the latter can be demonstrated by the Bank, the exposure to the common risk factor need not be added to the exposure to the entity representing that common risk factor.

16.1 Banks' exposures to Qualifying Central Counterparties related to clearing activities are exempted from the large exposures limit, however, these exposures are subject to the reporting requirements as defined in Article 5 of this regulation.

16.2 Banks' exposures to non-Qualifying Central Counterparties must be measured as the sum of the clearing exposures described in Article 16.4 and the non-clearing exposures described in Article 16.6, and is subject to the large exposure limit set out in Article 3 of this regulation.

16.3 The requirement related to connected counterparties set out in Article 4 of this regulation does not apply to exposures to central counterparties specifically related to clearing activities. For non-clearing exposures, the provisions related to connected counterparties fully apply.

16.4 Banks must calculate the following types of exposure as set out below:

16.4.1 Trade exposures: the exposure value of trade exposures must be calculated following the relevant provisions of this regulation (as for any other counterparty).

16.4.2 Segregated initial margin: the exposure value is zero.

16.4.3 Non-segregated initial margin: the exposure value is the nominal amount of the initial margin posted.

16.4.4 Pre-funded default fund contributions: the exposure value is the nominal amount of the funded contribution.

16.4.5 Unfunded default fund contributions: the exposure value is zero.

16.4.6 Equity stakes: the exposure value is the nominal amount.

16.5 For exposures where the Bank acts as a clearing member or where the Bank acts as client of a clearing member, the Bank must determine the counterparty to which the exposures must be assigned in accordance with the capital adequacy standards.

16.6 Any other exposure types not directly related to clearing services provided by the central counterparty must be measured according to the rules set out in this regulation, as for any other counterparty, and are subject to the large exposure limit.

17.1 A Bank must have policies and processes that provide a comprehensive, Bank-wide view of significant sources of concentration risk, including also sources of concentration risk not captured by the large exposure limit as described in this regulation, such as exposures to a single industry, economic sector, geographic region, as well as exposures to a particular asset class, product, collateral or currency.

17.2 A Bank's information systems must be able to identify and aggregate risk concentrations in a timely manner, and facilitate the active monitoring and management of all risk concentrations as described in Article 17.1.

17.3 A Bank's risk appetite statement must include thresholds for acceptable concentrations of risk reflecting the Bank's risk appetite. These thresholds must be appropriately integrated into a Bank's processes and procedures, and well understood by any relevant staff.

17.4 All material risk concentrations must be regularly reviewed and reported to the Board. Such reports must highlight any current, near or expected breaches of the risk appetite and of the regulatory requirements.

17.5 Senior management must monitor the large exposure limits described in this regulation for the purposes of risk management and to detect any breaches. In the case of breaches, senior management must comply with Article 3.5 of this regulation immediately. Immediate communication means that this communication cannot be subject to Board approval, review, or any other form of confirmation by the Board.

17.6 A Bank must include in its stress testing programmes the impact of significant risk concentrations.

17.7 A Bank must cover in its Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) all forms of concentration risk.

17.8 New or additional exposures resulting in a large exposure may only be granted following approval by the Board of the Bank, or following approval by a designated Board committee.

17.9 Where an existing exposure becomes a large exposure for any reason other than the Bank granting an additional exposure, the Board must be informed immediately. Such a large exposure must also be approved by the Board or a designated Board committee, but it may be done ex-post within a reasonable timeframe.

17.10 A large exposure must be subject to increased monitoring, proportional to its size and risks, in terms of all associated risks, including also risks other than credit risk such as legal, compliance, market and interest rate risk. This should also be reflected in the frequency, detail, and the granularity of reporting to the Board.

18.1 In addition to the large exposure limits, additional limits apply to the Related Parties as set out below:

18.2 In Article 18.1.1 above, the individual limit for shareholders applies to an independent shareholder, the Group Of Connected Counterparties they belong to, and their Related Parties. The aggregate limit applies to multiple such Groups of Connected Counterparties and Related Parties, which are otherwise not identified as a Group Of Connected Counterparties.

18.3 Where a Board Member constitutes a Group Of Connected Counterparties with a shareholder who owns 5% or more of the Bank's capital, the lower limits applicable to Board Members apply to that Group Of Connected Counterparties. However, a natural person nominated by a shareholder need not be considered a Group Of Connected Counterparties with that shareholder based on his nomination alone.

19.1 The general large exposure limit applicable to branches of foreign banks is equal to the lower of 250% of the Branch Capital and 25% of the entity level capital. This is instead of the limit set in Article 3.1 of this regulation.

19.2 A branch's head office and its head office's branches are always considered a single counterparty, and, based on the criteria set out in Article 4 of this regulation, will normally constitute a Group Of Connected Counterparties with its group, including all subsidiaries of the ultimate parent, to which the large exposure limits apply.

19.3 A branch of a foreign bank must limit its exposures to its head office, which includes exposures to other branches of the head office, to maximum 30% of the Branch Capital for funded exposures and 300% of the Branch Capital for unfunded exposures.

19.4 For the large exposure limits for which the application to branches is not specified, the same limits apply as for Banks incorporated in the UAE, and the limits are applied to the Branch Capital.

20.1 Violation of any provision of this regulation and any accompanying Standards may be subject to supervisory action and administrative and financial sanctions as deemed appropriate by the Central Bank.

20.2 Supervisory action and administrative and financial sanctions by the Central Bank may include withdrawing, replacing or restricting the powers of Senior Management or members of the Board, providing for the interim management of the Bank, imposition of fines or barring individuals from the UAE banking sector.

The Regulatory Development Division of the Central Bank shall be the reference for interpretation of the provisions of this regulation.

This regulation repeals and replaces the following Central Bank Circulars and Notices:

22.1 Circular No. 32 of 2013 regarding “Monitoring of Large Exposure Limits” and its annexes (including the “Guidelines to Monitoring of Large Exposures”);

22.2 Notice No. 300/2013 dated 17/11/2013 regarding “Regulations Re Monitoring of Large Exposure Limits”; and,

22.3 Notice No. 226/2018 dated 1/10/2018 regarding “Large Exposures - Credit Concentrations Above Limits”.

23.1 This regulation shall be published in the Official Gazette in both Arabic and English and shall come into effect (1) one month from the date of publication.

23.2 A grandfathering scheme will apply to any breaches that are due to the change in regulation, as set out in this Article.

23.3 The ‘grandfathered basis' is equal to the breach recorded as of 31 December 2022 when applying the requirements of this regulation, deducted by the breach recorded as of the same date when applying the requirements of Circular No. 32/2013 regarding “Monitoring of Large Exposure Limits” and its annexes (including the “Guidelines to Monitoring of Large Exposures”). The aforementioned requirements include the change in capital base, large exposure limits, and calculation methods.

The grandfathered basis is tied to a specific exposure and counterparty, which will be referred to as the ‘grandfathered exposure', and cannot be used to apply grandfathering to any other exposures or counterparties. For the avoidance of doubt, where the aggregate of multiple exposures to the same counterparty (or Group Of Connected Counterparties) leads to a breach, the grandfathering applies to that specific group of exposures only.

The grandfathered basis is fixed and does not change over time.

23.4 The grandfathering basis will determine the ‘grandfathered amount', which is the amount by which a grandfathered exposure may be reduced when applying the requirements of this regulation. The grandfathered amount is determined by multiplying the grandfathered basis with the following percentage:

23.4.1 100%, upon this regulation coming into force until 30 December 2023;

23.4.2 75%, from 31 December 2023 until 30 December 2024;

23.4.3 50%, from 31 December 2024 until 30 December 2025;

23.4.4 25%, from 31 December 2025 until 30 December 2026;

23.4.5 0%, from 31 December 2026 and onwards.

On 31 December 2026, the grandfathering scheme will cease having any effect.

23.5 Article 3.5 and 3.6 of this regulation do not apply to the grandfathered amount; but apply fully to the exposures in breach after applying the grandfathering scheme.

23.6 The reporting requirements set out in Article 5 of this regulation fully apply to any grandfathered exposures. Banks that have grandfathered exposures will however be required to attach additional information to their regular reporting to the Central Bank providing an overview of:

23.6.1 The grandfathering basis as per Article 23.3;

23.6.2 The percentage applied for the current period as per Article 23.4;

23.6.3 The grandfathered amount as per Article 23.4;

23.6.4 The current exposure amount without deduction of the grandfathered amount;

23.6.5 The amount by which the above (Article 24.6.4) breaches the applicable limits;

23.6.6 The current exposure amount after deduction of the grandfathered amount;

23.6.7 The amount by which the above (Article 24.6.6) breaches the applicable limits.

The Central Bank may issue further instructions on how the above should be reported, including both in terms of content and in terms of format.

23.7 For interbank exposures, the grandfathering scheme set out above does not apply, and Banks must comply fully by 31 December 2023.