The Central Bank seeks to promote the effective and efficient development and functioning of the banking system. To this end, Banks must have a comprehensive approach to market risk management, including Board and Senior Management oversight, to ensure their resiliency and enhance overall financial stability.

In introducing this Regulation and the accompanying Standards, the Central Bank intends to ensure that Banks’ approaches to the management of market risk are in line with leading international practices.

This Regulation and the accompanying Standards are issued pursuant to the powers vested in the Central Bank under the Central Bank Law.

Where this Regulation, or its accompanying Standards, include a requirement to provide information or to take certain measures, or to address certain items listed at a minimum, the Central Bank may impose requirements, which are additional to the list provided in the relevant article.

The objective of this Regulation is to establish the minimum acceptable standards for Banks’ approach to market risk management, with a view to:

i. Ensuring the soundness of Banks; and

ii. Enhancing financial stability.

The accompanying Standards supplement the Regulation to elaborate on the supervisory expectations of the Central Bank with respect to market risk management.

This Regulation and the accompanying Standards apply to all Banks. Banks established in the UAE with significant Group relationships, including Subsidiaries, Affiliates or international branches must ensure that the Regulation and Standards are adhered to on a solo and group-wide basis.

This Regulation and the accompanying Standards must be read in conjunction with the Risk Management Regulation and Standards issued by the Central Bank, which establish the requirements for a Bank’s overarching approach to risk management.

1. Affiliate: An entity that, directly or indirectly, controls, is controlled by, or is under common control with another entity. The term control as used herein shall mean the holding, directly or indirectly, of voting rights in another entity, or of the power to direct or cause the direction of the management of another entity.
    
2. Bank: A financial entity, which is authorized by the Central Bank to accept deposits as a Bank.
    
3. Board: The Bank’s Board of Directors.
    
4. Banking Book: Positions in financial instruments that are expected to be held to maturity.
    
5. Central Bank: The Central Bank of the United Arab Emirates.
    
6. Central Bank Law: Union Law No (10) of 1980 concerning the Central Bank, the Monetary System and Organization of Banking as amended or replaced from time to time.
    
7. Central Bank regulations: Any resolution, regulation, circular, rule, standard or notice issued by the Central Bank.
    
8. Group: A group of entities that includes an entity (the 'first entity') and:
    
   1. any Parent of the first entity;
       
   2. any Subsidiary of the first entity or of any Parent of the first entity; and
       
   3. any Affiliate.
   
    

9. Islamic Financial Services: Shari’a compliant financial services offered by Islamic Banks and Conventional Banks offering Islamic banking products (Islamic Windows).
    
10. Market risk: The risk of losses in on and off-balance sheet positions arising from movements in market prices.
     
11. Parent: An entity (the 'first entity') which:
     
    1. holds a majority of the voting rights in another entity (the 'second entity');
        
    2. is a shareholder of the second entity and has the right to appoint or remove a majority of the board of directors or managers of the second entity; or
        
    3. is a shareholder of the second entity and controls alone, pursuant to an agreement with other shareholders, a majority of the voting rights in the second entity.
       
         Or;
    4. if the second entity is a subsidiary of another entity which is itself a subsidiary of the first entity.
    
     

12. Risk appetite: The aggregate level and types of risk a Bank is willing to assume, decided in advance and within its risk capacity, to achieve its strategic objectives and business plan.
     
13. Risk governance framework: As part of the overall approach to corporate governance, the framework through which the Board and management establish and make decisions about the Bank’s strategy and risk approach; articulate and monitor adherence to the risk appetite and risk limits relative to the Bank’s strategy; and identify, measure, manage and control risks.
     
14. Risk limits: Specific quantitative measures that must not be exceeded, based on, for example, forward looking assumptions that allocate the Bank’s aggregate risk appetite to business lines, legal entities or management units within the Bank or Group in the form of specific risk categories, concentrations or other measures, as appropriate.
     
15. Risk profile: Point in time assessment of the Bank’s gross (before the application of any mitigants) or net (after taking into account mitigants) risk exposures aggregated within and across each relevant risk category based on current or forward-looking assumptions.
     
16. Senior Management: The executive management of the Bank responsible and accountable to the Board for the sound and prudent day-to-day management of the Bank, generally including, but not limited to, the chief executive officer, chief financial officer, chief risk officer and heads of the compliance and internal audit functions.
     
17. Subsidiary: An entity (the 'first entity') is a subsidiary of another entity (the 'second entity') if the second entity:
     
    1. holds a majority of the voting rights in the first entity;
        
    2. is a shareholder of the first entity and has the right to appoint or remove a majority of the board of directors or managers of the first entity; or
        
    3. is a shareholder of the first entity and controls alone, pursuant to an agreement with other shareholders, a majority of the voting rights in the first entity.
       
        Or;
       if the first entity is a subsidiary of another entity which is itself a subsidiary of the second entity.

18. Trading Book: Positions in financial instruments and commodities held either with trading intent or in order to hedge other elements of the trading book.
     

1. A Bank must have an appropriate market risk strategy and market risk governance framework that provides a Bank-wide and, if applicable, Group-wide view of market risk. This includes policies, processes, procedures, systems and controls to identify, measure, evaluate, monitor, report and control or mitigate material sources of market risk on a timely basis.
    
2. The Board must approve the Bank’s strategies, policies and processes for the management of market risk, which must be reviewed annually.
    
3. The Board must ensure that the Bank has in place adequate systems to identify, measure and manage market risk. Roles and responsibilities must be clearly articulated and provisions must be made for adequate separation of duties and avoiding conflicts of interest.
    
4. The Board must ensure that the Bank has appropriate market risk management processes that provide a bank-wide and, if applicable, Group-wide view of market risk exposure. These must be consistent with the risk appetite statement, risk profile, systemic importance and capital strength of the Bank, take into account market and macroeconomic conditions and the risk of a significant deterioration in market liquidity.
    
5. Senior Management must ensure that the strategy, policies and procedures are developed and implemented effectively. The Board must oversee the Senior Management to ensure that the strategies, policies and processes are implemented effectively and fully integrated into the Bank’s overall risk management process.
    
6. A Bank’s policies and processes must establish an appropriate and properly controlled market risk environment, including, at a minimum, the following items:
    
   1. Effective information systems for accurate and timely identification, aggregation, monitoring and reporting of market risk exposure to the Board and Senior Management;
       
   2. Appropriate market risk limits consistent with the Bank’s risk appetite, risk profile and capital strength and with the management’s ability to manage market risk and which are understood by and regularly communicated to, relevant staff;
       
   3. Exception tracking and reporting processes that ensure prompt action at the appropriate level of the Senior Management or Board, where necessary;
       
   4. Effective controls around the use of models to identify and measure market risk and set limits; and
       
   5. Sound policies and processes for allocation of exposures to the trading book.

7. A Bank must ensure that intra-day exposures are managed within limits established by the Board-approved market risk policies.
    
8. A Bank wishing to establish a trading book must submit for the Central Bank’s review a trading book policy statement that specifies those activities that belong in the trading book. Any significant change in a Bank’s existing trading book policy must be promptly submitted to the Central Bank for review.
    

1. A Bank’s market risk measurement systems, monitoring and controls must enable it to maintain capital adequacy on a continuous basis and remain within its intra-day and other market risk limits.
    
2. An independent review of a Bank’s market risk measurement system and the overall market risk management process must be earned out at least annually, as part of the Bank’s own internal auditing process, by functionally independent, appropriately trained and competent personnel.
    
3. A Bank must capture all transactions on a timely basis.
    
4. A Bank’s internal models must be validated internally by suitably qualified parties independent of the model development process, to ensure that they are conceptually sound and adequately capture all material market risks.
    
5. A Bank must have its internal models validated externally by an independent and suitably qualified party on a regular basis and, in addition, on an as-needed basis.
    
6. A Bank’s back-testing program must consist of periodic comparisons of its model results with the realized profit or loss (trading income) relating to corresponding periods.

1. A Bank must have systems and controls to ensure that the Bank’s mark-to-market positions, whether in the banking book or trading book, are revalued frequently.
    
2. A Bank’s valuation process must use consistent and prudent practices and reliable market data, or, in the absence of market prices, internal or industry-accepted models, verified by a function independent of the relevant risk-taking business units.
    
3. A Bank that relies on modelling for the purposes of valuation must ensure that the model is validated by a function independent of the relevant risk-taking business units.
    
4. A Bank must establish and maintain policies and processes for considering valuation adjustments for positions that otherwise cannot be prudently valued, including concentrated, less liquid and stale positions.
    
5. A Bank must make appropriate valuation adjustments for uncertainties in determining the fair value of assets and liabilities.
    
6. A Bank operating a trading book must establish an appropriate valuation methodology and measurement model.

1. A Bank must at all times hold appropriate levels of capital against unexpected losses, which may arise from its market risk exposures.
    
2. A Bank must ensure that market risk capital requirements are met on a continuous basis.

1. A Bank must include market risk exposure in its forward-looking stress-testing programs as part of its comprehensive approach to risk management.

1. A Bank must inform the Central Bank of all significant changes in its market risk measurement systems and in its market risk profile.
    
2. A Bank must promptly notify the Central Bank when it becomes aware of a significant deviation from its Board-approved market risk limits, policies or procedures, or becomes aware that material market risks have not been adequately addressed.
    
3. Banks must report to the Central Bank on market risk in the format and frequency prescribed in the Standards.

1. A Bank offering Islamic financial services must ensure that its comprehensive approach to market risk management incorporates appropriate measures to comply with Shari’a rules and principles and related Shari’a control functions.

1. Violation of any provision of this Regulation and the accompanying Standards shall be subject to supervisory action as deemed appropriate by the Central Bank.

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

1. This Regulation and the accompanying Standards replace all previous Central Bank regulations with respect to market risk.

1. This Regulation and the accompanying Standards shall be published in the Official Gazette in both Arabic and English and shall come into effect one month from the date of publication.