The drafts were approved for issuance by the Technical Committee, in its 25th meeting held in Abu Dhabi on 6 October 2011. The IFSB invites comments from among regulatory and supervisory authorities, international organisations, market players, academics and other interested parties on the two drafts.
Details on the two EDs are as follows:
The proposed document on liquidity risk management endeavours to delineate a set of guiding principles for the robust management of liquidity risk by IIFS and its vigorous supervision and monitoring by supervisory authorities, taking into consideration the specificities of IIFS and complementing relevant existing and emerging international standards and best practices. In keeping with the objectives of the IFSB, the twenty-two (22) Guiding Principles aim to help develop a prudent, efficient and resilient Islamic financial services industry, thus enhancing the stability of the overall financial systems in which IIFS operate.
In addition to providing necessary conditions for effective liquidity risk management in the Islamic financial services industry, these Guiding Principles outline, among others, the:
i)salient characteristics of the liquidity risk management process to be undertaken by IIFS including identification, measurement, monitoring, control, reporting and mitigation;
ii)role of various components in the governance structure as well as that of different functional and business units in ensuring robust and effective liquidity risk management by IIFS;
iii)liquidity risk implications of various Islamic financing contracts during different stages of operations;
iv)important ingredients of supervisory framework to monitor the liquidity positions and liquidity risk management framework of IIFS that include, inter alia, initiatives for the development of a robust national liquidity infrastructure, supervisors’ contingency planning for IIFS and supervisors’ role as provider of Shari`ah -compliant liquidity support to IIFS.
The proposed document on stress testing aims to provide a set of guiding principles intended to complement the existing international stress testing framework taking into consideration the specificities of IIFS as well as the lessons learned from the financial crisis so as to contribute to the soundness and stability of the IIFS particularly, and Islamic financial services industry as a whole.
Twenty-two (22) Guiding Principles provide a framework for IIFS with the aim to guide them in assessing and capturing vulnerabilities under various stress-testing scenarios including extreme but plausible shocks, in order to achieve the following, inter alia:
i)identify how different portfolios respond to changes in key economic variables (for example benchmark rates, foreign exchange rates and credit quality);
ii)assess the quality of assets to identify existing and potential loss exposures;
iii)evaluate potential threats to the IIFS’s ability to meet its financial obligations at any time arising from either funding or market liquidity exposures;
iv)estimate the impact of stress events on baseline profit (as profits normally act as the first line of defence before dipping into capital);
v)analyse the IIFS’s ability to meet its capital requirements at all times throughout a reasonably severe economic recession.
There are six Guiding Principles for supervisory authorities, which can be used as (i) a surveillance tool for periodic “safety and soundness” of the financial system, and (ii) from a financial stability perspective, an identification of ‘weaknesses’ in the financial system and structural (systemic) vulnerabilities arising from the specific risk profiles of IIFS individually and collectively.
The IFSB will be organising a Public Hearing for these two EDs on 16 November 2011 in Kuala Lumpur, Malaysia.
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