Dubai Financial Services Authority proposes a new Credit Funds class

Requirement

DFSA Proposal

Scope & Consideration

Foundational Issues

Propose to allow Fund Managers to use Fund Property for direct origination of loans or purchase of loan portfolio’s using fund property.

Restricted to a new specialist class of Funds (Credit Funds) that can originate loans/or purchase loan portfolio’s

Credit Fund

A Credit Fund’s investment objective must be to use at least 90% of the Fund Property for either:

  i.              loan origination; or

ii.               loan portfolio acquisition

Credit Funds to be restricted to Qualified Investor Funds (QIF) and Exempt Funds (EF) only

Legal Form

Credit Fund must be either:

1.         an Investment Company; or

2.         Investment Partnership;

3.         Closed-ended legal structure with a specified end date (proposed not to exceed 10 years); and

4.         Can be managed using an internal or external model

DIFC Fund Managers cannot establish an External Credit Fund.

External Fund Managers cannot establish a DIFC Credit Fund.

Risks

The treatment of bank lending and fund lending will be treated differently, such as:

1.       Riskiness of loans made through Credit Funds;

2.       Complexity of lending products offered by Credit Funds

3.       Permissible borrowers

To manage such risks- Credit Funds will be subject to certain limitations:

i)                Credit Funds should not issue letters of credit or give guarantees;

ii)              Credit funds should be able to undertake financial leasing along with discounting and factoring of invoices

iii)            Current considerations and stakeholder feedback sought as to whether trade finance activities should be permitted;

Permissible Borrower

Credit Funds should be prohibited from granting loans to:

      i.               Natural persons;

    ii.               The Fund Manager and related parties;

  iii.               Other funds;

  iv.               Financial institutions and their related parties (except under additional conduct and genuine treasury management)

    v.               Persons intending to trade in equities and other tradable investments and commodities, including digital assets; and

  vi.               Persons whose business is the provision of credit

Additional Controls for Credit Funds

A Fund Manager of a Credit Fund must establish, in respect of the fund, the following:

      i.               A risk appetite statement;

    ii.               Assessment, pricing and granting of credit (including criteria, governance and decision making);

  iii.               Credit monitoring, renewal and refinancing policy (including criteria, governance and decision making);

  iv.               Collateral management policy;

    v.               Concentration risk management policy;

  vi.               Valuation, including collateral valuation and impairment;

 vii.               Credit monitoring;

viii.               Identification of problem debt management;

  ix.               Forbearance;

    x.               Delegation; and

  xi.               Documentation and security

The Credit Fund should also:

i.            Ensure credit-granting is based on sound and well-defined criteria;

ii.            Internal methodologies to assess the credit risk of exposures to individual obligors, securities or securitization positions and credit risk at the portfolio level which do not rely solely on external credit rating agencies;

iii.            Be ongoing administration and monitoring of the various credit risk bearing portfolio positions and exposures, including for identifying and managing problem credits and making value adjustments and provisions;

iv.            Measures o ensure that the diversification of credit positions is adequate having regard to the target markets and overall credit strategy’

v.            If credit risk mitigation techniques adopted are to prove less effective than expected, measures to address and control credit risks; and

vi.            Measures to address concentration risk

Additional Systems and Controls requirements for Credit Funds 

   i.               Fund Managers of Credit Funds must have systems and controls including stress-testing, and performed at least annually

 ii.               Diversification requirement to state in the prospectus limit exposure to any one issuer or group to a maximum of 25% of net assets within a specified time-frame;

iii.               Not intentionally breach the specified risk diversification strategy;

iv.               Seek approval from unitholders, in circumstances where the diversification strategy may be breached (in the absence of such unitholder approval, terminate the fund);

 v.               Limited redemption is permissible, subject to controls

vi.               Leverage to be permitted up to a maximum of 10% of the Funds NAV;

Disclosure & Marketing

Enhanced disclosures to be included in the prospectus of a Credit Fund, including:

  i.              Risk warnings;

ii.               Risk and reward profile relating to the specific loan origination strategy;

iii.              Information on the proposed concentration risk exposure to geographies, sectors and risks;

iv.              Details of the credit assessment and monitoring process;

Enhanced disclosures in the periodic reporting to include:

  i.              Breakdown of originated loans, senior secured v junior and mezzanine;

ii.               Breakdown of originated loans, between loans made with an amortizing repayment schedule;

iii.              Breakdown of the loan to value ratio for each originated loan;

iv.              Information in respect of:

a.       Non-performing exposures, as defined in the applicable implementing technical standards; and

b.      Exposures subject to forbearance activities

v.               Any material changes to the credit assessment and monitoring process

Prudential Requirements

A Fund Manager of a Credit Fund should be subject to a base capital requirement of USD100,000

DFSA Application fee for licensing of a Fund Manager of a Credit Fund will be USD10,000