SCA issues decision on adequacy standards for investment managers and management companies to protect investor assets and promote financial system stability

H.E. Dr. Obaid Al Zaabi, CEO of the Securities and Commodities Authority (SCA), issued a decision concerning capital adequacy standards for investment managers and management companies. The decision will enter into force 30 days from the date of its publication in the official gazette. Companies will be given a one-year grace period for compliance. 

This decision came after the SCA board has approved, in its last meeting, a study on adequacy standards for management companies and investment managers. The study was aimed at protecting investor assets and promoting the stability of the financial system through monitoring systemic risks, which is a key requirement by the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO).   
The decision includes nine articles on the scope of application, capital adequacy, credit risk, operational risk, market risk (managed assets), risk control and management, penalties, compliance, and entry into effect.

Article 1 of the decision stipulates that investment managers and management companies must demonstrate ongoing compliance with the adequacy standards provided therein, in accordance with the calculation methods outlined in the form prescribed by SCA.

Capital adequacy

Article 2 on capital adequacy stipulates that:
1. The investment manager and the management company must allocate capital to cover credit risk, market risk, and operational risk, even if not included as balance sheet items, in accordance with the ratios specified in Articles 3, 4, and 5 of this decision.
2. For the purposes of capital adequacy calculation, capital is classified as follows:
a. Tier one capital (core capital).
b. Tier two capital (supplementary capital). 
c. Tier one capital should not be less than tier two capital. 

Credit, operational, and market risk

The article on credit risk stipulates that the capital allocated to cover credit risk must not fall below 14% of the calculated amounts, according to the form prescribed for the purpose of capital adequacy calculation. 
Article 4 on operational risk includes risks resulting from inadequate or failed internal regulation, employee errors, or external events, including legal risk. It stipulates that the capital allocated to cover operational risk must not fall below 25% of the total expenses shown in the results of previous fiscal year. 
The article on market risk (managed assets) states that the capital allocated to cover market risk (managed assets) must not fall below 0.02% of the value of these assets.
Penalty and risk control and management
Article 6 on risk control and management stipulates that the investment manager and the management company must incorporate an effective mechanism and enforceable accounting and administrative procedures into its internal control system to manage and control risks the company may be exposed to.
Article 7 on penalties stipulates that violators of the provisions of this decision will be subject to penalty, in line with Federal Law No. (4) of 2000 concerning the Emirates Securities and Commodities Authority and Market and the regulations issued thereunder.   

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