5.23. Transactions with related parties
(1) The detailed requirements specifying the description, additional clarifications on definition of related parties, methodologies, parameters, and controls formulae in respect of the primary regulations on related party transactions are provided in Section J of Chapter 5 of the Baking Prudential Guideline (BPG) issued by the AFSA. It is suggested that this rule on related party transactions, be read in conjunction with Chapter 5 of the BPG issued by the AFSA to facilitate understanding of the regulatory requirements and compliance with them.
Related parties
(2) Related parties, of a Bank, includes:
Related party transactions – governance and controls
(3) A Bank must establish and implement a documented policy for transactions with related parties, which is approved by its Governing Body and includes:
- (a) effective systems to identify, monitor and report individual and total exposures to, and transactions with, related parties;
- (b) procedures to prevent a member of the governing body, a member of the Bank’s senior management or any other person who stands to gain a benefit from a related-party transaction from being part of the process of granting and managing the transaction;
- (c) well-defined criteria for the write-off of exposures to related parties;
- (d) prudent and appropriate limits to prevent or address conflicts of interest; and
- (e) procedures for tracking and reporting exceptions to, and deviations from, limits or policies.
(4) A Bank’s Governing Body must ensure that the Bank’s policies relating to related-party transactions are complied with and that any exceptions are reported to the appropriate level of the senior management, and, if necessary, to the governing body.
(5) The Governing Body must also ensure that the Bank’s senior management monitors transactions with related parties, takes appropriate steps to control or mitigate the risks from such transactions and writes off exposures to related parties only in accordance with the Bank’s policies.
(6) The Governing Body must approve transactions with related parties, and the write-off of relatedparty exposures, if such transactions or write-off exceeds specified amounts or otherwise poses any special risk.
(7) A transaction with a related party must not be undertaken on terms more favourable to the party than a corresponding transaction with a non- related party.
Limits on lending to related parties
(8) A Bank must not enter into a transaction that would cause it to exceed the limits set out in table 5 L unless it has the written approval of the AFSA to do so.
Table 5 L Limits on Banks’ exposure to related partie
Column 1 Item | Column 2Kind of exposure | Column 3Limit (% of total assets) |
1 | exposures to a member of the Governing Body or senior management of the Bank, or a person connected to either of them | 0.5 |
2 | the total of exposures under item 1 | 3 |
3 | exposures to a significant shareholder of the Bank (other than exposures to a shareholder that is a Bank or an equivalent entity regulated in a way comparable to a Bank in the AIFC)) | 2 |
4 | the total of exposures under item 3 | 5 |
5 | exposures to a related party or a party connected to the related party (other than exposures to a Bank or an equivalent entity that is regulated in a way comparable to a Bank in the AIFC) | 2 |
6 | the total of exposures under item 5 | 5 |
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Powers of the AFSA
(9) Despite anything in these rules, the AFSA may, in writing, set specific limits on a Bank’s exposures to a related party or to related parties in total.
(10) The AFSA may direct such exposures to be deducted from regulatory capital when assessing capital adequacy or direct that such exposures be collateralised.