The Dubai virtual assets Regulatory Authority “VARA” was established and authorized by Law No. [4] of 2022 regarding regulating virtual assets
in the Emirate of Dubai to establish a legal framework in relation to virtual assets “VA” and Virtual Asset Service Providers” VASPs”. In this article we will highlight the most important things that you shall know to abide with the lending and borrowing services rulebook.
What is the scope of lending and borrowing services rulebook?
This rulebook covers carrying out a contract under which a virtual asset shall be transferred or lent from one or more parties “the lender[s]” to one or more other parties “the borrower[s]” where the borrower[s] shall commit to return the same, at the request of the lender[s], at any time either during or at the end of the period agreed upon.
What shall be Publicly disclosed?
VASPs providing lending and borrowing services shall publish on their website in a prominent place or make available by other publicly accessible means:
- A detailed description of any actual or potential conflicts of interest arising out of their activities, and how these are managed.
- Their policies and procedures relating to data privacy, whistleblowing, and handling of client complaints.
- A statement regarding the ability of clients to have access to and withdraw their VA, particularly in times of extreme volatility.
- A statement regarding VASP’s arrangements for the protection of clients’ assets held by the VASP and how it determines uses of client VA, including but not limited to a detailed description of such uses.
- A statement as to how they protect client VA from counterparty risk, including but not limited to whether the VASP only enters into over-collateralized loans.
- A statement as to how during the provision of lending and borrowing services, client VA are used and how clients’ interests in respect of those VA are thereby respected.
- A statement explaining that client VA used by the VASP during the provision of lending and borrowing services may be at risk, including the types and nature of such risks, and a statement on the likelihood and severity of any losses which may be suffered.
- A statement as to how liquidity risk is managed.
- Details of any past convictions or prosecutions of any member[s] of their senior management or board, whether before the courts of the UAE or the courts of another jurisdiction.
Are there any activity related disclosures?
VASPs shall, at a minimum, clearly disclose the following in relation to VA they borrow from clients:
- The denomination of interest payments and whether the client has an option to select such denomination and modify the selection at any time.
- The amount and nature of interest offered to clients in the form of annual percentage yield denominated in the type of borrowed virtual asset.
- Whether the amount of interest is an estimation and if so, provide a description of how such estimation is made by the VASP.
- The frequency at which interest accrues and is credited to client accounts.
- Whether interest is accrued on a simple or compound basis and, if the VASP adopts a tiered approach which offers compound interest for a maximum value of VA, the details of such tiered approach.
- VASPs shall publish a prominent explanation of:
- Their services and specification of which lending and borrowing services are available to which client types.
- Any restrictions on the services.
- VASPs shall publish and update at least every three months a lending and borrowing asset and liability report, including but not limited to values of VA held, lent, or borrowed, pledged, or posted as collateral, and how they are held.
- VASPs shall publish a clear and transparent explanation of all governance arrangements in respect of:
- Protocol governance structures to the extent relevant and applicable to the provision of Lending and Borrowing Services and the loaning and pledging of VA to and by clients, as applicable, including client risks in respect of the same.
- Whether or not the VASP uses any proprietary protocols during the provision of the lending and borrowing services.
- To the extent that a VASP’s lending and borrowing services are made available through, or information communicated via, a third party, the VASP shall also procure that all disclosures and information required is provided in an easily accessible location on the website of that third party, in plain and transparent language, in a machine-readable format and is kept accurate and up to date at all times.
Are there any general requirements VASP shall abide by?
- VASPs shall, always, ensure that:
- They have sufficient VA to provide services and satisfy client obligations. Sufficient collateral has been posted by borrowers in accordance with agreed amounts and that both are monitored and audited on a regular basis.
- VASPs shall ensure all clients are fully aware when VA are not able to be withdrawn as part of the lending and borrowing services they provide. To the extent VA are able to be withdrawn, VASPs shall ensure all clients can withdraw such VA at all times, and complete withdrawal requests so that VA which are the subject of such requests are transferred in accordance with client instructions within twenty-four hours, subject to any factors outside of the VASP’s control including limitations or malfunctioning of any distributed ledger technology not controlled by the VASP or its group.
- VA of a client used by a VASP during, or in connection with, the provision of any lending and borrowing services shall be held on behalf of the client unless the client agreement expressly states otherwise.
- VASPs shall, on a regular basis, conduct comprehensive due diligence on all clients and counterparties such that they are satisfied that client VA are not subject to undue counterparty risk. VASPs shall collect and verify the following information of each counterparty:
- The nature and type of business.
- Financial situation and overall liquidity.
- All other information which a prudent lender would require to assess ris associated with a particular loan.
What are the client’s obligations regarding reporting & valuation?
VASPs shall, at least monthly, provide to clients a written statement containing the following information:
- The total value of VA in a client’s account.
- All lending and borrowing transactions entered between the VASP and the client in the reporting period.
- The amount of interest accrued from and credited to the client’s account for lending transactions.
- The amount of collateral posted by the client for borrowing transactions in the reporting period.
- VASPs shall maintain accurate and reliable records that are sufficient to confirm and identify assets under management and client positions and ensure that all assets under management are subject to independent valuation and client reporting.
- VASPs shall have comprehensive and well-documented valuation policies and procedures in place to ensure the production of timely and accurate valuations.
What are the record-keeping requirements?
VASPs shall maintain the following for at least eight years:
- Records of all transactions in relation to their services, including but not limited to all client agreements, agreements with other counterparties and client instructions.
- Information collected from counterparties.
What are risk management and due diligence requirements?
- Before providing services to a client, a VASP shall carry out sufficient due diligence to satisfy itself as to the risk profile of such client and transaction at that time and during the services, the need for and the suitability of any collateral to be provided, and that any collateral is capable of being pledged including under applicable law.
- VASPs shall ensure that liquidity risk and market risk are each monitored and tested regularly, and appropriate measures put in place as required to address any such risk in a prompt manner and that collateral, including VA, is held by them, such collateral is adequate and appropriately protects the VASP against applicable risks. VASPs shall monitor any such risk and record the assessment of such risk regularly and on an ongoing basis and put appropriate measures in place as required to address any such risk in a prompt manner.
- All such risk management and due diligence must be regularly audited by an independent third party.
What shall be mentioned in the Client’s agreements?
Client’s agreements shall set out the following:
- Descriptions of the VA lent, borrowed, and/or used as collateral that are sufficient to identify such VA.
- Any loan-to-value ratio[s] applicable under the agreement.
- The respective rights of the VASP, the client and any other entity involved providing the services in respect of VA that are the subject of the agreement, including in respect of collateral.
- How and when any interest is paid or payable, the applicable rate, or in the case of a variable rate, how it is calculated and how interest may vary and how such variations will be communicated by the VASP to the client.
- How and when any VA lent or borrowed, or held as collateral, are to be held and returned.
- Whether or not VA of a client used by a VASP during, or in connection with, carrying out any of the services, shall be held on behalf of the client.
- The consent of the clients to the use of any VA of the client during the provision of the services by the VASP shall be clearly and transparently obtained.
- Any right of the client to withdraw any VA lent or borrowed or held as collateral.
- A statement explaining that client’s VA used by the VASP during the provision of the services may be at risk, including the types and nature of such risks, and a statement on the likelihood and severity of any losses which may be suffered.
- Any rights of the VASP to vary the terms of the agreement.
- Any rights of the VASP and the client to terminate the agreement and the consequences of termination; any terms relating to any fluctuation in value of the VA.
- Consequences of any event of default.
- An explanation of the risks the client may be exposed to.
- Full details of the VASP’s client complaints procedure to enable clients to register complaints as required in relation to the VASP or the services provided by the VASP.
- Any requirements necessary for compliance with the governing law of the agreement.
VARA has issued the lending and borrowing services rulebook which stipulates the requirements and obligation to provide such services. In this article we have determine all the necessary information in relation to the scope of lending and borrowing services and the covered activities, what shall be publicly disclosed, activity related disclosures, client’s reporting and valuation obligations, record-keeping, risk management and due diligence requirements and finally the most important information that shall be mentioned in client’s agreements.
For further assistance please contact Al Safar & Partners on +97144221944 ext. 720? or +971 55 763 0405-email [email protected] ?- ? ? www.alsafarpartners.com
