Financial Operations and Activities in Capital Markets

371 / Text/ Section 1/ No. 66 dated 30-6-2018 / K Basic Circular for Banks No. 66 1 Also addressed to financial institutions and financial intermediation institutions

We enclose herewith a copy of Basic Decision No. 7493 dated December 24, 1999, concerning Financial Operations and Activities in Capital Markets. Beirut, December 24, 1999 Governor of the Central Bank of Lebanon Riad Tawfiq Salamah

1 - Addressed to financial institutions and financial intermediation institutions pursuant to Interim Decision No. 8786 dated July 14, 2004 (Interim Circular No. 63). 2 - The title of this decision was amended pursuant to Article One of Interim Decision No. 11705 dated February 28, 2014 (Interim Circular No. 353), effective as of March 3, 2014. Old No. 1784

Basic Decision No. 7493 / 1 Financial Operations and Activities in Capital Markets The Governor of the Central Bank of Lebanon, pursuant to the Monetary and Loan Law, particularly Article 174 thereof, and based on a resolution adopted by the Central Council in its meeting held on December 22, 1999, hereby decides as follows:

Article One: First: Banks are prohibited from conducting transactions on their own account in derivative instruments, except for hedging purposes. The prohibition stipulated in this paragraph does not include transactions on derivative instruments that banks conduct for the purpose of marketing them to the public. Second: Banks and financial institutions, each in respect of itself, are prohibited from conducting on their own account the following:

• 1. Participating in investment entities established or resident in Lebanon, only after obtaining prior approval from the Central Bank of Lebanon, with such bank participations subject to the provisions of Article 153 of the Monetary and Loan Law.
• 2. Transactions on securities and composite financial instruments issued in Lebanon, in any currency, excluding those whose conditions are specified in paragraph (3) of this article or those that: a. Benefit from an unconditional guarantee for the full principal amount. b. Do not exceed in aggregate nominal value 25% of the own funds of the concerned banks or financial institutions.

3. Transactions on securities and composite financial instruments issued in Lebanon and linked to Lebanese government treasury bills or foreign currency certificates of deposit issued by the Central Bank of Lebanon ("Notes Linked Credit"), excluding those whose conditions include the following: a. An unconditional guarantee for the full principal amount, at least in case of an "Event of Default" (Credit Event), particularly non-payment of the value of the aforementioned treasury bills and certificates of deposit. b. Mandatory repayment of the aforementioned treasury bills by transferring them to the client, in case of an "Event of Default" (Credit Event), particularly non-payment of the value of the aforementioned treasury bills and certificates of deposit. c. Not considering changes in prices of Credit Default Swaps (CDS) on Lebanese government treasury bills, without any internationally recognized credit event occurring, within the categories of credit events that require the issuer to repay the aforementioned treasury bills by transferring them to the client.
4. The transactions referred to in paragraphs (1), (2), and (3) above with non-resident sectors are exempt from the regulatory provisions issued by the Central Bank of Lebanon on this matter.

Article Two: First: Subject to the provisions of Article One of this decision and while retaining the regulatory and supervisory powers granted by prevailing laws to the Central Bank of Lebanon and the Banking Control Commission, banks and financial institutions that conduct on behalf of their clients:

• for subscription, the issuance, purchase, sale, or marketing of financial instruments offered directly to the public or purchased/sold on behalf of the public,
• in trading financial instruments and financial rights listed or traded in regulated financial markets and those licensed by the Financial Markets Authority established pursuant to Law No. 161 dated August 17, 2011, including shares, options rights, forward contracts, derivative or composite financial instruments, and instruments/rights linked to currencies, commodities, and metals, shall comply with the following:

1. Opening accounts in their name dedicated to the aforementioned transactions, subject to all conditions and requirements stipulated in relevant laws, under the supervision of the Financial Markets Authority, and subject to its implementing regulations.
2. Taking appropriate legal measures to ensure the exercise of this supervision. Second: If non-exempt banks (exempt from the provisions of Legislative Decree No. 50 dated July 15, 1983) and financial institutions wish to conduct, on behalf of their clients, transactions in all financial instruments and products through specialized banks subject to the aforementioned Legislative Decree or through financial intermediation institutions, it is required:

• Opening dedicated accounts for the aforementioned transactions with specialized banks or concerned financial intermediation institutions, subject to the supervision of the Financial Markets Authority.
• Signing contracts between clients and specialized banks, or among them and financial intermediation institutions, as stipulated in relevant laws and implementing regulations issued by the Financial Markets Authority, subject to its supervision. Third: In the case referred to in the "Second" paragraph, it is permitted:
• For a specialized bank or affiliated financial intermediation institution to avail itself of committees established at the parent bank or parent financial institution to assist the committees stipulated in implementing regulations issued by the Financial Markets Authority.
• For a parent bank or parent financial institution to act as an intermediary for the specialized bank or affiliated financial intermediation institution. Fourth: Transactions in financial instruments and products conducted by all banks and financial institutions on their own account, subject to execution according to prevailing market prices, are under the supervision of the Financial Markets Authority, with exclusive verification, except for transactions conducted with the Central Bank of Lebanon.

Article Two (Recopied):

Article Three: Banks that provide guarantees for the issuance or marketing of any financial instruments and products must notify the Banking Control Commission thereof, and in all cases, the value of provided guarantees shall not exceed 7% of the own funds of the concerned bank.

Article Four: The percentage specified in the above Article Three shall not apply if the transactions concerned by this decision are conducted outside the bank's budget, recorded only as a note and not generating any independent obligation in the "Contingent Liabilities" section, and accounted for accordingly.

Article Four (Recopied): First: Banks must record the surplus resulting from transactions selling sovereign financial instruments in Lebanese Lira and purchasing, simultaneously and integrally, foreign currency financial instruments under the "Deferred Liabilities" (Liabilities Deferred) item. This surplus is recorded in Lebanese Lira and calculated within the bank's own funds (Tier 2 Capital). Second: Banks must utilize the realized surplus to secure:

1. The solvency ratio requirements specified in Basic Decision No. 6939 dated March 25, 1998.
2. Any additional requirements resulting from the application of International Financial Reporting Standard No. 9 (IFRS 9), effective as of January 2, 2018.
3. A Lebanese Lira provision to cover impairment of foreign participations, subject to the bank's supervisory auditors conducting an impairment test for these participations in accordance with International Accounting Standard No. 36 (Impairment of Assets - IAS 36).
4. A Lebanese Lira provision to cover impairment of goodwill resulting from merger transactions, subject to the bank's supervisory auditors conducting an impairment test in accordance with International Financial Reporting Standard No. 3 (IFRS 3), pursuant to Basic Decision No. 9371 dated July 7, 2006. Third: If a surplus remains after securing the requirements specified in the "Second" paragraph of this article, up to 70% of the difference may be released and recorded in the Profit and Loss account as undistributable profits before allocation, according to the case, as a capital increase reserve calculated within the Ordinary Shareholders' Equity (One Tier Equity Common) category. Fourth: The increase in own funds resulting from applying the provisions of this article shall not be included in calculating the maximum 60% ratio for creditor fixed exchange rate centers stipulated in Basic Decision No. 6568 dated April 24, 1997.

Article Five: The concerned banks must establish a specialized unit for composite and derivative instruments, composed of competent and sufficiently experienced persons in financial markets and securities trading. The role of this unit is to conduct transactions on all composite and derivative instruments and products through a clear and specific trading mechanism governing the unit's operations in accordance with the bank's objectives.

Article Six: If a bank is required to provide financial guarantees for marketing or selling shares or units of a foreign investment entity in Lebanon, the value of provided financial guarantees shall not exceed 7% of the own funds of the concerned bank.

Article Seven: Financial institutions licensed by the Central Bank of Lebanon before the establishment of the Financial Markets Authority, and by the Financial Markets Authority after its operational date, for establishing or managing joint investment funds or participating in joint investment companies that manage a joint investment fund, must establish an independent administrative body responsible for managing the fund according to an internal control system encompassing rules ensuring compliance with applicable legal and regulatory obligations.

Article Eight: Banks licensed by the Central Bank of Lebanon before the establishment of the Financial Markets Authority, and by the Financial Markets Authority after its operational date, for managing joint investment funds or participating in joint investment companies, must comply with the following combined conditions:

1. Their own funds shall not be less than ten billion Lebanese Lira.
2. They must have dedicated an independent specialized unit operating according to a defined internal system and administrative structure for managing joint investment funds or their participation in joint investment companies.
3. In addition to the Financial Markets Authority license, they must obtain prior approval from the Central Bank of Lebanon to manage any joint investment fund.

Article Eight (Recopied):

Article Nine: This decision shall take effect upon its issuance.

Article Ten: This decision shall be published in the Official Gazette.

Beirut, December 24, 1999 Governor of the Central Bank of Lebanon Riad Tawfiq Salamah

(Form No. 1)

• This form was added pursuant to Interim Decision No. 8786 dated July 14, 2004 (Interim Circular No. 63), and subsequently repealed pursuant to Article Two of Interim Decision No. 11724 dated March 11, 2014 (Interim Circular No. 362).