Notice No. 09/2016 of June 22: Prudential Limits on Large Exposures

Published in the Official Gazette, First Series, No. 102, of June 22

NOTICE No. 09/2016

SUBJECT: PRUDENTIAL LIMITS ON LARGE EXPOSURES

It is necessary to establish prudential limits on large exposures and holdings of participations in non-financial enterprises by Financial Institutions supervised by the Bank of Angola.

In these terms, and under the combined provisions of letters d) and f) of paragraph 1 of Article 21 and letter d) of paragraph 1 of Article 51, both of Law No. 16/10, of July 15 – Law of the Bank of Angola, and Article 90 of Law No. 12/15, of June 17 – Law of the Basic Framework of Financial Institutions.

HEREBY DETERMINES:

Article 1. (Object) This Notice establishes limits on large exposures in accordance with Article 6, and on holdings of participations in non-financial enterprises in accordance with Article 7, both of this Notice.

Article 2. (Scope) This Notice applies to Financial Institutions under the supervision of the Bank of Angola, hereinafter abbreviated as Institutions, under the terms and conditions provided in the Law of the Basic Framework of Financial Institutions.

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Article 3. (Definitions) Without prejudice to the definitions established in the Law of the Basic Framework of Financial Institutions, for the purposes of this Notice, the following are understood:

1. Correlation: statistical measure of the relationship between two variables, which reflects the degree of relation, interdependence, or reciprocity between them.

2. Counterparty: natural or legal person, resident or non-resident, on which an Institution assumes one or more exposures.

3. Delta: variation in the value of an option resulting from a marginal variation in the value of its underlying asset.

4. Credit derivative: financial derivative instrument that results in the transfer of credit risk between the contracting parties.

5. Indirect holding of quotas or shares: it is considered that a person, natural or legal, indirectly holds quotas or shares in a company when these are attributable to them according to the criteria fixed in paragraph 2 of Article 6 of Notice No. 01/2013, of April 19, on corporate governance.

6. Non-financial enterprises: legal persons, resident and non-resident, whose nature does not fit the definition of 'Financial Institutions' present in the Law of the Basic Framework of Financial Institutions.

7. Exposures: the assets and off-balance sheet items listed in Annex I to this Notice.

8. Regulatory capital: 'RC' calculated in accordance with Notice No. 02/2016, on regulatory capital.

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9. Large exposure: situation where the sum of exposures towards a counterparty or a group of interconnected counterparties is equal to or greater than 10% (ten percent) of the regulatory capital of the Institutions.

10. Group of interconnected counterparties: set of persons, natural or legal, that constitute a single entity from the point of view of the assumed risk, due to being so linked that, in the event that one of them faces financial problems, the others may have difficulty in fulfilling their obligations. It is considered that this link exists in entities belonging to the same economic group, within the meaning of paragraph 3 of Article 1 of Notice No. 14/2007, of September 28, on consolidation for accounting purposes. The existence of common shareholders or administrators, cross-guarantees, or commercial interdependence that cannot be replaced in the short term constitutes indications of the existence of a group of interconnected counterparties, with the substance of transactions and economic relations prevailing over their formal aspects. The concept of group of counterparties does not apply, however, to relationships between companies with predominantly public capital, headquartered in Angola, without participation relationships between themselves, and between these and the Angolan State.

11. Financial derivative instrument: any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity, and respects the following characteristics: a) its value changes depending on an interest rate, price of a financial instrument or commodity, exchange rate, price index, rating, or credit index or other variable, designated as 'underlying';

CONTINUATION OF NOTICE No. 09/2016 page 4 of 18 b) no initial investment is required or this investment is not greater than that required for other types of contracts producing similar effects in relation to changes in risk factors, and; c) it is settled on a future date.

12. Concentration risk: exposure, or group of exposures of interconnected counterparties, with a quantitative expression sufficiently high to produce significant potential losses, which call into question the solvency of the Institution or its capacity to maintain current activity. In particular, in the case of credit concentration risk, there are common risk factors among the various interconnected counterparties, to such an extent that the variation of these factors can lead to a simultaneous adverse effect on the credit quality of each of the counterparties.

13. Security: fungible and freely negotiable financial instrument that confers to its holders credit rights, patrimonial rights, or participation rights in capital, including, notably, shares, bonds, debentures, participation certificates, quotas in collective investment institutions, and subscription rights associated.

14. Notional value: declared face value on which future payments in some financial derivative instruments are based.

Article 4. (Policies and processes)

1. Institutions must adopt operational procedures associated with solid, effective, and complete internal control policies and processes, for the identification of all risk concentration situations and for the control of the limits referred to in this Notice.

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2. In large exposures, Institutions may consider the direct risk or the risk of the guarantors of the operations provided that they apply consistent and uniform methodologies over time.

3. For the purposes of the preceding paragraph, sellers of protection in credit derivative contracts are equated to guarantors.

4. In exposures assumed towards collective investment schemes and in securitization operations, Institutions must consider, in an articulated manner, the direct and underlying risks of the exposure and its economic reality.

Article 5. (Control of concentration risk)

1. Without prejudice to the limits referred to in Article 1 of this Notice, Institutions must identify, assess, monitor, control, and report on concentration risk, particularly in situations of stress in financial markets, at the level: a) of the activity sectors of borrowers and guarantors; b) of the guarantors of the operations in the case they opt not to consider the direct risk; c) of counterparties in financial derivative operations, notably those traded in the over-the-counter market; d) of the countries of allocation of the operations; e) of suppliers of goods and services, and; f) of the dependence on the technology used, notably information technology.

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2. The Bank of Angola may determine adjustments to exposures on the matters referred to in the preceding paragraph, whenever it considers necessary for the good management of concentration risk.

3. For the purposes of the preceding paragraph, the Bank of Angola may analyze information regarding the regular formal reporting or request specific information.

Article 6. (Limits on large exposures)

1. Institutions may not assume large exposures towards a counterparty or a group of interconnected counterparties whose value exceeds 25% (twenty-five percent) of their regulatory capital.

2. The limit referred to in the preceding paragraph is reduced to 10% (ten percent) of regulatory capital when the large exposures concern Institutions holding qualified participations or the group of interconnected counterparties includes these shareholders, except if the qualified participation is on an Institution.

3. The sum of the 20 (twenty) largest large exposures may not exceed 300% (three hundred percent) of regulatory capital.

4. In the calculation of risks, exemptions and deductions provided for in Articles 11 and 12 of this Notice must be taken into account.

5. The limits established in paragraphs 1 to 3 of this article apply equally on a consolidated basis.

Article 7. (Limits on holdings of participations in non-financial enterprises)

1. Without prejudice to the provisions of the previous article, Institutions may not directly or indirectly hold quotas or shares of a non-financial enterprise or a group of interconnected non-financial enterprises whose amount exceeds 15% (fifteen percent) of the regulatory capital of the participating Institution.

2. The global amount of quotas or shares held, directly and indirectly, in non-financial enterprises may not exceed 40% (forty percent) of the regulatory capital of the participating Institution.

3. Institutions may not hold for a period exceeding 3 (three) years, consecutive or interpolated, directly or indirectly, shares or quotas whose amount exceeds 25% (twenty-five percent) of the capital of a non-financial enterprise.

4. The limits defined in this article are not applicable to management companies of social participations subject to supervision by the Bank of Angola.

5. The limits established in paragraphs 1 to 3 of this article apply equally on a consolidated basis.

Article 8. (Allocation to regulatory capital)

1. The limits fixed in this Notice are not applicable to exposures, or part of exposures, fully covered by regulatory capital, provided that these regulatory capitals are not considered in the calculation of the solvency ratio nor in other prudential ratios or limits.

2. Excesses to the limits provided for in this Notice are deductible from regulatory capital.

Article 9. (Categories of risky exposures)

1. Without prejudice to the provisions in Articles 13 and 14 of this Notice, exposures must be considered at the following values:

CONTINUATION OF NOTICE No. 09/2016 page 8 of 18 a) assets at their accounting book value, according to the rules of the Chart of Accounts Manual for Financial Institutions (CONTIF), with the exception of exposures belonging to the trading book; b) the trading book at the excess of long positions over short positions; c) high, medium, medium/low, and low-risk off-balance sheet items listed in Annex I of this Notice, at their nominal value, and; d) off-balance sheet items relating to financial derivative instruments, referred to in Annex I, at the value resulting from the multiplication of their notional value by the percentages in the table presented in Annex II, both of this Notice.

2. Exposures resulting from the following are not considered for the calculation of large exposure limits: a) foreign exchange operations during the normal settlement period according to commercial practices for each currency; b) purchase or sale of securities operations, during the normal settlement period according to commercial practices, up to a limit of 5 (five) business days counted from the date of payment or delivery of the securities; c) fund transfers, including payment services, clearing and settlement, in any currency, as well as clearing, settlement, and custody services for financial instruments on behalf and at the risk of counterparties in operations, and; d) firm commitment operations, up to a limit of 5 (five) business days, counted from the date the Institution received the previously subscribed assets.

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Article 10. (Associated guarantees)

1. Real and personal guarantees received by Institutions that meet the criteria established for guarantees for prudential purposes are eligible as mitigants of large exposures.

2. The guarantees referred to in the preceding paragraph may be considered within the scope of exemptions provided for in Article 13 or deductions in accordance with Article 14, both of this Notice.

Article 11. (Exemptions) Exposures are exempt from the limits stipulated in Article 6 of this Notice:

1. towards the Angolan State or Bank of Angola, including their central and provincial administrations.

2. fully secured by a guarantee, eligible under Notice No. 10/2014, of December 10, on guarantees for prudential purposes, granted by the Angolan State or Bank of Angola, including their central and provincial administrations.

3. towards central administrations and central banks of countries included in group 1, international organizations, or multilateral development banks, within the meaning provided in Instruction No. 1/2015, on classification of countries, multilateral development banks, and international organizations.

4. fully secured by a guarantee, eligible under Notice No. 10/2014, of December 10, on guarantees for prudential purposes, granted by central administrations or central banks of countries included in group 1, international organizations, or multilateral development banks, within the meaning provided in Instruction No. 1/2015, on classification of countries, multilateral development banks, and international organizations.

5. towards central administrations or central banks of countries not referred to in paragraph 2 of this article, provided they are denominated and financed in their national currencies.

6. fully secured by a guarantee, eligible under Notice No. 10/2014, of December 10, on guarantees for prudential purposes, granted by central administrations or central banks of countries not referred to in paragraph 2 of this article, provided that the exposure and the guarantee are denominated in their national currencies.

7. assumed by an Institution towards companies with which it is in a relationship of dominance or group, provided these are included in the consolidation perimeter for prudential purposes, provided for in Notice No. 03/2013, of April 22, on prudential supervision on a consolidated basis.

8. secured by cash deposits, constituted in the lending Institution or in an Institution with which it is in a relationship of dominance or group.

9. fully secured by liabilities subject to netting agreements.

10. secured by deposit certificates, issued by the lending Institution or by Institutions headquartered in Angola or in countries included in group 1, within the meaning provided in Instruction No. 1/2015, on classification of countries, multilateral development banks, and international organizations, with which it is in a relationship of dominance or group, provided they are deposited in these entities.

11. resulting from unused revocable credit lines, provided the contract stipulates that the lines can only be used on the condition that they do not imply exceeding the limits provided for in Article 6 of this Notice.

12. secured by securities issued by entities headquartered in countries or territories not included in group 5, within the meaning provided in Instruction No. 1/2015, on classification of countries, multilateral development banks, and international organizations, under the conditions provided for in Article 13 of this Notice, and

13. secured by securities issued by entities not referred to in the previous letter, provided they are denominated in their national currencies and respect the conditions provided for in Article 13 of this Notice.

Article 12. (Partial deductions from exposures to counterparties)

1. 80% (eighty percent) of the value of exposures must be deducted: a) towards or secured by guarantees of local or regional administrations of countries included in groups 1 and 2, within the meaning provided in Instruction No. 1/2015, on classification of countries, multilateral development banks, and international organizations, and; b) towards or secured by guarantees of Banking Financial Institutions that have their headquarters in Angola or in countries included in groups 1 and 2, within the meaning provided in Instruction No. 1/2015, on classification of countries, multilateral development banks, and international organizations.

2. 50% (fifty percent) of the value of exposures must be deducted: a) classified as low and medium/low risk listed in Annex I to this Notice, and; b) towards microcredit societies.

Article 13.

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(Exposures secured by securities) For the purposes of paragraphs 10 and 11 of Article 11 of this Notice, securities must respect the conditions referred to in paragraph 3 of Article 9 of Notice No. 10/2014, of December 10, on guarantees for prudential purposes, and their value must be at least 200% (two hundred percent) of the secured risk, except if:

1. they have the nature of shares or equity parts in which the value must be at least 250% (two hundred and fifty percent) of the secured risk.

2. they were issued by central, local, or regional administrations, exclusively public capital companies, central banks of countries included in groups 1 and 2, or by international organizations, within the meaning provided in Instruction No. 1/2015, on classification of countries, multilateral development banks, and international organizations, in which the value must be at least 150% (one hundred and fifty percent) of the secured risk.

3. they were issued by central, local, or regional administrations, exclusively public capital companies, or central banks, not referred to in paragraph 2 of this article, provided that the exposure and the securities are denominated in their respective national currencies, in which the value must be at least 150% (one hundred and fifty percent) of the secured risk.

Article 14. (Information reporting) The Bank of Angola will establish, in specific regulation, the deadlines and duties of information reporting in terms of structure, specifying the large exposures and the exposures subject to and exempt from limits, as well as the nature of mitigants.

Article 15.

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(Sanctions) Non-compliance with the imperative norms established in this Notice constitutes a misdemeanor punishable under the Law of the Basic Framework of Financial Institutions.

Article 16. (Transitional provision) Institutions must comply with the provisions of this Notice within 12 (twelve) months from the date of its publication.

Article 17. (Regulation) The Bank of Angola may establish additional requirements or issue technical instructions complementary to this Notice.

Article 18. (Revocation) All regulations that contradict this Notice are revoked, notably, Notice No. 08/2007, of September 26, on prohibitions and limits of credit operations, as well as Notice No. 02/2015, of January 29, on exposure limits to exchange rate risk.

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Article 19. (Doubts and omissions) Doubts and omissions resulting from the interpretation and application of this Notice are resolved by the Bank of Angola.

Article 20. (Entry into force) This Notice enters into force on the date of its publication.

PUBLISH Luanda, on May 16, 2016

THE GOVERNOR VALTER FILIPE DUARTE DA SILVA

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ANNEX I Assets and off-balance sheet items to be considered for the purposes of "Prudential Limits on Large Exposures"

For the purposes of paragraph 2 of Article 1 of this Notice, the assets present in the accounts of the Chart of Accounts Manual for Financial Institutions (CONTIF) listed in Table 1 and the off-balance sheet items present in Table 2 must be considered.

Table 1 – Assets

Account CONTIF Asset Class

1.10 Cash 1.20 Liquidity Applications 1.30 Securities and Marketable Securities 1.40 Financial Derivative Instruments 1.50 Credits in the Payment System 1.60 Foreign Exchange Operations 1.70 Credits 1.80 Other Values

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1.90.10 Financial Fixed Assets

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Table 2 – Off-balance sheet items

Account CONTIF Class of Off-balance sheet Risk Type of instrument Description

9.10.20 Liabilities towards Third Parties High

• Guarantees with the nature of credit substitutes
• Acceptances
• Endorsements of bills where the signature of another Institution does not appear
• Irrevocable stand-by letters of credit with the nature of credit substitutes
• Sales of assets with repurchase agreements
• Unpaid portion of shares and other partially realized values
• Term deposits against term deposits (forward forward deposits)
• Purchase of assets on credit
• Transactions with recourse

Medium

• Indemnities and guarantees that do not have the nature of credit substitutes, notably the guarantees of good execution of contracts and customs and tax guarantees
• Unused credit lines, with an initial maturity period greater than one year
• Irrevocable stand-by letters of credit that do not have the nature of credit substitutes
• Documentary credits, issued and confirmed, except those of medium/low risk

Medium/ Low

• Unused credit lines, with an initial maturity period less than or equal to one year and irrevocable
• Documentary credits regarding which the shipping documents serve as guarantee and other transactions of potential automatic settlement

Low

• Unused credit lines, which can be unconditionally cancelled at any time and without prior notice or which provide for automatic cancellation due to deterioration of the borrower's credit situation

9.10.30.40 Securities and Marketable Securities Subscribed for Primary Placement Medium

• Note issuance facilities (NIF), revolving underwriting facilities (RUF) and other similar instruments

9.10.40 Reference Value of Financial Derivative Instruments N.A.

• Interest rate swaps in the same currency
• Variable interest rate swaps of different nature ("basis swaps")
• Forward contracts relating to interest rates
• Futures on interest rates
• Acquired options on interest rates
• Interest rate swaps in different currencies or gold
• Futures on currencies or gold
• Acquired options on currencies or gold
• All the above relating to other reference elements or indices related to equity securities, precious metals, and commodities

High

• Credit derivatives

9.10.60 Foreign Exchange Operations N.A. - Forward contracts on currencies or gold

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ANNEX II