Guideline of Interest Rate Risk Management

GUIDELINE OF INTEREST RATE RISK MANAGEMENT

ONE. Generel provisions

1. The guideline is aimed at defining responsibilities of Bank of Mongolia, Executive Director, Board of Director, Asset and Liability Management Committee, Internal Control unit, Auditors to carry out activities of implementing and monitoring the Interest rate risk management. TWO. Rights and duties of Board of Directors
2. The board of directors of the Bank / hereinafter referred to as the board/ has the following rights and duties:

2.1. To appoint a member of Assets and liability Management Committee.

2.2. To approve a regulation on Interest rate risk management formulated by Asset and liability Management Committee

2.3. To make consultations and approve inspection reports and documents prepared by Internal Control Agency on Interest rate risk management

2.4. To review reports submitted by Asset and liability Management Committee and make amendments to the regulation on interest rate risk management if needed. THREE. Assets and liability Management Committee of the Bank 3. Following directors and officials shall be a member of Asset and liability Management Committee. 3.1. Executive Director 3.2. Associate Director 3.3. Director of Accounting Department 3.4. Director of Investment Department 3.5. Director of Loan Department 3.6. Director of Treasury Department 3.7. Others 4. Assets and liability Management Committee has following rights and duties:

4.1. To develop a regulation on interest rate risk management and seek approvals from the Board and introduce proposed amendments to the regulation to the Board. (the following shall be regulated by the regulation: a method to determine interest rate risk, mechanism of interest rate risk information, approaches to reduce interest rate risk, supervision by the internal control unit, regulation on inspection, regulation on auditor involvement in the inspection process of interest rate risk and employee task schedule.) 4.2. To submit a report on the level of interest rate risk of banks, procedures for proper management and their results to the Board at least twice a year,

4.3. To impose restrictions on particular activities that contain interest rate risk.

4.4. To choose among options of different approaches to reduce interest rate risk, e.g. futures, option, interest rate swap, cap, floor and corridor or use them simultaneously 4.5. Asset and liability Management Committee shall approve the structure of the report of the Interest rate risk submitted to the Board and determine the frequency of the report submission.

4.6. To appoint a specialized officer by each function of the work according to the regulation on Interest rate risk management

4.7. The level of interest risk of the bank can be determined according to the methods stipulated in the Appendix of this guideline. FOUR. Rights and Duties of Internal Control Unit 5. Internal control unit conducts an examination on Interest rate risk at least once a year and reports the results to the Board. 6. Relations arising out of imposing corrections for violations occurred during inspections and imposing sanctions against an officer who committed violation shall be regulated by the Banking Law and other related acts. FIVE. MONITORING OF BANK OF MONGOLIA 7. The Bank monitors the enforcement of the regulation on interest rate risk management. SIX. AUDIT 10. Auditor shall include facts related to the level of interest rate risk in the financial report of the bank and its conclusion of the fact document. 11. The Board may allow an auditor by a contract to be engaged in the inspection process of interest rate risk, if needed.

APPENDIX METHODOLOGIES OF INTEREST RATE RISK MEASUREMENT ONE. GAP is the difference between interest rate sensitivity assets and liabilities. GAP = rateInterest assetsysensitivit − rateInterest sliabilitieysensitivit Also, interest sensitivity gap can be calculated as following ratio: rateInterest sliabilitieysensitivit rateInterest assetsysensitivit GAP = Interest rate sensitivity assets include following items: a. Loans b. Securities c. Other Interest rate sensitivity liabilities include following items: a. Interest bearing customer accounts b. Deposits or Savings c. Certificate of Deposit d. Other securities issued by the Bank e. Debts from other financial institutions f. Other Compound GAP (CG) is the sum of interest gaps from 1 to n-th period. ∑= ++== n i CG GapGap Gapni 1 1 ... Net interest margin (NIM) is the ratio of the difference between interest income and interest expense liabilities (net interest income) divided by income bearing assets. Income assets Interest incmoe bearing assets Interest ense bearing sliabilitie NIM − exp = Net interest income change is: Δ = Δ ×CGkNIM where ΔNIM − Net interest income change k −Δ interest rate change

TWO. Duration also measures the average life of duration of assets and liabilities weighted by present value of their cash flows. where () () () () () ()n i i n i in i t i n i t i C i C n i C i C i C t i C Duration + ++ + × + ++×

• =

×

• = ∑ ∑ = = 1 ... 1 1 ...1 − cash flow at t-th period Ct i − interest rate 2.1. Average duration of total assets and total liabilities: where DA ∑ ∑ = = × = 1 i n i A TA A Duration D DA − Average duration of total assets AA − i-th asset Durationi − Average duration of i-th asset TA − Interest sensitivity assets ∑ ∑ = = × = 1 i n i L TL L Duration D where DA − Average duration of total liabilities AA − i-th liability Durationi − Average duration of i-th liability TL − Interest sensitivity liabilities 2.2. Duration disbalance is TA TL DDDD LA ×−= THREE. Prudential ratios

3.1. The difference between interest sensitivity assets and liabilities shall not exceed over capital of the bank.

<× %20%100 CA CG where CA – capital 3.2. The difference between average durations of assets and liabilities shall not exceed 30 percent of total assets’ average duration. <× %30%100 DA DD