Circular LISOL 1-682: Minimum Capital of Financial Entities. Liquidity Coverage Ratio. Adjustments in accordance with Basel Committee on Banking Supervision standards

"2016 - Year of the Bicentennial of the Declaration of National Independence" COMMUNICATION "A" 6004 01/07/2016 TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 682
Minimum Capital of Financial Entities. Liquidity Coverage Ratio. Adjustments in accordance with the standards of the Basel Committee on Banking Supervision.
____________________________________________________________ We address you to inform you that this Institution has adopted the resolution that, in its pertinent part, provides:

"1. Incorporate into the regulations on 'Minimum Capital of Financial Entities' the Section attached in the annex that forms part of this communication.

2. Replace the third paragraph of point 3.6. of the regulations on 'Minimum Capital of Financial Entities' with the following:
   "Given that securitizations can be structured in different ways, the capital requirement for a securitization position shall be determined taking into account its economic reality or purpose and not its legal form. In cases where there is uncertainty as to whether a particular transaction should be considered as securitization, consultation with the Superintendence of Financial and Exchange Entities shall be requested."

3. Eliminate points 4.2.3. and 4.2.5. of the regulations on 'Minimum Capital of Financial Entities'.

4. Incorporate into the regulations on 'Minimum Capital of Financial Entities' the following:
   "3.5.2.11. For the purposes of determining the risk weight to be applied to exposures referred to in points 4.2.6., 4.2.7., 4.2.X., 4.4.2. and 4.5., the rating assigned by an entity that is an External Credit Assessment Institution ("ECAI") admitted by the Central Bank of the Republic Argentina shall be used, in accordance with what is established in Section X. The credit ratings contemplated in said points correspond to the methodology used by Standard & Poor’s and are used only as examples. No exposure with unrated debtors may receive a risk weight lower than that applied to the country of incorporation, except for the exposures referred to in points 4.2.2. and 4.2.4. Nevertheless, exposures to unrated financial entities incorporated in jurisdictions where sovereigns have a rating between BB+ and B- shall receive a risk weight of 100%."

"4.2.X. Entities of the non-financial public sector of other sovereign states, according to the credit rating assigned to the corresponding sovereign.
Rating
AAA to
AAA+ to
A
BBB+ to
BBB
BB+ to
B
BB to
B-
Below
B
Unrated
Risk Weight
20 % 50 % 100 % 100 % 150 % 100 %"

5.2.2.1. Assets admitted as collateral.
"…) Trusts whose underlying is integrated exclusively by assets contemplated in items i) to iv).
Structures are excluded in which cash flows from underlying exposures are used to service at least two stratified positions -or tranches- with different degrees of credit risk or subordination, which shall receive the treatment of point 3.6."

5. Replace points 4.2.6., 4.2.7., 4.4.2., 4.5., the first paragraph of point 4.9. and item v) of point 5.2.2.1. of the regulations on 'Minimum Capital of Financial Entities' with the following:

"4.2.6. To the non-financial public sector and B.C.R.A. Others.
Rating
AAA to
AAA+ to
A
BBB+ to
BBB
BB+ to
B
BB to
B-
Below
B
Unrated
Risk Weight
0 % 20 % 50 % 100 % 150 % 100 %"

"4.2.7. To other sovereign states (or their central banks).
Rating
AAA to
AAA+ to
A
BBB+ to
BBB
BB+ to
B
BB to
B-
Below
B
Unrated
Risk Weight
0 % 20 % 50 % 100 % 150 % 100 %"

"4.4.2. Others. The risk weight corresponding to a less favorable category than that assigned to exposures with the National Government in foreign currency shall be applied, in accordance with point 4.2.6., with a maximum cap of 100 %, except if the rating was below B-."

"4.5. Exposure to foreign financial entities, according to the credit rating assigned to the sovereign of the jurisdiction where they are incorporated.
Rating
AAA to
AAA+ to
A
BBB+ to
BBB
BB+ to
B
BB to
B-
Below
B
Unrated
Risk Weight
20 % 50 % 100 % 100 % 150 % 100 %"

"4.9. Financing with first-degree mortgage collateral, and regardless of its subordination level as long as the entity is the creditor in all levels, on residential housing, to the extent that the debt balance at no time exceeds the appraised value of the mortgaged property."

5.2.2.1. Assets admitted as collateral.
"v) Shares of common investment funds, when:

• their value is determined and published daily; and
• their investment is limited to the assets included in items i) to iv)."

6. Replace the first paragraph of point 4.1.1., the second paragraph of point 4.2.4., the second paragraph of point 4.5.5. and points 4.5.2.1. and 4.5.6.1. of the regulations on 'Liquidity Coverage Ratio' with the following:

4.1.1. Stable deposits.
"Comprises deposits in pesos in current accounts, savings accounts, salary/social security accounts, Labor Termination Fund for Workers in the Construction Industry, pupilary usuries, savings accounts for the payment of plans or social assistance programs and time deposits -in the latter case, when the holder maintains other relationships with the financial entity that make the withdrawal of such deposits in the 30-day period unlikely-, which are covered by the deposit guarantee insurance system, to the extent that their total balance for the same holder does not exceed one third of the amount provided in point 4.2.1. -the entity, when it comes to accounts or deposits constituted in the name of two or more holders, must distribute the balance proportionally among them-. This balance shall be computed by accumulation of accounts and deposits in the financial entity, except if it is a controlling financial entity subject to consolidated supervision, in which case the accumulation shall be on a consolidated basis."

4.2.4. Unsecured wholesale funding provided by other legal entities, non-financial public sector and SPEs.
…

"Client cash positions resulting from services provided to large institutional investors -'prime brokerage services'- such as cash resulting from services provided by item i) of point 4.2.2.- shall be considered separate from any segregated position that might be required by current regulations on investor protection and shall not be offset with other client positions covered by these norms. These positions must be excluded from the LCR and receive the treatment provided in paragraphs 1°, 2° and 3° (items i) and ii)) of point 5.2.3.2."

4.5.5. Contractual obligations to grant funds within the 30-day period.
…

"If the set of contractual obligations to grant funds to retail clients, SMEs and non-financial private sector entities -excluding exchange entities, insurers, entities regulated by the CNV and trustees of non-financial trusts- not provided in the previous points exceeds, in the following 30 days, 50 % of the total contractual inflows from said clients expected in the same period, the difference shall be included in this category."

"4.5.2.1. Clauses triggered by a deterioration in the credit quality of the financial entity.
In the case of contracts that include clauses that result in higher collateral requirements or fund outflows due to a decrease in their credit quality, the financial entity shall assume that it must provide 100 % of those additional guarantees or that 100 % of those outflows will occur for scenarios of downgrade of its long-term credit rating by up to three steps ('notches'). It shall be assumed that clauses linked to short-term credit ratings will activate at the corresponding levels of long-term ratings, according to publicly disclosed rating criteria. The impact of the decrease in credit quality must consider the effects on all types of collateral requirements and on the triggering events provided in contracts that modify the rights of reallocation of unsegregated collateral. The factor provided in point 6.1.5.2. shall be applied to the amount of collateral that should be provided, or of contractual cash outflows that would originate, as a consequence of the deterioration in credit quality."

"4.5.6.1. Non-contractual contingent financing obligations related to temporary unions ('joint ventures') or minority investments that are not consolidated: all such obligations must be included whenever there is an expectation that the financial entity will be the main provider of liquidity. The amount included shall be calculated according to the methodology determined by the financial entity, which must be previously approved by the Superintendence of Financial and Exchange Entities. The factor provided in item i) of point 6.1.5.11. shall apply."

7. Nullify points 4.4. and 6.1.4. of the regulations on 'Liquidity Coverage Ratio'.

8. Incorporate into point 4.5.6.3. and item iii) of point 6.1.5.11. of the regulations on 'Liquidity Coverage Ratio' the following:

4.5.6.3. Other contingent funding obligations, such as:
"…) Demand and time deposits ordered by the Judiciary with funds originating in the cases in which they intervene, with residual maturity within 30 days (judicial deposits)."

6.1.5.11. Other contingent financing obligations (point 4.5.6.).
"…) Judicial deposits (item iii) of point 4.5.6.3.). 3 %"

9. Provide that what is established in points 1. to 5. of this communication shall apply to the minimum capital requirement that financial entities must have integrated by 7/31/16, while the provisions contained in points 6. to 8. shall enter into force from 7/31/16.

10. Provide that until this Institution issues the list of external rating agencies (ECAI), for the purposes of compliance with what is established in points 4. and 5. of this communication, the risk weight to be applied to exposures to governments, central banks and financial entities shall be 100%."

Finally, we inform you that subsequently the sheets to be replaced in the regulations mentioned in the reference will be distributed.
We salute you attentively.
CENTRAL BANK OF THE REPUBLIC ARGENTINA
Darío C. Stefanelli Agustín Torcassi
Principal Manager of Issuance and Normative Applications General Manager of Norms

ANNEX

X. External Credit Assessment Institutions (ECAI).

X.1. General provisions.
Credit ratings issued by entities that are External Credit Assessment Institutions ("ECAI") may only be used for the determination of the risk weight of an exposure when the ECAI that issued them has been previously recognized as eligible for those purposes by the Central Bank of the Republic Argentina. For the recognition of an ECAI as eligible, among other factors, the 'Principles of the Code of Conduct for Credit Rating Agencies' of OICV-IOSCO incorporated into Argentine regulation in the regulations of the National Securities Commission shall be taken into account, and it will be required that its rating methodology and credit ratings meet the requirements established in point X.2. Requests for the recognition of ECAIs must be submitted to the Central Bank of the Republic Argentina, in accordance with the provisions established for that effect. The Central Bank of the Republic Argentina will publish the list of eligible ECAIs.

X.2. Eligibility criteria.
ECAIs must meet each of the following six criteria:

X.2.1. Objectivity.
The methodology used to assign credit ratings must be rigorous, systematic and subject to some type of validation based on historical experience. In addition, the assessments must be subject to constant control and respond to changes in the financial situation. To be recognized by the Central Bank of the Republic Argentina, the evaluation methodology for each market segment must previously have been used for at least one year -preferably three years- and have been subject during that period to rigorous verification of its accuracy through retrospective tests ('backtesting').

X.2.2. Independence.
An ECAI must be independent and not subject to political or economic pressures that could influence the ratings it grants. To the extent possible, the evaluation process must be free of any restriction that might arise in situations where the composition of the Board of Directors -or equivalent governing body- or the shareholding structure of the ECAI give rise to a conflict of interest. B.C.R.A.
Section X. External Credit Assessment Institutions (ECAI) of the regulations on 'Minimum Capital of Financial Entities'.
Annex to
Comm. "A"

X.2.3. International openness/transparency.
Individual assessments, the key elements underlying the assessments and information on whether the issuer participated in the evaluation process must be available to the public on equal terms, except for private assessments. In addition, the general procedures, methodologies and assumptions used by ECAIs to obtain ratings must be public domain.

X.2.4. Disclosure.
ECAIs must disclose the following information: their code of conduct; the general nature of their remuneration agreements with evaluated entities; their evaluation methods, including the definition of default, the time horizon and the meaning of each rating; the default rates actually recorded in each rating category and the transition between ratings -that is, the probability of migrating between ratings-.

X.2.5. Resources.
ECAIs must have sufficient resources to be able to perform high-quality credit evaluations. These resources must allow them to maintain permanent contact with the Board of Directors and Senior Management, as well as with the operational management, of the evaluated entities, in order to add value to their credit evaluations. Such evaluations must be based on methodologies that combine qualitative and quantitative approaches.

X.2.6. Credibility.
The credit ratings of ECAIs must be reliable for independent third parties. In addition, the existence of internal procedures intended to prevent the misuse of confidential information contributes to the credibility of an ECAI.
To be recognized, it is not a requirement that an ECAI evaluate companies in more than one country.

X.3. Considerations for implementation.

X.3.1. Rating assignment process ('mapping').

X.3.1.1. The Central Bank of the Republic Argentina will assign the ratings of admissible ECAIs to the risk weights provided in the points referred to in the first paragraph of point 3.5.2.11. of the regulations on 'Minimum Capital of Financial Entities'; that is, it will establish which ratings or evaluation categories correspond to those risk weights. The assignment ('mapping') process will be objective and offer a distribution of weights coherent with the distribution of credit risk levels collected in those ratings. In addition, it will cover all risk weights provided in those points.

X.3.1.2. During the process of assigning the credit quality levels referred to in point X.3.1., among other factors, the size and scope of the set of issuers covered by each ECAI, the range and meaning of the credit ratings it assigns and the definition of default it uses will be taken into account.

X.3.1.3. Financial entities will use the selected ECAIs and their ratings for each type of credit consistently, both for weighting and for risk management purposes. Entities may not choose the best of the evaluations provided by different ECAIs -no 'cherry-picking'- nor arbitrarily change ECAI.

X.3.1.4. Financial entities must inform the ECAIs they use to weight the risk of their assets by type of credit, the risk weights associated with each rating -in accordance with what is established by the Central Bank of the Republic Argentina through the assignment process- and the aggregate risk-weighted assets corresponding to each risk weight according to the evaluations of each admissible ECAI.

X.3.2. Treatment for multiple ratings.

X.3.2.1. In cases where there is only one credit rating issued by the ECAI selected by the financial entity for an exposure, that rating shall be used to determine the risk weight of the referred exposure.

X.3.2.2. When there are two credit ratings issued by ECAIs selected by the financial entity for an exposure and those ratings correspond to different risk weights, the highest risk weighting shall be applied to the exposure.

X.3.2.3. When there are more than two credit ratings for an exposure, those corresponding to the two lowest risk weights shall be used, and the higher of both shall be applied.

X.3.3. Issuer or issuance evaluations.

X.3.3.1. When a financial entity invests in an issuance that has a specific rating for that issuance, the risk weight will be based on that rating. Otherwise, the following shall apply:
i) In cases where the borrower has a specific rating for one of its debt issuances -but the financial entity's credit exposure is not in that issuance- the financial entity's credit exposure will only receive a high-quality credit rating -that is, one corresponding to a risk weight lower than that applicable to an unrated credit- when it is equal to or senior in all aspects to the evaluated credit. Otherwise, that rating cannot be used and the unrated credit exposure will receive the risk weight corresponding to unrated credits. ii) When the borrower has been evaluated as an issuer, that rating can be applied to unsecured non-subordinated credits granted to it that have not been evaluated. Other unrated credit exposures of the issuer will be treated as unrated. iii) When the issuer or a specific issuance has a low credit rating -that is, associated with a risk weight equal to or greater than that applicable to unrated exposures-, an unevaluated credit exposure against such counterparty that is comparable to, or subordinated to, the issuer's evaluation -corresponding to its unsecured non-subordinated liabilities- or to the exposure's evaluation, will receive the same risk weight as that corresponding to that low credit rating.

X.3.3.2. For a financial entity to be able to use the evaluation of a particular issuer or issuance, the rating must take into account and reflect all credit risk exposure assumed by the entity for all payments owed to it -for example, if it is a creditor of both principal and interest, the evaluation must take into account and reflect the credit risk associated with both the repayment of principal and the payment of interest-.

X.3.3.3. In order to avoid double counting the effect of credit enhancements, no recognition will be given to credit risk coverage that is already reflected in the specific rating of the issuance.

X.3.4. Evaluations in national and foreign currency.
When weighting unrated exposures based on the rating of an equivalent exposure with the same borrower, the general criterion is that foreign currency ratings will be used to weight foreign currency exposures. If there are also national currency ratings, these will be used only to weight exposures denominated in that currency.

X.3.5. Scope of application of evaluations.
External evaluations corresponding to a unit of an economic group may not be used to weight other entities of the same group.