Notice No. 04/2016 on Regulatory Capital Requirements for Market Risk and Counterparty Credit Risk in the Trading Book

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

NOTICE No. 04/2016

SUBJECT: REGULATORY CAPITAL REQUIREMENT FOR MARKET RISK AND COUNTERPARTY CREDIT RISK IN THE TRADING BOOK

Considering the development of the Angolan Financial System, international best practices, and the issuance of Notice No. 02/2016 on Regulatory Capital (RC), which establishes new risk categories considered in the calculation of the regulatory solvency ratio, it is necessary to establish the capital requirement to cover market risk and counterparty credit risk in the trading book.

Under these terms, and pursuant to the combined provisions of letters d) and f) of paragraph 1 of Article 21st and letter d) of paragraph 1 of Article 51st, both of Law No. 16/10, of July 15 – Law of the Bank of Angola, and Article 88th of Law No. 12/15, of June 17 – Law of the Basic Framework of Financial Institutions.

HEREBY DETERMINES:

Article 1. (Object) This Notice establishes the regulatory capital requirement that financial institutions must consider regarding market risk and counterparty credit risk in the trading book, in accordance with the provisions of letter b) of paragraph 4 of Article 4th of Notice No. 02/2016, on regulatory capital.

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

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. Trading Book: all positions in financial instruments and commodities held by an Institution for trading purposes or to hedge positions held for trading purposes. Under these terms, the following are considered positions held for trading purposes: a) proprietary positions and positions resulting from the provision of services to clients and market making; b) positions intended for short-term resale; c) positions intended to benefit from short-term differences, actual or expected, between purchase and sale prices or other price or interest rate variations.

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

3. Parent Company: a legal entity that exercises a relationship of control or group relationship over another legal entity, designated as a subsidiary, when one of the following situations occurs: a) Institutions authorized by the Bank of Angola; b) Management companies of shareholdings subject to the supervision of the Bank of Angola as provided in paragraphs 4 and 5 of Article 65th of the Law of the Basic Framework of Financial Institutions.

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4. Regulatory Capital: "RC" as defined and calculated in accordance with Notice No. 02/2016, on regulatory capital.

5. Financial Group: a set of resident and non-resident companies that have the nature of banking and non-banking Institutions, with the exception of Institutions linked to insurance and social security activities, in which there is a relationship of control by a parent company supervised by the Bank of Angola over the other companies comprising it.

6. 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, respecting the following characteristics: a) its value changes in response to an interest rate, price of a financial instrument or commodity, exchange rate, price index, rating, credit index, or another variable, designated as the "underlying"; b) no initial investment is required, or this investment is equal to or less than that required for other types of contracts producing similar effects in response to changes in risk factors, and; c) it is settled on a future date.

7. Position: risk position relative to an asset, an off-balance sheet item, or a financial derivative instrument, plus profits of any nature not yet received, and which are reflected accounting-wise as amounts receivable, regardless of whether they are due or overdue, in accordance with the criteria of the Chart of Accounts Manual for Financial Institutions.

8. Risk: the possibility of a future event occurring with a negative impact on the net worth of Institutions.

9. Counterparty Credit Risk: arising from the default by the counterparty of an operation before the final settlement of its respective cash flows.

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10. Settlement/Delivery Risk: arising from payments by Institutions for debt instruments, equity securities, or commodities that remain unsettled after the agreed delivery date.

11. Market Risk: risk arising from adverse movements in the prices of bonds, stocks, or commodities. It includes exchange rate risk and interest rate risk: a) Exchange Rate Risk: arising from movements in exchange rates resulting from currency positions originated by the existence of financial instruments denominated in different currencies; b) Interest Rate Risk: arising from movements in interest rates resulting from mismatches in amount, maturities, or interest rate reset periods observed in financial instruments with receivable and payable interest.

12. Incomplete Transaction Risk: resulting from price differences to which Institutions are exposed in the case of having paid for securities, currencies, or commodities before their receipt or having delivered securities, currencies, or commodities before receiving the respective payment.

13. Security: a fungible and freely negotiable financial instrument that confers upon its holders credit, property, or capital participation rights, encompassing, notably, shares, bonds, debentures, participation certificates, units in collective investment institutions, and associated subscription rights.

14. Firm Commitment to Take a Position: the process by which Institutions assume the commitment to buy securities from an entity with the objective of selling them quickly to investors in the financial market.

15. Incomplete Transactions: a situation where securities, currencies, or commodities were paid for before their receipt or delivered before the respective payment was received.

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Article 4. (Regulatory capital requirement to cover market risk and counterparty credit risk in the trading book)

1. Institutions must calculate the regulatory capital requirement to cover market risk and counterparty credit risk in the trading book, as established in the Instruction on the Calculation and Regulatory Capital Requirement for Market Risk and Counterparty Credit Risk in the Trading Book, regarding: a) their trading book, for the following exposures: i. debt instruments; ii. equity securities; iii. firm commitment transactions to take a position in equity securities or debt instruments; iv. hedging operations using credit derivatives; v. collective investment schemes; vi. subject to counterparty credit risk; b) their total activity, for exposures subject to the following risks: i. settlement and incomplete transaction risks; ii. currency risk; iii. commodity risk.

2. Without prejudice to the provisions of the previous paragraph, Institutions may calculate the regulatory capital requirement for their trading book in accordance with the provisions of the Instruction on the Calculation and Regulatory Capital Requirement for Credit Risk and Counterparty Credit Risk – provided they meet the following conditions: a) the activity of their trading book does not exceed 5% (five percent) of their total activity; b) the total positions of their trading book do not exceed the amount of one billion Kwanzas; c) they have previously communicated this to the Bank of Angola.

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Article 5. (Application Basis)

1. Except for management companies of shareholdings, institutions must apply the provisions of this Notice on an individual basis.

2. Without prejudice to the previous paragraph, parent companies of financial groups provided for in Notice No. 03/2013, of April 22, on prudential supervision on a consolidated basis, must apply the provisions contained in this Notice to the activity of the financial group they are part of on a consolidated basis, ensuring coherence and alignment of approaches to market risk.

Article 6. (Information Reporting) The Bank of Angola establishes, in the Instruction on Information Reporting on Regulatory Capital Requirement for Market Risk and Counterparty Credit Risk in the Trading Book, the structure and minimum content of the reports and other information elements that must be submitted within the scope of this Notice.

Article 7. (Sanctions) Non-compliance with the mandatory norms established in this Notice constitutes an offense punishable under the Law of the Basic Framework of Financial Institutions.

Article 8. (Transitional Provision) Institutions must comply with the provisions of this Notice under the terms of the transitional provisions of Notice No. 02/2016, on regulatory capital.

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Article 9. (Revocation) Instruction No. 06/2007, of September 26, is revoked, eighteen (18) months after the publication date of this Notice.

Article 10. (Regulation) The Bank of Angola will define the framework applicable to securitization operations and credit derivatives that are not credit default swaps and total return swaps, which must be presented to the Bank of Angola prior to their contracting.

Article 11. (Doubts and Omissions) Doubts and omissions resulting from the interpretation and application of this Notice are resolved by the Bank of Angola.

Article 12. (Entry into Force) This Notice enters into force on the date of its publication.

PUBLISH Luanda, April 28, 2016

THE GOVERNOR VALTER FILIPE DUARTE DA SILVA