Resolution R-CNMV-2020-08-MV: Regulation on Integrated Risk Management for Securities Intermediaries

CERTIFICATION

The undersigned, Ervin Novas Bello, General Manager of the Central Bank of the Dominican Republic (hereinafter "Central Bank"), representing the Governor of the Central Bank, ex officio member and President of the National Securities Market Council (hereinafter "Council"); and Fabel María Sandoval Ventura, Secretary of the Council,

CERTIFY that the text below constitutes an exact and complete copy transcribed from the original document, of the Third Resolution, R-CNMV-2020-08-MV, adopted on November 3, 2020, which is held in the archives of this Secretariat; namely:

"THIRD RESOLUTION OF THE NATIONAL SECURITIES MARKET COUNCIL DATED NOVEMBER 3 (3) OF TWO THOUSAND TWENTY (2020). R-CNMV-2020-08-MV REFERENCE: Approval of the Regulation on Integrated Risk Management for Securities Intermediaries.

WHEREAS:

That in compliance with Law No. 249-17, on the Securities Market of the Dominican Republic, promulgated on December 19, 2017 (hereinafter "Law No. 249-17"), as well as the provisions of the Internal Regulation of the National Securities Market Council, adopted by said collegiate body through the First Resolution, R-CNMV-2018-06-MV, dated November 29, 2018 (hereinafter "Council Internal Regulation"); on Friday, October 25, 2019, the Superintendent of the Securities Market submitted to the knowledge and approval of the National Securities Market Council (hereinafter the "Council") the definitive version of the draft Regulation on Integrated Risk Management for Securities Intermediaries (hereinafter the "draft Regulation").

That the Council, in compliance with the powers conferred by articles 13, letter 5, and 25 of Law No. 249-17, duly convened, deems it appropriate to state the following:

CONSIDERING:

1. That Article 1 of Law No. 249-17 establishes within its object the minimization of systemic risk, the promotion of healthy competition, and the preservation of confidence in the securities market.

2. That the draft Regulation directly links the object of Law No. 249-17 with the requirements of the Corporate Governance Regulation, sanctioned by Single Resolution, R-CNMV-2019-11-MV, dated April 2, 2019, in the matter of risk governability; taking into account the organizational and operational structure defined in the Regulation for Securities Intermediaries, Regulation for Securities Intermediaries, approved by First Resolution, R-CNMV-2019-21-MV, dated August 13, 2019, its corresponding instructives, and the draft Regulation on Change of Control, Merger, Intervention, Supervision, Dissolution and Liquidation of Market Participants (in process).

3. That, likewise, in the development of the draft Regulation, best practices in securities market regulation have been considered, and especially the principles of the International Organization of Securities Commissions (IOSCO), the white paper of the Organization for Economic Co-operation and Development (OECD), in adherence to the legal framework of the Dominican Republic.

4. That the draft Regulation introduces the following innovations based on the existing regulatory framework: a. Application of the principle of proportionality. b. Introduction of the concept of economic capital along with the implementation schedule. c. Introduction of formal requirements to regulate the application of market risk management and the application of operational risk management.

5. That pursuant to Article 13 of Law No. 249-17, the Council is the superior body of the Securities Market Superintendence (hereinafter "Superintendence"), with essentially normative, supervisory, and control functions.

6. That paragraph 5 of the aforementioned article confers upon the Council the attribution to "[i]ssue, upon proposal of the Superintendent, the regulations for the application of this law." (sic)

7. That Article 25 of the aforementioned Law No. 249-17 provides that "[t]he Council is the competent body to establish regulations relating to the securities market activities indicated in this law."

8. That by Single Resolution, R-CNMV-2019-25-MV, issued by the Council on October 25, 2019, the Superintendent of the Securities Market (hereinafter "Superintendent") was authorized to publish the draft Regulation in one or more newspapers of wide national circulation, as well as on the institutional portal, for the purpose of submitting it to public consultation by market participants and interested sectors; granting a period of twenty-five (25) business days, in compliance with the provisions contained in Law No. 200-04, General Law on Free Access to Public Information, dated July 28, 2004 (hereinafter "Law No. 200-04") and its implementing regulation, approved by Decree No. 130-05, dated February 25, 2005 (hereinafter "Decree No. 130-05").

9. That prior to the publication of the draft Regulation for public consultation, the concerns raised by the members of the (Institutional) Risk Committee were answered, as well as the observations received from the Ministry of Finance.

10. That subsequently, as a result of the aforementioned consultative process, which took place from October 26 to December 2, 2019, inclusive, observations were received from the Stock Exchange Association, the Banking Superintendence, and the Central Bank of the Dominican Republic.

11. That these observations were duly analyzed and weighed by a technical team of the Superintendence with its external, national, and international advisors.

12. That the new contents developed from the comments received and the discussions held in the corresponding working group correspond to: a. Regulation of market risk management. b. Regulation of operational risk management.

13. That subsequently, as part of the administrative procedure, in attention to the principles of transparency and participation, various working groups were held with interested sectors.

14. That the draft Regulation aims to establish the principles, policies, guidelines, and procedures that must accompany the risk management process in securities intermediaries, with the goal of achieving a robust integrated risk management that allows for the timely identification of inherent risks, transferring or minimizing their effects, according to the size of the entity, sophistication of its counterparties, and complexity of the operations they perform.

15. That the draft Regulation will apply to securities intermediaries registered in the Securities Market Registry.

16. That, in adherence to the legal framework of the Dominican Republic, the draft Regulation has been prepared in accordance with international best practices on the subject and the regulations consulted from different countries; especially the principles of the International Organization of Securities Commissions (IOSCO), an organization that in 1998 issued the framework document of principles for securities markets, whose last update occurred in 2017; and that in the matter of regulation of securities intermediaries contemplates the following principles (free translation from English to Spanish performed by the technical team of the Superintendence): a. Principle 29: Regulation should provide minimum entry standards for securities intermediaries. b. Principle 30: Regulation should establish initial and continuous capital requirements or other fundamental requirements that reflect the risks taken by securities intermediaries. c. Principle 31: Regulation should require intermediaries to establish functions oriented towards achieving compliance with internal organizational standards and operational conduct, with the objective of protecting the interests of their clients and their assets, guaranteeing appropriate levels of risk management with which the management of the entity accepts its primary responsibility in these actions. d. Principle 32: The regulator should possess procedures to treat potential failure situations of intermediaries in such a way that it can contain systemic risk and minimize both damage and economic losses for investors.

VIEWING:

a) The Constitution of the Dominican Republic, voted and proclaimed by the National Assembly on June 13, 2015, published on July 10, 2015. b) The Commercial Code of the Dominican Republic, dated July 4, 1882, and its modifications. c) The Civil Code of the Dominican Republic dated April 17, 1884, and its modifications. d) Law No. 249-17, on the Securities Market, dated December 19, 2017. e) Law No. 183-02, Monetary and Financial Law, dated November 21, 2002, and its modifications. f) Law No. 479-08, General Law of Commercial Companies and Individual Limited Liability Enterprises, dated December 11, 2008, and its modifications. g) Law No. 189-11, for the Development of the Mortgage Market and Trusts in the Dominican Republic, dated July 16, 2011, and its modifications. h) Law No. 141-15, on Restructuring and Liquidation of Companies and Merchant Natural Persons, dated August 7, 2015. i) Law No. 107-13, on the Rights of Persons in their Relations with the Administration and Administrative Procedure, dated August 6, 2013. j) Law No. 155-17, Against Money Laundering, Terrorism Financing, and Proliferation of Weapons of Mass Destruction, promulgated on June 1, 2017. k) Law No. 200-04, General Law on Free Access to Public Information, dated July 28, 2004. l) Law No. 126-02 on Electronic Commerce, Documents, and Digital Signatures, promulgated on September 4, 2002. m) The Regulation for the Application of the Securities Market Law, approved by Decree No. 664-12, dated December 7, 2012. n) The Regulation of the General Law on Free Access to Public Information, approved by Decree No. 130-05, dated February 25, 2005. o) The Regulation for the Application of the Law on Development of the Mortgage Market and Trusts in the Dominican Republic No. 189-11, approved by Decree No. 95-12, dated March 2, 2012. p) The Internal Regulation of the National Securities Market Council, issued by First Resolution, R-CNMV-2018-06-MV, dated November 29, 2018. q) The Regulation on Fees for Regulation Concepts and for the Services of the Securities Market Superintendence, approved by the Council by First Resolution, R-CNMV-2018-10-MV, dated December 11, 2018. r) The Regulation that Regulates the Prevention of Money Laundering, Terrorism Financing, and Proliferation of Weapons of Mass Destruction in the Dominican Securities Market, approved by the Council by Third Resolution, R-CNMV-2018-12-MV, dated December 11, 2018. s) The Corporate Governance Regulation, approved by the Council by Single Resolution, R-CNMV-2019-11-MV, dated April 2, 2019. t) The Regulation for Centralized Securities Depositories and Securities Compensation and Settlement Systems, approved by the Council by Fifth Resolution, R-CNMV-2019-18-MV, dated July 2, 2019. u) The Regulation to Establish and Operate Centralized Negotiation Mechanisms, approved by the Council by Fourth Resolution, R-CNMV-2019-17-MV, dated July 2, 2019. v) The Regulation to Establish and Operate in the OTC Market and Operation Records Systems on Securities, approved by the Council by Third Resolution, R-CNMV-2019-16-MV, dated July 2, 2019. w) The Regulation for Securities Intermediaries, approved by the Council by First Resolution, R-CNMV-2019-21-MV, dated August 13, 2019. x) The Public Offering Regulation, approved by the Council by Single Resolution, R-CNMV-2019-24-MV, dated October 15, 2019. y) The Regulation for Administrator Companies and Investment Funds, approved by the Council by First Resolution, R-CNMV-2019-28-MV, dated November 5, 2019. z) The Principles of Regulation of Securities Markets established by the International Organization of Securities Commissions (IOSCO). aa) The principles of the Organization for Economic Co-operation and Development (OECD). bb) International Financial Reporting Standards (IFRS). cc) The matrix prepared by the technical team of the Superintendence, which collects the observations and comments of the sectors that participated in the public consultation. dd) The other documents that make up the file.

THEREFORE:

After having studied and deliberated on the matter, the National Securities Market Council, in the exercise of the powers conferred by Law No. 249-17, by unanimous vote of its members, attending to the reasons exposed,

RESOLVES:

FIRST: APPROVE the definitive version of the draft Regulation on Integrated Risk Management for Securities Intermediaries, the text of which is attached to the present, as an integral part of it.

SECOND: AUTHORIZE the Superintendent of the Securities Market to publish this resolution in one or more newspapers of wide national circulation, as well as on the institutional portal, for the purposes of the principle of publicity contained in Article 138 of the Constitution of the Dominican Republic, voted and proclaimed on June 13, 2015; in attention to what is provided by articles 3, paragraph 7, and 31, paragraph 8, of Law No. 107-13, on the Rights of Persons in their Relations with the Administration and Administrative Procedure, dated August 6, 2013; Article 3 of Law No. 200-04, General Law on Free Access to Public Information, dated July 28, 2004, and Article 56 of the Regulation of the General Law on Free Access to Public Information, approved by Decree No. 130-05, dated February 25, 2005.

THIRD: ORDER the Secretary of the National Securities Market Council to issue a certified copy of this resolution, as provided by Article 16, Paragraph, of Law No. 249-17, promulgated on December 19, 2017, on the Securities Market of the Dominican Republic; for the corresponding purposes."

REGULATION ON INTEGRATED RISK MANAGEMENT FOR SECURITIES INTERMEDIARIES

INDEX

TITLE I GENERAL PROVISIONS SINGLE CHAPTER

• Object, Scope, and Definitions Article 1°.- Object. 15 Article 2°.- Scope. 15 Article 3°.- Definitions. 15

TITLE II PRINCIPLES, STAGES, AND ORGANIZATIONAL STRUCTURE OF RISK MANAGEMENT CHAPTER I - Principles and Stages of Risk Management Article 4°.- Principle of separation. 24 Article 5°.- Principle of independence. 24 Article 6°.- Risk Management Framework. 24 Article 7°.- Risk Management Stages. 25

CHAPTER II - Organizational Structure of Risk Management Article 8°.- Risk policies. 25 Article 9°.- Organizational structure. 26 Article 10°.- Board of Directors. 27 Article 11°.- Senior Management. 27 Article 12°.- Internal organization. 28 Article 13°.- Risk Committee. 28 Article 14°.- Functions of the Risk Committee. 28 Article 15°.- Meetings. 29 Article 16°.- Risk Committee Minutes. 30 Article 17°.- Functions of the Risk Unit. 30 Article 18°.- Limits and parameters of risk management. 31 Article 19°.- Internal Audit. 32

CHAPTER III - Other general application provisions Article 20°.- Data risk management. 32 Article 21°.- Contingency plan and business continuity. 33 Article 22°.- Methodologies for risk identification and measurement. 33 Article 23°.- Modifications to risk identification methodologies. 33 Article 24°.- Risk mitigation processes. 33 Article 25°.- Responsibility of subcontracting. 33 Article 26°.- Significant subcontracting. 34 Article 27°.- Mandatory submission of documents and manuals. 34

TITLE III ON LIQUIDITY RISK MANAGEMENT CHAPTER I - Object of Liquidity Risk Management Article 28°.- Object of Liquidity Risk Management. 34

CHAPTER II - Responsibilities on Liquidity Risk Administration Article 29°.- Board of Directors. 35 Article 30°.- Senior Management. 35 Article 31°.- Treasury. 35 Article 32°.- Evaluation of liquidity risks. 36 Article 33°.- Action of the Risk Management Department. 36

CHAPTER III - On the Liquidity Risk Management Process Article 34°.- On classes of financing operations. 36 Article 35°.- Liquidity risk management process. 36 Article 36°.- Active position management. 37 Article 37°.- Concentration in liquidity sources. 37 Article 38°.- The liquidity contingency plan and Stress Tests. 37 Article 39°.- Design of the Liquidity Contingency Plan and Stress Tests. 37

CHAPTER IV - On the Identification and Measurement of Financing Risks Article 40°.- Financing activities. 39 Article 41°.- Financing mix. 39 Article 42°.- Diversification of liquidity sources. 39 Article 43°.- Weighted average financing rate. 39 Article 44°.- Maturity tenors. 40 Article 45°.- Net Financing Position. 40 Article 46°.- Margin loans. 42 Article 47°.- Margin loan position. 42 Article 48°.- Flows of the long position with the optionality component. 42 Article 49°.- Flows of the short position in financial options. 43 Article 50°.- Net liquidity position. 43 Article 51°.- High-quality liquid asset reserves. 43 Article 52°.- Other liquid asset reserves. 44 Article 53°.- Exclusion of investments with restricted availability. 44 Article 54°.- Treatment of structured products. 44 Article 55°.- Estimation of the value of asset reserves. 44 Article 56°.- Method applicable for estimating the value of asset reserves. 45 Article 57°.- Admissible sources of securities liquidity information. 47 Article 58°.- Liquidity Coverage Ratio - LCR. 47

CHAPTER V - On Limits and Stress Tests Article 59°.- Regulatory limits for financing liquidity risks. 49 Article 60°.- Internal limits for liquidity risks. 49