Resolution No. JPRF-V-2023-065: Update to the Operational Manual for Market Price Valuation of Credit Content Securities and Participation and Application Procedures

Resolution No. JPRF-V-2023-065 THE FINANCIAL POLICY AND REGULATION BOARD CONSIDERING: That, Article 226 of the Constitution of the Republic of Ecuador provides: "State institutions, their agencies, dependencies, public servants, and persons acting by virtue of a state power shall exercise only the competencies and faculties attributed to them in the Constitution and the law. They shall have the duty to coordinate actions for the fulfillment of their purposes and to make effective the enjoyment and exercise of the rights recognized in the Constitution."; That, Article 303 of the Fundamental Charter states that the formulation of monetary, credit, exchange, and financial policies is the exclusive faculty of the Executive Branch; That, Article 13 of the Organic Monetary and Financial Code, Book I, created the Financial Policy and Regulation Board, part of the Executive Branch, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care services policy and regulation; That, Article 14 ibidem, regarding the scope of action of the Financial Policy and Regulation Board, states: "(...) 2. Issue regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial, securities, insurance, and prepaid comprehensive health care services systems; (...)"; That, letter a) of number 7 of Article 14.1 ibidem, establishes: "For the performance of its functions, the Financial Policy and Regulation Board must fulfill the following duties and exercise the following faculties: 1. Regulate the creation, constitution, organization, activities, operation, and liquidation of financial, securities, insurance, and prepaid comprehensive health care services entities; (...) 16. Regulate the constitution, operation, and liquidation of funds and fiduciary businesses related to the securities market; (...)"; That, the antepenultimate paragraph of Article 14.1 ibidem, determines: "The Superintendent of Banks, the Superintendent of Companies, Securities and Insurance; the Superintendent of Popular and Solidarity Economy; the President of the Monetary Policy and Regulation Board; and the Deposit Insurance Corporation through its legal representative, Liquidity Fund and Private Insurance Fund, may propose regulation projects for consideration by the Financial Policy and Regulation Board backed by the respective technical reports. (...)"; That, Article 1 of the Organic Monetary and Financial Code, Book II states: "This Law aims to promote an organized, integrated, efficient, and transparent securities market, in which securities intermediation is competitive, orderly, equitable, and continuous, as a result of true, complete, and timely information. (...)"; That, the article numbered after Article 1 of the Organic Monetary and Financial Code, Book II, establishes: "The guiding principles of the securities market that guide the actions of the Monetary and Financial Policy and Regulation Board, the Superintendent of Companies and Securities, and participants are:

1. Public faith;
2. Investor protection;
3. Transparency and publicity;
4. Symmetric, clear, true, complete, and timely information; (...)"; That, General Provision Twenty-Ninth of the Organic Monetary and Financial Code, Book I, provides: "In current legislation where mention is made to the 'Monetary and Financial Policy and Regulation Board', replace it with 'Financial Policy and Regulation Board'; That, Transitory Provision Fifty-Fourth of the Organic Monetary and Financial Code, Book I prescribes: "Resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy and Regulation Board and norms issued by control bodies will remain in force until the Monetary Policy Board and the Financial Policy and Regulation Board resolve what corresponds, within the scope of their competencies."; That, Article 1 of Chapter II "Information that Stock Exchanges must disclose", of Title VII "Stock Exchanges", of Book II "Securities Market" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, establishes that, in order to maintain registration in the Public Registry of the Securities Market, Stock Exchanges must present and disclose the information detailed in the aforementioned article, in particular, the price vector referred to in letter c of number 2; That, through Letter No. SCVS-INMV-DNFCDN-2021-00065414-O of December 17, 2021, the Superintendent of Companies, Securities and Insurance (R), brings to the knowledge of the Financial Policy and Regulation Board the proposal for regulation that reforms Chapter II "Operational Manual for Market Price Valuation of Credit Content Securities and Participation and Application Procedures", Title XXI "General Provisions" Book II "Securities Market" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions; That, the Technical Secretary of the Financial Policy and Regulation Board, through Memorandum No. JPRF-ST-2023-0034-M of April 19, 2023, sends to the President of the Board the Technical Report No. JPRF-CTSF-2023-003 of April 18, 2023 and Legal Report No. JPRF-CJF-2023-011 of April 18, 2023, which contain the following conclusions: a) Technical Report No. JPRF-CTSF-2023-003 "4.1 Once the reform proposals presented by the Superintendent of Companies, Securities and Insurance, together with the Stock Exchanges of Quito and Guayaquil, have been analyzed, considering the literature review, the results presented by these entities for the application of the methodology, as well as the impact on the market, a reform to Chapter II "Operational Manual for Market Price Valuation of Credit Content Securities and Participation and Application Procedures", Title XXI "General Provisions", Book II "Securities Market" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions is determined to be necessary, in order to adapt the valuation manual to the development and functioning of the securities market. 4.2 The most widely used methodology in Latin America is that of Nelson, Siegel, and Svensson. The results obtained from the application of the Nelson, Siegel, and Svensson methodology show a lower mean squared error, with a value of 0.08587 compared to the mean squared error obtained from the Smoothing Splines methodology with a value of 0.08592. 4.3 By grouping titles with similar characteristics of the real sector considering at least level 1 of the ISIC, as well as titles with similar characteristics of the financial sector, distinguishing them between banking entities, mutuals, and cooperatives, a value of 0.5964 was obtained for the mean squared error, for the sample taken as an example by the BVQ, while when grouping them under the current standard, the value of the mean squared error is 1.0813. 4.4 The changes proposed by the SCVS to the regulatory body of the Operational Manual for Market Price Valuation of Credit Content Securities and Participation and Application Procedures, are in concordance with the change proposed for the valuation methodology and sample selection, therefore, it is considered pertinent to accept said changes in order to harmonize the standard." b) Legal Report No. JPRF-CJF-2023-011 "4.1. The Financial Policy and Regulation Board, in accordance with articles 13; 14 numbers 1 and 2; 14.1 numbers 1 and 16 of the Organic Monetary and Financial Code, Book I, has autonomy and is competent to regulate the organization, activities, and operation of entities that are part of the securities market.

Resolution No. JPRF-V-2023-065 Page 3 of 25

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4.2. The Superintendent of Companies, Securities and Insurance, as provided in the antepenultimate paragraph of Article 14.1 and Article 78 of the Organic Monetary and Financial Code, Book I, is competent to propose regulation projects within the scope of its competence for consideration by the Financial Policy and Regulation Board; without prejudice to the technical discretion that this financial regulatory body has."; That, the Financial Policy and Regulation Board, in an ordinary session convened by technological means on April 20, 2023 and carried out via video conference on April 24, 2023, learned of Letter No. SCVS-INMV-DNFCDN-2021-00065414-O of December 17, 2021, from the Superintendent of Companies, Securities and Insurance (R), Memorandum No. JPRF-ST-2023-0034-M of April 19, 2023, issued by the Technical Secretary of the Board, as well as Technical Report No. JPRF-CTSF-2023-003 of April 18, 2023 and Legal Report No. JPRF-CJF-2023-011 of April 18, 2023, issued by the Technical Coordination of Policy and Regulation of the Public and Private Financial Sector and the Legal Coordination of Financial Policy and Regulation, respectively; and the corresponding resolution project; That, the Financial Policy and Regulation Board, in an ordinary session convened by technological means on April 20, 2023 and carried out via video conference on April 24, 2023, learned of and approved the following Resolution; and, In exercise of its functions, RESOLVES: SINGLE ARTICLE.- Substitute the content of Chapter II "Operational Manual for Market Price Valuation of Credit Content Securities and Participation and Application Procedures", Title XXI "General Provisions", Book II "Securities Market" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

CHAPTER II: Standard for Market Price Valuation of Credit Content Securities and Participation and Application Procedures

"Article 1.- General Aspects.- The objective of this standard is to detail the steps, procedures, calculations, and filters that system users must apply towards the obtaining and publication of market prices for credit content securities, whose information is available in the transactional sources provided by the stock exchanges.

The Quito Stock Exchange and the Guayaquil Stock Exchange shall act as administrators of the "Information System for Valuation" described in this chapter, who must comply with the principles of integrity, confidentiality, and availability of information, aspects that must be controlled and supervised by the Superintendent of Companies, Securities and Insurance.

The prices resulting from the application of the following methodology do not constitute a recommendation for trading price and therefore serve exclusively for valuation and accounting recording purposes.

Correct valuation guarantees an adequate value of assets, and at the same time serves to calculate the return thereof over a specific period.

Adequate valuation of financial instruments allows knowing and/or evaluating the losses and/or gains derived from a position in financial instruments, the value of a fund and its financial performance, the daily balance of each individual account, if any; and, the risk inherent to the set of investments made in an investment fund.

Article 2.- Principles for the valuation of investments.- For the purposes of this chapter, the following principles are applicable:

1. Equity.- Granting equitable treatment to investors (participants, beneficiaries, or principals, as the case may be) acting impartially, under equal conditions and opportunities, avoiding any act, conduct, practice, or omission that could result in benefit or prejudice to any of them;

2. Conflict of interest.- In the terms of the Organic Monetary and Financial Code, Book II as well as in this Codification;

3. Information reserve.- In the terms established both in the Organic Monetary and Financial Code, Book II as well as in this Codification;

4. Competition.- Having adequate and necessary resources, as well as adequate procedures and systems to efficiently develop their activities linked to funds or commercial trusts for investment purposes, or third-party portfolios, as the case may be;

5. Information and investors.- All information provided to participants and investors must be clear, correct, precise, sufficient, and timely, to avoid misinterpretations and must reveal the risks that each operation entails;

6. Objectivity and prudence.- Acting with exhaustive professional rigor and moderation in the obtaining, processing, and application of information related to investment decisions and valuation of the assets of the respective portfolios, in order to safeguard the interests of this and its investors;

7. Consistency.- Maintaining over time the stability and uniformity of the criteria and procedures used in the valuation processes carried out on financial assets;

8. Observance.- Complying with the norms that regulate the exercise of their activities; as well as with their own procedures established in internal regulations and operation manuals; and,

9. Transparency.- The administration and control of the technical valuation procedure is open to public scrutiny, to system users, control and regulation bodies; and to the rest of participants in the securities market.

Article 3.- Definitions.- For the purposes of this chapter, the following definitions are applicable:

1. Category.- It is the grouping of titles that present similar characteristics regarding: class of title, risk rating, type of nominal rate, currency, and days until maturity;

2. Class of title.- It is one of the grouping criteria for fixed income or credit content titles carried out for valuation purposes, which considers the sector to which the issuer belongs and the type of title issued;

3. Days until maturity.- Are the days counted from the trade date to the maturity date of the title, on the respective calculation basis (360 / 365);

4. Filters.- Correspond to the minimum parameters that an operation must meet to be taken into account by the information system for Investment Valuation. These parameters can be, for example: minimum residual nominal value conditions, maximum price fluctuations, among others;

5. Transactional sources.- Corresponds to the Unified Stock System used by the Stock Exchanges;

6. Margin (M).- Is the effective annual percentage expressed with up to four decimals, which refers to the relationship existing between the spot rate (TS) and the internal rate of return (IRR) used to value each title. This margin can be average, historical, or referenced, and will be calculated with the following formula:

7. Clean Price (Pl).- Percentage price with up to four decimals, at which an operation is aligned or registered, which excludes accrued and pending interest on the title, from the date of issuance or last interest payment to the date of fulfillment of the sales operation.

(Equation 1)

Where: Pl Clean price of the title Fi Are the flows of the title for interest and capital ni Are the days that elapse between the settlement date and the next interest and capital payment, considering a calculation basis of 360/365 or calendar, depending on the nature of the value to be analyzed and the current legal basis nx days elapsed between the last interest payment date (issuance date in case of no payments) and the settlement date base 360 or 365 days, depending on the calculation basis used IRR Internal rate of return, equivalent to the profitability rate of the operation NP Par value or residual nominal value I nominal interest rate of the title K Is the total number of remaining flows of the title

8. Dirty Price (Ps).- Percentage price with up to four decimals, at which an operation is aligned or registered, which includes accrued and pending interest on the title, from the date of issuance or last interest payment to the date of fulfillment of the sales operation.

(Equation 2)

Where: Ps Dirty price of the title Fi Are the flows of the title for interest and capital ni Are the days that elapse between the settlement date and the next interest and capital payment, considering a calculation basis of 360/365 or calendar, depending on the nature of the value to be analyzed and the current legal basis base 360 or 365 days, depending on the calculation basis used IRR Internal rate of return, equivalent to the profitability rate of the operation NP Par value or residual nominal value K Is the total number of remaining flows of the title

9. Average Price (Pp).- Price (clean or dirty) with up to four decimals that is obtained by calculating the price equivalent to the average yield weighted by the residual nominal value of the operations for the same title. This calculation only proceeds if the specific conditions detailed in this chapter are met;

10. Estimated Price (Pe).- In case the necessary conditions for the calculation of the average price are not met, the estimated price will be known as the price (clean or dirty) with up to four decimals resulting from finding the present value of the future flows of a title, discounting them with the respective discount rate, divided by the residual nominal value and multiplied by one hundred;

11. SOFR Rate.- For the purposes of its application in this chapter, the SOFR rate published for each valuation day will be taken;

12. Prime Rate.- For the purposes of its application in this chapter, the Prime Rate published by the Central Bank of Ecuador in the pertinent printed or electronic media, valid for each valuation day, will be taken;

13. Internal Rate of Return (IRR).- For the purposes of its application in this chapter, the IRR will be taken as the profitability rate of an operation expressed in effective annual terms, up to four decimals, at which the operation was aligned or reported in the respective transactional source, according to the corresponding calculation basis;

14. Discount Rate (DR).- Is the rate that will be used to calculate the present value of the flows of a certain value. It is composed of a reference rate and a margin that reflects the different risks of the title not incorporated in the reference rate, according to the following formula:

(Equation 3)

Where: DR Discount rate in effective annual terms on the corresponding calculation basis RR Reference rate, different for each category, in effective annual terms M Margin, different for each category, in effective annual terms

In the event that the reference rate for the complete title corresponds to an estimated zero-coupon curve, the discount rate may vary for the update of each flow of the same title

15. Reference Rate (RR).- Is the rate that together with the calculated or referenced average margin will be used for valuation purposes (discounting to present value the expected flows of a certain value), in the absence of the necessary conditions to calculate the average price of that title. The reference rate can be an estimated profitability rate from a given curve, a profitability index, or a financial indicator agreed upon and stated facially in the respective title; among them, the most appropriate one will be chosen according to the category of values to be analyzed;

16. Type of nominal rate.- Is the interest percentage fixed contractually to determine the payment of returns, established in the issuance conditions of the title. It can be fixed, variable, or a composite type that groups more than one of the above options;

17. Residual nominal value or par value (NP).- Corresponds to the Capital to be amortized: NP = (100 - % of amortizations) x Original nominal value

18. Price Vector.- Is the unique report of prices for titles that meet the conditions established in the technical valuation procedure that will be distributed daily; the report indicates the market price for each instrument following the methodology approved for the effect;

19. System Users.- Will be users of the valuation system and consequently obliged to use the price vector to value their portfolios and the portfolios of third parties they administer, when applicable, the following entities: securities houses, fund and trust administrators, insurance companies, multiple banks, specialized banks, public banking, cooperatives, pension funds, investment funds, and other institutions that maintain in their portfolios values registered in the price vector; and,

20. Information System for Investment Valuation.- Is the automatic process that the Quito Stock Exchange and the Guayaquil Stock Exchange will implement, to provide the necessary and sufficient information for the valuation of investments (prices, yields, margins, among others), based on the procedures described in this chapter.

Article 4.- Valuation Committee.- It is the collegiate body that will have the object of permanently analyzing the regulation on market price valuation, in order to propose modifications to it and present them to the Superintendent of Companies, Securities and Insurance, through a motivated report, in order for said control body to analyze the proposal and present it to the market regulator.

1. Formation.- This committee will be composed as follows: 1.1. Committee members with voting rights: 1.1.1. A delegate from the Quito Stock Exchange; 1.1.2. A delegate from the Guayaquil Stock Exchange; 1.1.3. A delegate designated by the Fund and Trust Administrators; 1.1.4. A delegate designated by the Securities Houses; and, 1.1.5. A delegate designated by the Risk Rating Agencies. 1.2. Committee members who do not have voting rights: 1.2.1. A delegate from the Bank of the Ecuadorian Institute of Social Security (BIESS); 1.2.2. A delegate from the Social Security Institute of the Armed Forces (ISSFA); 1.2.3. A delegate from the Social Security Institute of the National Police (ISSPOL); and, 1.2.4. A delegate from the National Police Severance Service (SCPN) The Valuation Committee must elect, from among its members with voting rights, a President, a Substitute President, and a Secretary of the Committee, who will exercise their office for a period of one (1) year. The positions of President and Substitute President are incompatible with the position of Se