Directive D2/2023: Instructions for Completing Form BA 330 and IRRBB Reporting Requirements

P O Box 427 Pretoria 0001 South Africa 370 Helen Joseph Street Pretoria 0002 +27 12 313 3911 / 0861 12 7272 www.resbank.co.za 1 Ref.: 15/8/2/3 D2/2023 To: All banks, branches of foreign institutions, controlling companies, eligible institutions, and auditors of banks or controlling companies Directive issued in terms of section 6(6) of the Banks Act 94 of 1990 Reporting requirements in terms of regulation 30 of the Regulations relating to Banks Executive summary The amendments to regulation 30 of the Regulations relating to Banks Regulations were gazetted on 23 December 2022, and implemented with effect from 1 January 2023 This Directive sets out, amongst others, the instructions for completing the form BA 330 and matters related thereto

1. Introduction 1.1 The amendments to regulation 30 of the Regulations were gazetted on 23 December 2022 and came into effect from 1 January 2023. 1.2 The amended Regulations make provision for the Authority to issue directives for completion of the form BA 330. As such, this Directive includes, among others, instructions for the completion of the form BA 330. 1.3 The Pillar 2 Interest rate risk in the banking book (IRRBB) framework requires banks to assess, and stress test their overall interest rate risk exposure according to specified methods and take corrective measures should this exposure be deemed excessive. 1.4 The treatment of credit impairments in the revised form BA 330 should be aligned with stage 3 credit risk exposures. This means that a specific impairment will not be raised until the exposure has been classified in stage 3 (or the exposure has become "credit impaired"), and as a result, interest on the exposure will be suspended. 1.5 Inflation is a measure of the rate of change in prices of a basket of goods and services over a period of time, usually measured on a monthly or annual basis. Inflation is typically measured using a government-issued index, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI). These indices measure the prices of a basket of goods and services commonly consumed by

2 households or used by producers. The inflation rate is calculated as the percentage change in the index from one period to the next. 1.6 Inflation-linked items, such as inflation-linked bonds, are a type of bond linked to the rate of inflation. Governments issue inflation-linked bonds. The government will adjust the bond's face value, coupon payments, and maturity date to keep pace with inflation. That way, the value of the bond will not erode over time, and the bondholder will receive the same real value at maturity as the face value. 1.7 Inflation-linked bonds reprice at the next coupon date and at maturity, therefore, such items should be classified as fixed-rate items. The actual coupon amount being paid, at each of the coupon payment dates, will be different as the nominal balance is linked to an inflation index. This will adjust the nominal balance used to calculate the coupon amount but the fixed coupon rate will remain the same. 2. Directive 2.1 Based on the aforesaid and in accordance with the provisions of section 6(6) of the Banks Act 94 of 1990, banks are hereby directed as follows: 2.1.1 A bank shall construct the relevant required repricing gap by classifying all relevant interest rate-sensitive assets and liabilities in time buckets according to their repricing characteristics or maturity dates. The repricing gap: (a) measures the bank’s exposure to risk by focusing on changes to future profitability within a given time horizon, eventually affecting future levels of the bank’s equity; (b) is derived from a static balance sheet; and (c) assumes that the derived potential rate movements will occur through a parallel rate shock to all maturities along the yield curve. 2.1.2 Instructions relating to the completion of the form BA 330 are furnished with reference to column and line-item descriptions appearing on the form BA 330, as per the tables below. BA 330 Column instructions: Column number Column description Instruction 1 Overnight This column shall reflect the relevant required amounts related to items profiled to reprice/reset within the next business day or maturity date if maturing within the next day. 10 Non-rate sensitive items This column shall reflect the required aggregate amounts of assets, liabilities or items held in the bank's banking book in relation to which the value is not sensitive to or influenced by changes in interest rates.

3 BA 330 Line-item instructions: Line number Line-item description Instruction 2 Variable rate items These items shall reflect the aggregate amount of all relevant prime-linked items, central bank main reference rate, and other overnight resetting assets or items profiled according to their overnight (next business day) reset date or maturity date if maturing within the next day. 3 Fixed-rate items These items shall reflect the aggregate amount of all relevant fixed-rate assets or items profiled according to their contractual maturity dates or next reset date. 4 Benchmark rate items These items shall reflect the aggregate amount of all relevant reference rate-linked assets or items. 5 Discretionary rate items These items shall reflect the aggregate amount of all relevant assets or items- (a) in respect of which the relevant rate: (i) may or may not change in line with a regular base rate, and (ii) may be varied at the discretion of the reporting bank, (b) which assets, items, or instruments shall be reported based on the earliest adjustable interest￾rate date. 6 Other assets These items shall reflect the aggregate amount of all relevant assets or items held in the bank's banking book in relation to which the value is not sensitive to or changed or influenced by changes in interest rates- (a) such as, for example- (i) a deferred tax asset; or (ii) any portion of an impaired exposure or loan in respect of which the bank is no longer exposed to movements in interest rates since the bank has suspended interest accrual or; (iii) interest is recognised on the amortised cost, that is, on the gross exposure amount, but an equivalent amount is raised as an impairment against that exposure amount in terms of any relevant Financial Reporting Standard, such as, for example, IFRS 9 stage 3 type of exposures or loans. As such, in the end, that exposure or loan does not impact or change the bank's Income Statement or Balance sheet, provided that any portion of the loan or exposure that

4 Line number Line-item description Instruction remains sensitive to changes or fluctuations in interest rates, and in respect of which the bank calculates interest, must be reported in the relevant interest rate bucket related to rate sensitive assets or items on the form BA 330; (b) which assets or items are generally referred to as non-rate sensitive assets or items. 8 Variable rate item These items shall reflect the aggregate amount of all relevant prime-linked items, central bank main reference rate, and other overnight resetting liabilities or items profiled according to their overnight (next business day) reset date or maturity date if maturing within the next day. 9 Fixed-rate items These items shall reflect the aggregate amount related to all relevant fixed-rate liabilities or items profiled according to their contractual maturity dates or next reset date. 10 Benchmark rate items These items shall reflect the appropriate aggregate amount related to all reference rate-linked liabilities. 11 Discretionary rate items These items shall reflect the aggregate amount of all relevant discretionary rate liabilities or items or non￾maturity deposit balances that are subject to pass￾through and profiling assumptions, which liabilities or items can contractually reprice overnight and/or be withdrawn overnight resulting in the full balance being reported in the overnight bucket. 12 Other liabilities These items shall reflect the aggregate amount of all relevant liabilities or items held in the bank's banking book and amounts constituting capital and reserve funds of the bank- (a) the relevant values of which are not sensitive to or influenced by changes in interest rates, such as, for example- (i) balances due to creditors; or (ii) any non-interest-bearing capital instrument or reserve fund; (b) which liabilities or items, or capital and reserve funds are generally referred to as non-rate sensitive liabilities or items. 13 Net funding to / (from) trading book These items shall reflect the relevant net position or amount arising from or related to the bank's internal lending between its trading book and banking book, provided that the bank shall report the relevant trading to banking book offsetting positions in the column titled non-rate sensitive items.

5 Line number Line-item description Instruction 14 Net funding to / (from) foreign branches These items: (a) relate to the completion of the form BA 330 on a legal entity basis that includes any relevant activity or exposure of a foreign branch; (b) shall reflect the relevant net position or amount related to funds borrowed from or lent to the bank's foreign branches, provided that the bank shall report the relevant offsetting positions in the non-rate sensitive items column. 17 to 19 Swaps and forward rate agreements In accordance with the relevant requirements specified in the form BA 330, the bank shall separately report all relevant- (a) contracts or agreements in respect of which the bank pays a fixed rate and receives a floating rate, including all relevant interest rate swaps, assets swaps, FRAs, etc.; (b) contracts or agreements in respect of which the bank receives a fixed rate and pays a floating rate, including all relevant interest rate swaps, assets swaps, FRAs, etc.; and (c) contracts or agreements in respect of which the bank pays a floating rate and receives a floating rate, including all relevant basis risk swaps, that is, for example, pay a 3-month Jibar linked rate and receive prime linked rate, provided that the bank shall, in all relevant cases- (i) report the relevant notional amounts associated with paid positions as a negative notional amount and amounts received as a positive notional amount in the appropriate maturing (fixed leg) or next, reprice date (floating leg) bucket; (ii) treat an interest-rate swap contract in terms of which the bank receives a floating rate and pays fixed as being equivalent to a long position in a floating￾rate instrument with a maturity equivalent to the period until the next interest-rate fixing and as a short position in a fixed-rate instrument with the same maturity as the interest-rate swap contract itself; and vice versa.

6 Line number Line-item description Instruction (iii) report a Forward Rate Agreement (FRA) or futures contract on the same basis as a purchased or sold position, that is, as a long or short position. The maturity of the relevant contract or instrument shall be based on the exercise date plus the life of the underlying contract or instrument. For example, a 3 x 6 FRA buyer borrowing money in three months must report a long position in the 3- month time band and a short position in the 6-month time band. 20 Other derivative instruments These items shall reflect the aggregate amount of all relevant derivative instruments other than swaps, futures, and FRAs reported in line items 17 to 19, which derivative instruments form part of managing the reporting bank's exposure to interest rate risk in the banking book. Similar to other derivative contracts, the bank shall, in the case of an option contract, report the appropriate contract amounts in the relevant time bands based on the contract's relevant settlement date and maturity date. For example, (a) when the bank buys a call option in respect of a 3-month interest future, which option is exercisable in two months, the bank shall, based on the relevant delta equivalent value of the contract, report a long position in the 5-month time bucket and a short position in the 2- month time bucket; and (b) in the case of a swaption contract, the bank that bought the swaption shall report a short position, that is, a sold position, in respect of the strike date, and a long position, that is, a purchased position, in respect of the maturity date. 22 Cumulative gap, including derivative instruments Based on the relevant net amounts reported in item 21, this item shall reflect the appropriate cumulative amount in respect of the reporting bank's repricing gap in the relevant specified time band. 23 to 44 Behavioural static repricing gap The bank shall apply the same line-item instructions specified herein before in relation to the bank's contractual static repricing gap when it completes the respective items specified in items 23 to 44, provided that the bank shall apply its behavioural assumptions in relation to the relevant specified items.

7 Line number Line-item description Instruction 45 to 48 Contractual sensitivity of net-interest income Based on the bank's respective contractual positions and in accordance with the requirements specified in the form BA 330, these items shall reflect the relevant required aggregate amounts indicating the bank's sensitivity to specified interest rate movements 45 to 46 Parallel rate shock up/down These items shall reflect the relevant required aggregate amounts, calculated as scenario less base, excluding the impact of any relevant interest rate swaps, FRAs, etc. 47 to 48 Parallel rate shock up/down These items shall reflect the relevant required aggregate amounts, calculated as scenario less base, including the impact of any relevant interest rate swaps, FRAs, etc. 49 to 50 Impact of a parallel rate shock on Tier 1 Capital and reserve funds Based on the relevant amounts reported in items 47 and 48, the reporting bank shall express the relevant impact of the specified rate change on its net interest income as a percentage of the bank's Tier 1 capital and reserve funds, as reported in line item 77 under column 1 of the form BA 700. 51 to 52 Impact of parallel rate shock on forecast net interest income Based on the relevant amounts reported in items 47 and 48, the reporting bank shall express the relevant impact of a rate change on its net interest income as a percentage of the bank's forecast net interest income for the twelve months following the reporting month. 53 Impact of adverse correlated risk shock These items shall reflect the expected impact on net interest income over 12 months of an unchanged prime interest rate but an adverse movement of 100bps or such further currency-specific absolute shocks as may be directed in writing by the Authority in the call rate or any applicable specified benchmark rate. 54 to 55 Impact of adverse correlated risk shock In accordance with the requirements specified in the form BA 330, these items shall reflect the relevant required aggregate amounts related to an adverse correlated rate shock. 54 NII Impact of bank-specific rate shock These items shall reflect the relevant required NII Impact of a bank-specific rate shock derived from the bank's own internally formulated scenario for adverse correlated moves in rates, provided that, when requested in writing by the Authority, the bank shall submit in writing to the Authority all relevant required information regarding the assumptions and yield curve shifts used in the calculation of the relevant reported amount.

8 Line number Line-item description Instruction 55 NII Impact of bank-specific rate shock for ZAR adverse correlated moves as a percentage of 12-month forecast NII In accordance with the respective requirements specified in the form BA 330, this item shall reflect the expected impact of the bank-specific shock on the bank's 12-month forecast NII. 56 to 66 Behavioural interest rate sensitivity: banking book impact on NII The bank shall apply the same corresponding line￾item instructions specified herein before concerning the bank's contractual interest rate sensitivity: banking book impact on NII when the bank completes the relevant items specified in items 56 to 66, provided that the bank must apply its behavioural assumptions in respect of the relevant specified items. 67 and 77 Contractual and Behavioural Change in the economic value of equity: Total assets These items shall reflect the required aggregate cash flow amounts of all applicable rate-sensitive assets as well as relevant derivative positions, including the respective aggregate amounts related to all applicable variable rates, fixed rates, benchmark rates and discretionary rate items. 68 and 78 Contractual and Behavioural Change in the economic value of equity: Total liabilities These items shall reflect the required aggregate cash flow amounts of all relevant rate-sensitive liabilities as well as relevant derivative positions, including the respective aggregate amounts related to- (a) all relevant variable rate, fixed rate, benchmark rate and discretionary rate items; and (b) the relevant net funding to/from the bank's trading and banking books. 69 and 79 Contractual and Behavioural Change in the economic value of equity: Net gap This item shall reflect the difference between the repricing cash flows of assets and liabilities. 70 and 80 Contractual and Behavioural Change in the economic value of equity: Base (a) The starting point for an EVE sensitivity calculation is the static interest-rate gap report. In this scenario, the gaps in each time bucket are transformed into a net present value (NPV) by discounting using discount factors based on the level of interest rates.

9 Line number Line-item description Instruction economic value of equity (b) The NPVs for each time bucket are then added to create a high-level estimate of the bank's economic value. (c) The tenor bucket to use for each asset and liability product for EVE calculation purposes is the interest￾rate repricing tenor, not its expected life tenor. This item shall reflect the Base EVE (the net present value) as per discount factor rates applied in the discount curves table in the BA 330 form. In accordance with the respective requirements specified in the form BA 330, this item shall reflect the bank's relevant base EVE amount for each time bucket, duly distinguishing between: (a) summed EVE amount that includes derivatives used or affecting the bank's EVE amount, whether tactical or structural; and (b) summed EVE amount that excludes derivatives used or affecting the bank's EVE amount, whether tactical or structural. 71 to 76 Contractual EVE sensitivity In accordance with the respective requirements specified in the form BA 330, these items shall reflect the impact of each relevant specified shock scenario relative to the bank's base EVE per time bucket. 81 to 86 Behavioural EVE sensitivity In accordance with the respective requirements specified in the form BA 330, these items shall reflect the impact of each relevant specified shock scenario relative to the bank's base EVE per time bucket. 87 to 93 Discount curves In accordance with the respective requirements specified in regulation 39(4) of the Regulations, these items shall reflect the relevant mid-point curve rates in relation to the specified curves, provided that in relation to the >25Y term structure, the bank shall report the 30Y mid-point curve rate. Base curve- This item shall reference the Jibar swap curve (ZAR reporting). For material foreign currency reporting, the PA is not prescribing the base curve at this stage, and banks shall report curves used for internal risk management purposes. 94 and 97 Maximum In accordance with the respective requirements specified in the form BA 330, this item shall reflect the bank's relevant maximum loss amount derived from the 6 prescribed scenarios prespecified in regulation

10 Line number Line-item description Instruction 30(5)(a)(iii)(H)(i) of the Regulations, duly distinguishing between- (a) the relevant amount that includes derivatives used or affecting the bank's EVE amount, whether tactical or structural; and (b)the relevant amount that excludes derivatives used or affecting the bank's EVE amount. 95 and 98 Tier 1 capital This item shall reflect the bank's appropriate aggregate amount of Tier 1 capital and reserve funds, reported in line item 77 column 1 of the form BA 700. 96 and 99 Maximum (loss) % of Tier 1 Capital This item shall reflect the maximum loss (lines 94 and 97) divided by Tier 1 capital (95 and 98). If a negative amount is reported in the maximum loss, the reported maximum loss as a percentage of Tier 1 capital will be reported as a negative percentage in lines 96 and 99. 100 Base case This item shall reflect the bank's relevant required forecast level of the applicable rate and not the rate of change for the bank's base case scenario. 101 Bearish case This item shall reflect the bank's relevant required forecast level of the applicable rate and not the rate of change for the bank's increasing rate case scenario. 102 Bullish case This item shall reflect the bank's relevant required forecast level of the relevant rate, not the rate of change for the bank's decreasing rate case scenario. 103 Material foreign currency reporting When completing the material foreign currency reporting of the form BA 330, the bank shall apply the respective corresponding line-item instructions specified hereinbefore- (a) in relation to any relevant foreign currency exposure that individually is equal to or exceeds 5% of the bank's total assets /liabilities, in which case the bank shall not convert the relevant amounts required to be reported to ZAR; or (b) when the aggregate or combined amount of all the bank's respective exposures to foreign currencies regarded as immaterial is equal to or exceeds 5% of the bank's total assets/liabilities, the bank shall convert the aggregate amounts required to be reported to ZAR. Material foreign currency reporting- list and The below list of currencies is an indication of the currency denomination numbers to use when reporting the material foreign currency section; report the respective currency denomination number in line 200 of the form BA 330 following the list specified

11 Line number Line-item description Instruction numbering instructions below: Material currencies: USD- 1 GBP-2 JPY-3 CHF-4 EUR-5 CNH-6 CNY-7 Other-8 Immaterial currencies: BWP- 9 2.2 Banks are further directed as follows: 2.2.1 Consolidated reporting requirements: 2.2.1.1 Regulation 30 of the Regulations, as amended to incorporate the updated IRRBB standards, shall be applied by banks on a solo basis until IRRBB Public Disclosure requirements come into effect, from 1 January 2024, when regulation 30 of the Regulations shall apply on both a solo and group consolidated basis. 2.2.1.2 For Group consolidated reporting requirements, all IRRBB requirements shall be applicable. Any challenges concerning the IRRBB reporting on a group consolidated basis should be brought to the attention of the PA. 2.2.2 Internal capital framework for IRRBB: 2.2.2.1 The PA will assess capital requirements for IRRBB through the Pillar 2 process during the annual Internal Capital Adequacy Assessment Process (ICAAP). 2.2.3 IRRBB model validation: 2.2.3.1 Models used to model IRRBB will be subject to annual model validation. The scope of the models subject to validation must include the following: a. Non-maturity deposits (NMD) models. b. Behaviouralisation models/bank-specific assumptions. c. Models used to allocate economic capital for IRRBB. d. Methodology for constructing interest rate curves. e. Methodology for creating interest rate scenarios. f. Methodology for banks using Internal Measurement System (IMS) approach; and g. Methodology for banks using a standardised approach. 2.2.4 Negative interest rates: 2.2.4.1 The 0% floor on interest rates no longer applies, and negative interest rates can now be included in NII and EVE calculations.

12 2.2.4.2 In this regard, the banks shall apply a -100bps floor, as there is an economic floor to interest rates. 2.2.5 Non-performing loans: 2.2.5.1 The portion of any non-performing loan on which interest is calculated shall be reported in the original interest rate bucket, and the portion of the loan on which interest is no longer accrued does not expose the bank to interest rate risk and shall be reported in the non-rate sensitive time bucket. This reporting treatment shall be consistent for the BA 330 and BA 610 returns for jurisdictions implementing IFRS 9. If IFRS 9 has not been implemented, the respective jurisdictions shall follow their own regulatory requirements and financial reporting guidelines and inform the PA in writing accordingly. 2.2.6 Inflation-linked items: 2.2.6.1 Inflation-linked bonds reprice at the next coupon date and at maturity, therefore, such items shall be classified as fixed-rate items. Banks should apply consistent treatment from an interest rate shock perspective, whether for gap reporting, NII or EVE sensitivity perspective. 3. Acknowledgement of receipt 3.1 Kindly ensure that a copy of this Directive is made available to your institution’s external auditors. In addition, the attached acknowledgement of receipt duly completed and signed by both the chief executive officer of the institution and the said auditors should be returned to the PA at the earliest convenience of the aforementioned signatories. Fundi Tshazibana Chief Executive Officer Date: The previous Directive issued was Directive 1/2023, dated 23 January 2023.