Circular D1 96/2 Implementation of the Regulation on Own Funds of Credit Institutions

BANKING AND FINANCIAL COMMISSION
Prudential Supervision
.
Brussels, April 15, 1990.
CIRCULAR D1 96/2 TO CREDIT INSTITUTIONS

Madam,
Sir,

Subject: Implementation of the regulation on own funds of credit institutions

Following the approval by the competent Ministers and the publication in the Belgian Monitor of March 22, 1996, of the Banking and Financial Commission's order of December 5, 1995, concerning the regulation on own funds of credit institutions, this regulation, the accompanying commentary, and a set of adapted periodic reporting tables have been communicated to credit institutions (cf. Circular D1 96/1 of April 2, 1996).

The modifications introduced by the new regulation may require adaptations to a credit institution's administrative and accounting organization. To ensure monitoring of the regulation's implementation, you will find attached a questionnaire regarding your institution's status in this matter.

On the one hand, in addition to practical information (contact person), information is requested regarding your institution's position concerning certain provisions of the regulation ("de minimis", definition of own funds, options chosen among those authorized by right by the regulation).

On the other hand, the regulation requires prior approval from the Commission in a number of situations. This is the case notably for the following elements:

• recourse to the simplified method for calculating position risk (question 3.1);
• use of sensitivity-based methods for calculating interest rate risk (question 3.2.2);
• use of scenario analysis regarding options (questions 3.2.3, 3.3.1, 3.3.4);
• definition of structural positions in foreign currencies (question 3.4.1);
• use of specific methods for calculating exchange rate risk (question 3.4.3);
• approval of internal models (question 4);
• offsetting positions of companies included in consolidation (question 5.2);
• extension of elements taken into account in the definition of own funds (question 6.1);
• application of the derogatory regime regarding risk concentration (question 6.4).

I draw your attention to the necessity of communicating to my services precise elements allowing the evaluation of authorization requests, initially based on your file. The examination of your requests may subsequently be completed by a more thorough inspection.

Please communicate your responses to the questionnaire by May 20, 1996.

Furthermore, modifications to your institution's situation as described in your response to the questionnaire must be submitted to the Commission, which will rule, if necessary, on the appropriateness of maintaining or granting authorization.

I send a copy of this to your auditor.

Please accept, Madam, Sir, the expression of my sentiments.

Annex

QUESTIONNAIRE ON THE IMPLEMENTATION OF THE ORDER OF THE BANKING AND FINANCIAL COMMISSION OF DECEMBER 1995 CONCERNING THE REGULATION ON OWN FUNDS OF CREDIT INSTITUTIONS (Reply to be addressed to the Banking and Financial Commission no later than May 20, 1996)

1. Name and function of the person designated as contact person within the institution for the CBF collaborators, regarding matters related to the introduction of the modified regulation on own funds?
   First Name, Last Name:
   Function:
   Telephone:
   Fax:

2. a. Does the institution intend to invoke the "de minimis" regime, in order to benefit from the regime described in Art. 7?
   b. If so, the institution will provide a numerical justification (nature and usual importance of trading portfolio positions), with reference to the criteria and calculation methods defined in Arts. 7 and 8. See Annex, number:

3. Standardized Methods
   3.1 a. Does the institution estimate that it will likely not be able to recourse to the "de minimis" regime, but that it nevertheless has a trading portfolio of low importance such that it may temporarily recourse to the simplified calculation method described in Arts. 10 and 11 (*)?
   b. If so, the institution will specify the nature and usual importance of operations belonging to its trading portfolio. See Annex, number:

3.2 Interest Rate Risk
3.2.1 Does the institution opt:
a. for the method based on maturity (Arts. 40 to 45) or b. for the method based on duration (Arts. 46 to 51)?

3.2.2 a. Does the institution wish to use the calculation methods based on sensitivity described in Art. 77 ()?
() Subject to prior approval of the Banking and Financial Commission

b. If so, for which operations?
See Annex, number:
c. If so, according to which precise modalities?
See Annex, number:

3.2.3 Which method does the institution wish to use for options operations:
a. simplified method (Art. 31, para. 6); b. "delta-plus" (Art. 31, paras. 1 to 5); If so, modalities:
See Annex, number:
(*) Subject to prior approval of the Banking and Financial Commission

c. scenario analysis (Art. 79) (*)?
If so, modalities:
See Annex, number:

3.3 Equity Position Risk
3.3.1 Which method does the institution wish to use for options operations:
a. simplified method (Art. 55, para. 6);
Non b. "delta-plus" (Art. 55, paras. 1 to 5);
Yes
Non
If so, modalities:
See Annex, number:
(*) Subject to prior approval of the Banking and Financial Commission

c. scenario analysis (Art. 79) (*)?
If so, modalities:
See Annex, number:

3.3.2 Does the institution estimate, regarding specific risk, that it may regularly use the reduced requirement based on the notion of "diversified portfolio" (Art. 59, para. 2)?

3.4 Exchange Rate Risk
3.4.1 How does the institution propose to define its structural position (Art. 66, para. 4) (*)?
See Annex, number:

3.4.2 a. Does the institution wish, for the calculation of positions, to use the net present value (Art. 68)?
(*) Subject to prior approval of the Banking and Financial Commission

b. If so, for which operations?
c. If so, according to which precise modalities?
See Annex, number:
See Annex, number:

3.4.3 Which calculation method does the institution wish to employ:
a. standard method (Art. 69); b. correlation method (Art. 73) ();
c. simulation method (Art. 78) ()?
Standard
Correlations
Simulations

3.4.4 Which method does the institution wish to use for options operations:
a. simplified method (Art. 72);
(*) Subject to prior approval of the Banking and Financial Commission

b. "delta-plus" (Art. 66 and 76);
If so, modalities:
See Annex, number:
c. scenario analysis (Art. 79) (*)?
If so, modalities:
See Annex, number:

4. Internal Models
   4.1 Does the institution wish to use internal models, possibly partial (cf. commentary on the order) ()?
   () Subject to prior approval of the Banking and Financial Commission

4.2. For which types of risks?
4.3 For each model:
a. Description of the model? b. Date of start of use?
c. Description of how the model meets qualitative and quantitative criteria?
d. Method of taking specific risk into account?
See Annex, number:
a. b. c. d.

5. Consolidation
   5.1. Should the consolidation perimeter be modified following adaptations of own funds requirements (e.g., addition of subsidiaries having a significant trading portfolio)?
   (*) Subject to prior approval of the Banking and Financial Commission

5.2 a. Does the institution wish to proceed to the offsetting of positions of companies included in the consolidation (Art. 86, para. 2) (*)?
b. If so, in what manner are the conditions for doing so met?
See Annex, number:

5.3 a. Does the institution wish to use the internal limits of companies included in the consolidation as an alternative to actual positions (cf. commentary on the order)?
b. If so, in what manner are the conditions for doing so met?

6. Miscellaneous
   6.1 a. Will the institution use the alternative definition of own funds (Art. 15)?
   (*) Subject to prior approval of the Banking and Financial Commission

b. If so, will the institution recourse to the elements referred to in Art. 15, 3rd para. 3, 2nd and/or 3rd (*)?

6.2 a. How does the institution define its trading portfolio (Art. 3)?
See Annex, number:
b. How are internal contracts ("internal deals") treated?
See Annex, number:

6.3 Settlement/Delivery Risk:
Does the institution use the lump-sum method referred to in Art. 20?

6.4 Risk Concentration by Counterparty:
Does the institution wish to recourse to the derogatory regime provided for in Art. 83, para. 2 (own funds less than BEF 2 billion) ()? () Subject to prior approval of the Banking and Financial Commission

6.5 Which method will the institution use for calculating the replacement cost of forward operations (Art. 17, para. 1):
a. Method based on market value evaluation? b. Method based on initial risk?
Market Value
Initial Risk

6.6 a. Does the institution wish to have recourse to novation and bilateral offsetting conventions (Art. 17, para. 2)?
b. If so, according to which modalities?
See Annex, number:
(*) Subject to prior approval of the Banking and Financial Commission