Circular LISOL 1-136. Minimum Capital Requirement for Market Risk Coverage

BANCO CENTRAL DE LA REPUBLICA ARGENTINA
COMMUNICATION “A” 2435 16/05/96
TO FINANCIAL ENTITIES:
Ref. Circular
LISOL -1- 136
Minimum Capital Requirement for the Coverage of Market Risks

We address you to inform you that this Institution has adopted the following resolution:

"1. Establish that, starting from 1.9.96, to the capital requirements established by Communication “A” 2136 and complementary regulations, the capital requirements for market risk established in point I.4, as the VaRp component, must be added.

I. CAPITAL REQUIREMENTS FOR MARKET RISK.

1. National Asset Portfolio.
   a. Bonds
   i. Included Positions.
   Positions in national public securities and shares of common investment funds whose object is the assets included in this point, which trade habitually in the markets, purchased or sold spot (holdings and to settle) or forward, linked or not with repos. Assets held in investment accounts are excepted from this treatment. Deposits of national public securities captured must additionally be included as passive positions (sold), and loans of national public securities granted as active positions (purchased). Additionally, operations of purchased or sold options contracts on the previously mentioned assets will be included. Opposite positions in the same instrument may be netted.

ii. Calculation of Value at Risk
ii.a. Purchased and sold positions in the considered assets will be grouped into 4 zones according to their average life ("modified duration": md)

1. bonds denominated in pesos, md up to 2.5 years;
2. bonds denominated in pesos, md of 2.5 years or more;
3. bonds denominated in foreign currency, md up to 2.5 years;
4. bonds denominated in foreign currency, md of 2.5 years or more.

ii.b. Value at Risk of the position in asset Ai, VaRi VaRi = Vi k * σi Ti ½ (1)

where:
Vi: Value of the sum of positions in asset i; in the case of purchased or sold options on the asset, the notional value of these multiplied by the delta of each option will be included. If the total sum of positions results negative, it will be considered a sold position; if positive, a purchased position. k: Factor expressing the considered risk level. σi: Measure of volatility of the return of asset i. Ti: Time necessary to unwind the position.

ii.c. The values at risk of purchased and sold positions in each zone will be summed separately, obtaining:
VaR j c= Σi VaRi , for purchased positions, in zone j (2) VaR j v= -Σi VaRi, for sold positions , in zone j (2’)

ii.d. Additional Value at Risk of Options. For purchased and sold options on each asset included in the bond portfolio, gamma and vega risks will be additionally calculated, according to the following expression:
VaR0i = Rgoi+Rvoi (3)
Rg0i =  min (0 ; Σj gamma j * (dP i
2
)/2 )  (4)
Rv0i = Σj vega j * 25 σi * (252 0.5)  (5)

where:
VaR0i : additional value at risk of the options portfolio on asset “i”; Rg0i : gamma risk of the options portfolio on asset “i”; Rv0i : vega risk of the options portfolio on asset “i”; gamma j : value of the gamma coefficient of option "j", expressed as the change in the delta coefficient of the option in response to a change of 1 peso in the price of the underlying asset; vega j : value of the vega coefficient of option "j", expressed as the change in the value of the option in response to a 1% change in the annual volatility of the underlying asset; dPi = k * σi * P i T i ½ , where P i is the price of the underlying asset. Both the gamma and vega coefficients of the options will take into account the number of units of the underlying asset to which each option refers.

The additional value at risk for the options portfolio will result from the sum of the values at risk in options for each asset:
VaR0 = Σi VaR0i (6)

ii.e. The total Value at Risk of the bond portfolio will be equal to:
VaRAN-B = min (VaR 1 c ; VaR 1 v) + abs (VaR 1 c - VaR 1 v ) +

• min (VaR 2
  c ; VaR 2 v) + abs (VaR 2 c - VaR 2 v ) +
• min (VaR 3
  c ; VaR 3 v) + abs (VaR 3 c - VaR 3 v ) +
• min (VaR 4
  c ; VaR 4 v) + abs (VaR 4 c - VaR 4 v ) +
• VaR 0
  (7)

b. Shares.
i. Included Positions.
Positions in shares of Argentine companies considered for the elaboration of the MERVAL Index and shares of common investment funds whose object is the assets included in this point, which trade habitually in the markets, purchased or sold spot (holdings and to settle) or forward, linked or not with repos. Deposits of shares captured must additionally be included as passive positions (sold), and loans of shares granted as active positions (purchased). Additionally, operations of purchased or sold options contracts on the previously mentioned assets will be included. Opposite positions in the same instrument may be netted.

ii. Calculation of Value at Risk
ii.a. Value at Risk of the position in asset Ai, VaRi VaRi = Vi * k * σi * Ti ½ (8)

where:
Vi: Value of the sum of positions in asset i; in the case of options, the notional value of these multiplied by the delta of each option will be included. If the total sum of positions results negative, it will be considered a sold position; if positive, a purchased position. k : Factor expressing the considered risk level. σi : Measure of volatility of the return of asset i. Ti : time necessary to unwind the position.

ii.b. The values at risk of purchased and sold positions will be summed separately, obtaining:
VaRc = Σi VaRi , for purchased positions (9)

VaRv = - Σi VaRi , for sold positions (9')

ii.c. Additional Value at Risk of Options. For purchased and sold options on each asset included in the share portfolio, gamma risk and vega risk will be additionally calculated, according to the following expression:
VaRoi = Rgoi + Rvoi (10)
Rgoi =  min (0 ; Σj gamma j * (dP i
2
)/2 )  (11)
Rvoi = Σj vega j * 25 σi * (252 0.5)ï (12)

where:
VaRoi : value at risk of the options portfolio on asset “i”; Rgoi : gamma risk of the options portfolio on asset “i”; Rvoi : vega risk of the options portfolio on asset “i”; gamma j : value of the gamma coefficient of option “j”, expressed as the change in the delta coefficient of the option in response to a change of 1 peso in the price of the underlying asset; vega j : value of the vega coefficient of option "j", expressed as the change in the value of the option in response to a 1% change in the annual volatility of the underlying asset; dPi = k * σi

• P i T i
  ½
  , where:
  P i is the price of the underlying asset.
  Both the gamma and vega coefficients of the options will take into account the number of units of the underlying asset to which each option refers.

The additional value at risk for the options portfolio will result from the sum of the values at risk for each asset:
VaR0 = Σi VaR0i (13)

ii.d. The total Value at Risk of the share portfolio will be equal to:
VaRAN-A = min (VaRc ; VaRv) + abs (VaRc - VaRv ) + VaR0 (14)

2. Foreign Asset Portfolio.
   a. Bonds
   i. Included Positions.
   Positions in debt securities of foreign companies, public securities of foreign governments, and shares of common investment funds whose object is the assets included in this point, which trade habitually in the markets, purchased or sold spot (holdings and to settle) or forward, linked or not with repos. Additionally, operations of purchased or sold options contracts on the previously mentioned assets will be included. Opposite positions in the same instrument may be netted.

The considered positions must be discriminated according to the currency of issuance of each instrument, regardless of the issuer's residence. In the case of assets expressed in currencies other than the United States dollar, the entity must consider the risk of two positions: the one composed of the asset and the position in foreign currency. On the latter, a capital requirement will be determined based on point 3. below. The value of all positions will be expressed in United States dollars, converting currencies other than this according to the repo rate elaborated by the Banco de la Nación Argentina.

Interest rate derivative contracts must be converted into positions in the relevant underlying assets. For example, interest rate “swaps” will be treated as a combination of two positions in bonds, one purchased and one sold, with the corresponding interests (fixed or variable) and issuers.

ii. Calculation of Value at Risk
The methodology of point 1.a.ii. will be followed.
The Value at Risk will be calculated according to what is provided in the second paragraph of point 2.a.i, obtaining the total Value at Risk of the foreign bond portfolio as the sum of the values at risk of each currency:
VaRAE-B = Σj VaRAE-BMj where:
VaRAE-BMj is the Value at Risk of instruments issued in currency “j”.

b. Shares.
i. Included Positions.
Positions in shares of foreign companies, shares of common investment funds whose object is the assets included in this point, and share indices, which trade habitually in the markets, purchased or sold spot (holdings and to settle) or forward, linked or not with repos. Additionally, operations of purchased or sold options contracts on the previously mentioned assets will be included. Opposite positions in the same instrument may be netted.

The considered positions must be discriminated by trading markets, taking into account the currency in which each instrument trades, regardless of the issuer's residence. In the case of assets expressed in currencies other than the United States dollar, the entity must consider the risk of two positions: the one composed of the asset and the position in foreign currency. On the latter, a capital requirement will be determined based on point 3. below. The value of all positions will be expressed in United States dollars, converting currencies other than this according to the repo rate elaborated by the Banco de la Nación Argentina.

ii. Calculation of Value at Risk.
The methodology of point 1.b.ii. will be followed. The Value at Risk will be calculated by trading market, according to what is provided in the second paragraph of point 2.b.i, obtaining the total Value at Risk of foreign shares as the sum of the values at risk by markets:
VaRAE-A = Σj VaRAE-AMj (16) where:
VaRAE-AMj is the Value at Risk of instruments that trade in market "j".

3. Foreign Currency Positions.
   i. Included Positions
   Purchased and sold positions in foreign currencies other than the United States dollar, spot or forward, derivatives purchased or sold on them, and the dollar value of the positions of instruments included in point 2., which trade in currencies other than the United States dollar, will be included.

ii. Calculation of Value at Risk
ii.a. Value at Risk of the position in currency "i", VaRi.
VaRi = Vi * k *σi * Ti
½ (17)

where:
Vi : Absolute value of the sum of positions in currency “i” expressed in United States dollars, using the repo rate elaborated by the Banco de la Nación Argentina; in the case of options on that currency, the notional value of these multiplied by the delta of each option will be included. k : Factor expressing the considered risk level; σi : Value of the standard deviation of the daily change in the quotation of the currency against the United States dollar; Ti : time necessary to unwind the position.

ii.b. The values at risk of the positions will be summed, obtaining:
VaRME-F = Σi VaRi (18)

ii.c. Additional Value at Risk of Options. For purchased and sold options on each considered currency, gamma risk and vega risk will be additionally calculated, according to the following expression:

VaRoi = Rgoi + Rvoi (19)
Rgoi =  min (0 ; Σj gamma j * (dP j
2
)/2 )  (20)
Rvoi = Σj vega j * 25 σi * (252 0.5)ï (21)

where:
VaRoi : value at risk of the options portfolio on currency “i”; Rgoi : gamma risk of the options portfolio on currency “i” Rvoi : vega risk of the options portfolio on currency “i” gamma j : value of the gamma coefficient of option "j", expressed as the change in the delta coefficient of the option in response to a change of 1 peso in the price of the underlying asset; vega j : value of the vega coefficient of option "j", expressed as the change in the value of the option in response to a 1% change in the annual volatility of the underlying asset; dPi = k * σi * Pi Ti ½ where Pi, is the quotation of currency "i". Both the gamma and vega coefficients of the options will take into account the number of units of the underlying asset to which each option refers.

The additional value at risk for the options portfolio will result from the sum of the values at risk for each currency:
VaRo = Σi VaRoi (22)

ii.d. The total Value at Risk of foreign currency will be equal to:
VaRME = VaRME-F + VaRO (23)

4. Capital Requirement Required by Market Risk.
   The capital requirement for market risk will be the sum of the Values at Risk calculated in 1, 2, and 3.
   VaRp = VaRAN-B + VaRAN-A + VaRAE-B + VaRAE-A + VaRME (24)

II. DEFINITIONS AND VALUES.
a. Prices and Calculation. The calculations of the capital requirement for market risk will be performed based on the positions that the entities hold at the close of operations of the day in the local market, using the prices in force at that moment. In case of not having a quotation for any instrument, the last available one will be used. On days when no operations are registered in the markets, the values of the requirement of the immediate previous business day will be repeated. b. Coefficient k: its value will be equal to 2.32.

c.: σi Measure of volatility of the return of asset i.
The Central Bank will inform monthly the values of σi that will be used for the calculation of the Value at Risk in the instruments included in points 1. and 2., specifying, additionally, to which zone each one belongs according to its average life. The information will be supplied on the last business day of the month and will be used for the calculations corresponding to the daily positions of the following month. Holdings of national assets whose volatilities are not published by the Central Bank will not generate capital requirements for market risk and will receive the treatment of “non-tradable” for the purposes of the application of the limits on total holdings referred to in points 3.3. and 3.4. of Annex II to Communication “A” 2140. For foreign assets, the entity must calculate the volatilities as the standard deviation of the daily return of the assets, following the methodology exposed below:
σi = [( 1 - λ ) Σj=1
74 λ j * (Ri,t-j - MRi ) 2 ] 0.5
Ri.t-j = ( Pi,t-j / Pi,t-j-1 ) -1
MRi
= ( 1 - λ ) * Σj=1
74 λ j * Ri,t-j where λ = 0,94; j = 1 to 74;
Pi,t-j
: Price of asset i, at the close of day t-j.
The volatility (standard deviation) obtained will be annualized, if necessary for the calculation of the value of the options, by multiplying σi by the square root of 252.

d. Ti: time that the financial entity needs to unwind an operation. The minimum value for this factor is 10. As the positions held by the entity are of great value or constitute less liquid assets, with lower volume of daily transactions, the value of Ti will increase. The financial entity must determine the value of Ti it considers adequate, given the size of its holdings and the liquidity of the market for that asset. Therefore, this factor will not be the same for all assets nor equal among financial entities. In the case where there is no fluid quotation of options and the entity must neutralize its impact through the futures market, the amount to buy or sell to neutralize the position will be determined based on the delta of the total position in the asset. The delta of the total position will be calculated as the weighted average by amount (notional value in the case of options) of the individual positions in the asset.

e. r: for the calculation of the VaR of derivatives on national assets, the interest rate for loans to first-line companies for 30 days in pesos or dollars will be used, depending on whether the derivatives are on assets in pesos or dollars, corresponding to the fifth business day prior to the calculation day, according to the information provided by the Central Bank. For the case of derivatives on foreign assets, the interest rate for the one-year government bond of the country in whose currency the asset is expressed will be used.

f. Valuation of options: for the calculation of the coefficients linked to options (delta, gamma, vega), the Black-Scholes options valuation model will be accepted. In the case of exotic options, or when the entity possesses an alternative valuation method, its use must be approved by the Superintendencia de Entidades Financieras y Cambiarias.

g. Position in each asset (Vi): the net position must show the exposure that the entity holds in each considered asset, therefore it will be constituted by (the signs are exposed in parentheses):
Spot Holdings (+)
Spot Purchases to Settle and Forwards (+)
Spot Sales to Settle and Forwards (-)
Forwards Purchases Linked with Passive Repos (+) Forwards Sales Linked with Active Repos (-) Purchase of Call Options (multiplied by the delta of the option)(+) Sale of Call Options (multiplied by the delta of the option ) (-) Purchase of Put Options (multiplied by the delta of the option ) (-) Sale of Put Options (multiplied by the delta of the option ) (+)

To determine Vi, the nominal values of bonds or shares included in each of the preceding operations must be multiplied by the spot price of the asset.

III. CAPITAL REQUIREMENT AND INTEGRATION.
a. Capital Requirement.
Each month, it will be determined daily considering:
i. the capital requirement according to the provisions in force in Communication “A” 2136 and complementary regulations, established at the end of the previous month and which will remain constant throughout the month, and
ii. the VaRp requirement, calculated in point I.4. for the daily positions of assets with market quotation.

b. Capital Integration.
Each month, it will be determined daily considering:
i. the capital integration on the last day of the previous month, according to the provisions in force in Communication “A” 2136 and complementary regulations, and
ii. off-balance sheet, the daily change in value that occurs in the portfolio of national, foreign assets, and their derivatives included in the calculations of the requirement for market risk (points 1 to 3) as a consequence of changes in their market prices. In the case of incorporations (purchases) of assets during the month, only the variation in the value of those assets from their incorporation will be taken. In the case of sales of these assets (closing of positions), the resulting loss or gain between the sale price and the last price at which the position was valued must be taken into account.

c. Integration Deficit.
In the case of an integration deficit of up to 3% of the required requirement, originating in the calculation of the VaRp requirement, the financial entity must replenish the capital and/or reduce its financial asset positions until it manages to comply with the established requirement, for which it will have a term of 3 business days, counted from the first deficiency. From the fourth business day, deficiencies will be subject to a daily charge equivalent to 24% nominal annual interest calculated on the largest daily deficiency recorded in the month. In the case of an integration deficit exceeding 3% and not being able to be remedied through a reduction of its financial asset positions within 10 business days counted from the first deficiency, within the following 24 hours, it must be reported...

inform the situation to the Superintendence of Financial and Exchange Entities, which may dispose of the application of the measures contained in point 3.2 of Communication “A” 2136.

IV. COUNTERPARTIES.
Starting from 1.9.96, options contracts may only be sold by local financial entities that hold an L3 or higher rating, issued by any of the rating agencies admitted by the Central Bank (Communication “A” 2269) or with a rating level similar to that of public bonds issued by the National Government, granted by an international risk assessment company included in the list in point 6 of Communication “A” 2269. Financial entities may purchase options contracts issued by foreign banks, only in the case that they hold an “investment grade” rating, granted by any of the aforementioned international agencies.

V. CONSOLIDATION.
The capital requirements for market risk must be observed on a consolidated basis, in accordance with the provisions disseminated by Communication “A” 2227.

VI. RESPONSIBILITIES.
Financial entities that operate with options contracts and those that on any day of a month register a position (bought or sold) in any asset whose value exceeds 25% of the computable net worth registered on the last day of the second preceding month, must define the responsibilities in the management of the risk administration policy assumed by the positions subject to the daily minimum capital requirement for market risk. This will imply designating the persons who will be in charge of the correct application of the established calculation methodology and the primary responsibility for adopting the necessary precautions to maintain positions covered with the required capital, especially the actions conducive to regularizing daily integration defects that exceed 3% of the requirement. They will also be responsible for supplying information in a timely and proper manner to the Central Bank in accordance with the information regime established in this matter. The list of designated responsible persons, the General Manager, the member of the Board of Directors, Administrative Council, or equivalent authority to whom the function is reported, must be supplied to the Superintendence of Financial and Exchange Entities before August 15, 1996, and within the ten consecutive days following in the event of any change.

VII. SANCTIONS.
The actions in which responsible officials incur that imply the concealment or non-computation of operations that must be considered for the purpose of determining the risk value of financial assets will determine the application of the provisions of Article 41 of the Financial Entities Law, for which effect the following guidelines will be taken into account:

• a fine between 1.5 and 3 times the amount of the largest daily deficiency recorded in the period of non-compliance. The financial entity and the aforementioned persons will be jointly and severally responsible for the fines imposed.
• disqualification for two to five years from performing functions in the financial activity by the responsible persons.

2. Substitute, with effect from 1.9.96, point 3.3. of Annex II to Communication “A” 2140, with the following:
   “3.3. The total holding of non-marketable shares, for which purpose the holdings that do not give rise to the minimum capital requirement for the coverage of market risks must be incorporated, excluding participations in companies that provide services complementary to the financial entity’s activity and the participations necessary to obtain the provision of public services: 15% of the CNW.” In the Annex to this communication, we send you the foundations that support the adopted decision. We salute you very attentively. CENTRAL BANK OF THE ARGENTINE REPUBLIC Alfredo A. Besio Miguel Kiguel Manager of Standards for Financial Entities General Sub-manager Area of Economy and Finance

ANNEX

+---------+--------------------------------+-------------+

I FUNDAMENTS OF THE MINIMUM CAPITAL REQUIREMENT FOR THE COVERAGE OF MARKET RISKS	Annex I
I B.C.R.A.	to Com. “A” 2435
+---------+--------------------------------+-------------+

1. Background.
   The need for the financial system to have an adequate level of capitalization has been a permanent concern of banking supervision authorities. In 1988, the Basel Committee on Banking Supervision of the Bank for International Settlements (BIS), representing the Central Banks of the main industrial countries, established minimum guidelines for capital requirements, considering exclusively counterparty risk. These guidelines were soon adopted by most industrial countries. In our country, they were incorporated through Communication “A” 1858 (1991), subsequently replaced by Communication “A” 2136. The growth of the capital market and, in particular, the use of financial derivatives has given rise to the need to consider other risks, additional to counterparty risk. Such is the case of the risk arising from the volatility of the price of assets traded in capital markets. The Basel Committee on Banking Supervision formulated a proposal on capital requirements for market risk in April 1993, which was expanded in April 1995 and January 1996. The European Union incorporated the topic through its Directive EEC93/6, which entered into force in January 1996.

2. The need for new capital requirements.
   The holding of financial assets and their derivatives by local financial entities, although it has not reached the levels seen in the main industrial countries, has grown significantly.
   The capital requirements implemented so far only take into consideration credit or counterparty risks and do not consider market risks (except for the fact that the risk weightings for national public bonds with a duration of more than one year are not zero). It is therefore necessary to incorporate capital requirements that take into consideration the risk assumed by financial entities due to their position in financial assets and derivatives, in order to prevent an excessively high exposure from leading to a significant loss of the entity’s net worth.

3. The methodology adopted by the Basel Committee and the European Union.
   The essence of the methodology adopted by both the Basel Committee and the European Union consists of measuring the risk introduced by the holding of each financial asset. Risk is defined considering the maximum loss that the value of an asset may experience as a consequence of an adverse change in its price, during a specified period. To determine this value, it is necessary to take into account the volatility of the asset’s price during the period to be covered and the probability that such a change will occur. In the measurement of market risk, the Basel Committee suggests that the maximum adverse change be measured with a 99% probability, meaning that adverse changes that will occur only in 1% of cases are not considered. This implies a factor equal to 2.32 that multiplies the standard deviation of the asset’s daily return. The period considered by the Basel Committee to unwind a position in assets is fixed for all of them and consists of ten business days. The Value at Risk of a portfolio of assets and derivatives does not arise from the simple sum of the values at risk of each instrument, since the diversification implied by having different assets can reduce risk, to the extent that the correlation between the change in their prices is less than 1. While the European Union does not consider this element of market risk mitigation, implicitly assuming that in the adverse scenario all correlations are equal to 1, the Basel Committee admits incorporating correlation coefficients, in the case that entities use their own models to measure market risk, but only within categories of assets (fixed income, equities, foreign currency, “commodities”). On the other hand, although the Committee’s standardized methodology does not explicitly take into account correlations between different instruments within a category of assets, nor between categories of assets, it applies additional requirements when there are bought and sold positions. These coefficients can be interpreted as an approximation to the use of correlations, but in an implicit manner. In the analysis of fixed income assets, and given the large number of assets that must be considered in a bank’s portfolio that holds significant positions in different international markets, an adopted approach is to resort to the “mapping” of positions. This technique consists of decomposing each asset into its corresponding cash flows, standardizing these cash flows by using predetermined “bins” (1 month, 1 year, 2 years, 3 years, 5 years, 7 years, 10 years, etc.) and then analyzing the correlation between the zero-coupon bonds representative of each of these bins. For equities, and given that the enormous number of investment possibilities would make it impossible to publish a correlation matrix, the Basel Committee allows those banks that have an internal model approved by the supervisory authority to use a simplifying technique consisting of computing the volatility of the indices of the markets of each
   country and calculating the volatility of individual stocks based on “Beta” coefficients, which indicate whether an asset has more or less volatility than the general index. With respect to positions in assets whose cash flow is in a currency different from the one the bank uses to measure its results, recourse is made to the “mapping” of two positions: the position of the asset’s cash flow and that of the foreign currency. With respect to derivatives, and recognizing the non-linear nature of the variations in their value in response to changes in the price of the underlying asset, the methodology proposed by the Basel Committee uses not only the “Delta” of options, but also “Gamma” and even the effect of the change in volatility (the “Vega” coefficient) to determine the risk of a position.

4. The methodology proposed for the Argentine financial system.
   The methodology proposed uses the most significant and relevant elements of the Argentine experience from the methodologies proposed by the Basel Committee, the European Union, and some private methodologies.
   The confidence interval is set at a value of 99%, i.e., 2.32 standard deviations of returns. With respect to the time to unwind the position, as with the Basel Committee, it is established at a fixed minimum value of 10 days.
   The Value at Risk of three portfolios will be calculated: i) the portfolio of Argentine financial assets, separating public bonds from equities; ii) the portfolio of foreign financial assets, also separating bonds from equities; and iii) the foreign currency portfolio. In the case of foreign securities, the portfolio will be divided into sub-portfolios according to the currencies in which the instruments traded by each entity are quoted (dollar, yen, German mark, etc.). To calculate the total capital requirement for market risk, the Value at Risk of each of the considered portfolios must be summed. For the most important Argentine assets with the greatest presence in the balance sheets of financial entities, the Central Bank will provide the volatilities of the return rates. Those national assets whose volatilities are not published by the Central Bank will not generate capital requirements for market risk and will be considered as “non-marketable” for the purpose of applying the limits on total holding as stipulated by Communication “A” 2140 (operations with clients linked to financial entities and credit assistance limits) and its modifications. In general, it is assumed that the correlation between the prices of different assets in each portfolio is equal to 1. This assumption is based on the fact that correlations between the prices of Argentine assets are inherently high, and in crisis situations they increase even more, so their adoption is realistic. Nevertheless, in certain cases, net risk values (of bought and sold positions) may be computed, but this compensation is partial as an additional capital requirement will be computed to contemplate correlations less than 1 between bought and sold positions. In the case of public or private bonds, it has been decided to group them into two zones according to the average life of each of them. Compensation between bought and sold positions in different instruments will only be allowed when they belong to the same zone, adding a capital requirement as mentioned in the previous paragraph. The limit between the two zones will be given by an average life of 2.5 years. As for equities, partial compensation of bought and sold positions will also be allowed, but in this case, no zones are distinguished. With respect to the methodology for evaluating the risk of options, a method is used that recognizes the peculiarities of these assets and, in particular, the non-linear nature of the relationship between the value of options and the change in the price of the underlying asset. On one hand, the “delta” risk of the total position in each asset will be calculated, taking into account the “delta” of bought and sold options on the same. Separately, the “gamma” risk and the “vega” risk of the options will be calculated. It should be noted that, in the case of operations with derivatives whose object is to reduce existing risks in credit intermediation operations (for example, interest rate “swaps”), they will
   not be subject to market risk calculation. The Superintendence of Financial and Exchange Entities will evaluate this type of circumstance on a case-by-case basis, upon request of the financial entities.

5. Daily measurement.
   The international methodology considers the calculation of Value at Risk on a daily basis, so it is appropriate that the capital requirement also have a daily expression. In order for the entity and the Superintendence of Financial and Exchange Entities to be able to monitor these values, it is necessary to adapt the way of measuring both the requirement and the capital integration. In each month, the requirement arising from the rules on risky assets (Communication “A” 2136) will be computed, to which the corresponding one for the holding of securities and their derivatives will be added daily, based on changes in the holding of securities and/or by changes in the determinants of the Values at Risk (volatility and market liquidity, with their impact on the time to unwind the position). Symmetrically, the integration of the minimum capital must be verified daily, taking into account the integration registered at the end of the previous month to which will be added, plus or minus, the variation registered in the value of the holding of computable assets according to market prices. That is, throughout the month, the first component of capital integration will remain constant, while the second will be adjusted in the same way that the market value of financial assets varies, including the change in value (due to quotation differences) that occurs in assets bought since the beginning of the month and that attributable to the sales of the assets that make up the daily portfolio (difference between the selling price and that at which they were valued). The total capital integration must be sufficient to cover the total daily capital requirement. If an adverse change in the price of a group of significant assets reduces the level of integrated capital below the requirement, the entity must replenish the capital and/or reduce its Value at Risk in financial assets.

6. Counterparties.
   To avoid excessive counterparty risk in operations, certain limitations are imposed with respect to local entities that can sell options and with respect to foreign banks from which these instruments can be acquired.

7. Consolidation.
   In order to have a complete view of the risk assumed by an entity, the capital requirement for market risk will be measured on a consolidated basis.

8. Responsibilities and sanctions.
   Given the importance that the Central Bank assigns to risk control by financial entities, those that operate with derivative instruments or that on any day of a month register a significant position in any asset, must define the responsibilities in the management of the risk administration policy assumed by the positions subject to the daily minimum capital requirement. This will imply designating the persons who will be in charge of the correct application of the established calculation methodology and the adoption of the necessary precautions to maintain positions covered with the required capital or, failing that, the courses of action to remedy eventual non-compliance. Likewise, they will be responsible for supplying information in a timely and proper manner to the Central Bank in accordance with the regime established in this matter and will be subject to the provisions of Article 41 of the Financial Entities Law when their actions tend to conceal or not compute operations that must be considered in order to establish the risk value.