Circular No. 1241: Adoption of the Basel III New Standardized Approach for the Computation of Operational Risk Capital Charge

Subject :
BANGKO SENTRAL NG PILIPINAS
OFFICE OF THE GOVERNOR
CIRCULAR NO.Iz4I
Series of 2026
Adoption of the Basel lll NewStandardized Approach forthe Computation of Operational Risk Capital Charge The Monetary Board, in its Resolution No. 948 dated 08 October 2C.26, approved the guidelines on the adoption of the Basel lll New Standardized Approach (NSA) on the computation of capital charge for operational risk by universal, commercial and digital ba n ks, a nd thei r su bsid iary ba n ks/q uasi-ban ks.
Section l. Part lX on Operational Risk-weighted Assets of Appendix 59/e-45 of the
Manual of Regulations for Banks/Non-Bank Financial Institutions (MORB/MORNBFI), as amended by Circular No. 1235 dated 20 May 2C.26, is hereby replaced by Attachment I of this Circular.
Section 2. Part X on Disclosures in the Annual Reports and Published Financial
statements of Appendix 59/Q-45 of the MORB/MoRNBFI is hereby amended to read, as follows:
xxx
Operational Risk
9. Aside from the general disclosure requirements stated in paragraph 4, covered
financial institutions (Fls) have to disclose their operational risk-weighted assets, including the operational loss events and divested activitiesr that were excluded from the internal loss data, in their Annual Reports. XXX
Section 3. Appendix 61/Q-47 of the MORB/MoRNBF| covering the guidelines on
the use of the old Standardized Approach methodology in computing the capital charge for operational risk is deleted.
Section 4. Monitoring period. A monitoring period will be observed after the
effectivity of this Circular where covered Fls shall submit parallel Capital Adequacy Ratio (CAR) Reports using both (a) existing measurement approaches leither Basic lndicator Approach (BlA) or The Standardized Approach (TSA)1, and (b) Basel ttt NSA Methodology (Attachment ll of this Circular) for operational risk. The risk-based CAR Reports using the BIA/fsA shall be the basis for determining continuing compliance with the requirements on minimum capital ratios and related supervisory actions untilthe implementation date of the Basel lll NSA methodology. Covered Fls may be allowed to adopt/implement the Basel lll NSA during the monitoring period, subject to prior notification to the Bangko Sentral and post￾verification by the appropriate Bangko Sentral supervising department. Also, the covered Fls shall comply with the applicable requirements of the framework and such other conditions as may be prescribed by the Bangko Sentral. With early adoption of the NSA, I These include the total count and amount of excluded operational loss events, or losses relating to divested . activifies, as applibable.
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the NSA-based cAR shall be used for determining compliance with the minimum capital requirements. The start of the monitoring period, as well as the mode and manner of submission of the parallel reports, shall be covered by separate issuance.
Section 5.lmplementation date. The following provisions shatl be incorporated
as a footnote in part lX of Appendix S9le-45 of the MORB/MORNBFton Operational Risk_ weighted Assets:
Starting with end-December 2C.27 report date, all covered financial institutions shall adopt the Basel lll NSA for operational risk, and the corresponding templates shall form part of the quarterly CAR report. For covered Fls that are allowed to adopt the Basel lll NSA during the monitoring period, the implementation shall be reckoned from the date of their early adoption.
section 6. Effectivity This circular shall take effect fifteen (15) calendar days following its publication either in the official Gazette or in a newspaper of general
circulation.
FOR THE MONETARY BOAFID:
./- /-t,

ELI M. REMOLONA, ]R.
Covernor
9 october2o26

Attachment I
Appendixsg/e-4s
Part lX. Operational Risk-weighted Assets
A. Definition of operationat risk
I' consistent with sec. )46/146-Q, operationat riskisdefined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events' This definition includes legal riskt but excludes strategic and reputational risk. B. Measurement of capital charge
2. ln computing for the operational risk capital charge, covered financial institutions (Fls) shall use the NSA methodology with the following components:
(i) the Business tndicator (Bl), which is a financial statement-based proxy for operational risk; (ii) the Business Indicator Component (BtC), which is calculated by multiplying the Bl by a set of rnarginal coefficients (qi) and adjusted upward by a factor of 1.25;2 and (iii) the Internal Loss Multiplier (lLM), which is a scaling factor that is based on the average historical losses and the BIC of the covered Fl.
3. Operational risk capital charge (ORCC) requirements are calculated by multiplying
the BIC and the ILM as shown in the formula below. Risk-weighted asslts (RWA) for operational risk are equal to lO times the ORCC (the reciprocal of the minimum capital ratio of lO percent). ORCC: BICxILM
C. Components of the New Standardized Approach
Business lndicator (Bt)
4. The Bl is the sum of the following three components: (i) the interest, leases and dividend component 0LDC); (ii) the services component (SC); and (iii) the financialcomponent (FC);
expressed as: Bl = ILDC + SC + FC
5. ILDC, SC, and FC are defined below, where:
(i) abs ( )is the absolute value of the item within the brackets: and (ii) a bar above a term indicates that it represents the average of year end balances3 for each calendar year over the last three consecutive years.o
6. ILDC is computed as follows:
ILDC = Uinl ,Z.ZSo/ox@l

• DwttrentrTnconre
  r Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements. 2 Mu ltiptied by 125 percent to be consistent with the higher capital charge for operational risk, i.e. ten percent - (1O9o) as opposed to Bank of International Settlement (BlS) recomm"nd"d .ight percent (8%o). 3 Where full-year-end balances are not available, the available balances shall be annualized for purposes of computing the three-year average. a The absolute value of net items (e.9., interest income - interest expense) should be calculated first year-by￾year. Only after this year-by-year calculation should the average of the three years be calculated. Pagel of4

Attachment I
AppendixSg/Q-45
Expressed as the sum of the following:
(a) minimum or lower value between the following:
. absolute value of net interest income, which is the difference between interest income and interest expense; or . 2.25o/o of the interest-earning assets; and (b) dividend income.
7. SC is computed as follows:
SC = M ax t@,@ I + u ax tF eeTncome,F eeExpensel Expressed as the sum of the following:
(a) maximum or larger value between the following:
o other operating income;or
. other operating expense; and
(b) maximum or larger value between the following:
. fee income: or
. fee expense.
8. FC is computed as follows:
Fc=@+@
Expressed as the sum of the absolute value of the following:
(a) net profit and loss (P&L) from the trading book; and (b) net P&L from the banking book. The detaifs of the lLDc, sc and FC components are provided in App. 59/e-4s Annex l. B us i ness I nd icator Com po ne nt (B I C)
9. To calculate the BlC, the Bl is multiplied by the marginal coefficients (qi). The
marginal coefficients increase with the size of the Bl as shown in the Table below:
Bucket Bl Range (in billion pesos)
Bl Marginal
Coefficients
I s3 12o/o
2 3<Bls30 15o/o
3 >30 18o/o
For Fls in the first bucket (i.e., with a Bl less than or equal to PHP 3.O billion); the BtC is equal to Bl x 12o/o. The marginal increase in the BIC resulting from a one unit increase in the Blisl?o/o in bucket 1,15o/o in bucket 2 and 18o/oin bucket 3. The Bl ranges shall be subject to periodic review to ensure their continued appropriateness. lnternal Loss Multiplier (ILM) 'lO. A covered Fl's internal operational risk loss experience affects the calculation of ORCC through the lLM, as defined below:
rLM =rn (exp(r) - t. (#)")

Attachment I
Appendix5g/e-45 where:
(i) The Loss Component (Lc) is equal to '15 times average annual (i.e. year-end balances for each calendar year) operational risk lolses incurred tver the previous lO years; and (ii) The calculation of average annual operational risk losses in the LC must be based on 10 years of high-quality annual loss data. High-quality data refers to loss data that complies with the general and specific criteria on loss data identification, collection, and treatment, as outlined in App. 59/Q-+S ennex J. The soundness of data collection and the quality and integrity of the data are crucial to generating capital outcomes aligned with the covered Fl,s operational loss exposure.
ll. The ILM is equal to one ('l ) where the LC and Blc are equal. Where the LC is greater than the BlC, the ILM is greater than one (l). That is, a covered Flwith losses that are higher relative to its BIC is required tg hold higher capital due to the incorporation
of internal losses into the calculation methodology. conversely, where the Li is lower than the BlC, the ILM is less than one ('l). That is, a covered Fl with losses that are low relative to its Blc is required to hold lower capitat due to the incorporation of internal losses into the calculation methodology.
12. In building the internal loss data, covered Fls shall be guided by the loss-event type categories enumerated in App. S9/e-45 Annex K.s
'13. A covered Fl that does not meet the general and specific criteria shall apply an ILM equalto one (1).
14. An ILM greater than one ('l) may be required by Bangko Sentral in cases of: (i) noted material deficiencies in the covered Fl's internal controls, systems, or processes
affecting the internal loss data;6 or (ii) where a higher ILM is warranted as part of supervisory enforcement or corrective actions.T .|5. The appropriate Bangko Sentral supervising department shall conduct post￾verification of a covered Fl's compliance with the general and specific criteria. Application of the NewstandardizedApproach within a banking group 16' At the consolidated level, the NSA calculation shall use consolidated Bl figures, which net all the intragroup income and expenses, Where the parent bank complies with the internal loss data requirements, the consolidated oRCC shall be based on the group's consolidated loss experience and the resulting lLM.
17. At the solo level, the covered Fl shall use its own Bl figures and loss experience in calculating Bt, LC, and ORCC.
For purposes of Pillar I reporting, the NSA operational risk capital charge shall not include potential loss or near-misses, as defined in Sec. 146n46-e. These include, but are not limited to, violations of the NSA framework provisions, misstatement or understatement of losses, or intentional misreporting of Bl components aimed at unduly reducing the calculated ORCC. These include, but are not limited to, persistent weaknesses in the Fl's operational risk management framework, repeated offenses, or failure to implement Bangko sentral directives on operational risk,-among others.

Attachment I
Appendix5g/Q-45 lnclusion of Bl items and operational loss events related to mergers and acquisitions
18. Bl items from merged and acquired businesses over the three-year period prior to
the date of the merger/acquisition shall be included in the calculation of the Bl component for ORCC immediately after the merger/acquisition and shall be subject to post-verification of appropriate Bangko Sentral supervising department.s Exclusions from the lnternal Loss Data and Business lndicator '19. Covered Fls may request approval, through appropriate Bangko Sentral supervising department, to exclude certain operational loss events that are no longer relevant to the Fl's risk profile in the internal loss data. ln evaluating the relevance of such operational loss events, the appropriate Bangko Sentral supervising department shall consider whether the cause of the loss event could occur in other areas of the Fl's operations.e The said exclusions should be rare and supported by strong justification.
20. Covered Fls may also request Bangko Sentral approval to exclude divested activities
from the calculation of the Bl.
2'1. Such exclusions (operational loss events and divested activities) must be disclosed, subject to the requirements in Part X. Disclosures in the Annual Reports and Pu b I is h ed Fi n a n c i a I Sta tem e n ts of Ap p. 59/Q-45. Suppose Bank A is merged with Bank B effective I lune 2021. For quarter end-september 2021, the Bl reported shall be the sum of Bank B (i.e. the surviving entity) and Bank A (merged entity) for calendar years December 2O18, December 2019, and December 2O2O), respectively. Taking settled legal exposures and divested businesses as examples, Bangko sentral would expect the requesting Fl's analysis to demonstrate that there is no similar or residual legal exposure and that the excluded loss experience has no relevance to other continuing activities or products.

AppendixSg/e-4S
Annex I
Business lndicator Components
Table l: ltems to be included in the interest leases and dividend component (1LDC)
Table 2: ftems to be included in the seruices component (SC)
Includes interest income from financial and operating leases and profits from leased assets. lncludes interest expense from financial and operating leases, depreciation and impairment of, and losses from, operating leased assets. lnterest Earning Assets - others refers to all other assets that generate interest income, including assets earning interest from financial leases and operating leases, as well as profits from leased assets gerierating interest. All olher operating income from ordinary banking operations not included in other BI-SC line items but of similar nature (e'9., rental income from investment properties, gains from non-current assets and disposal groups classified as held for sale not qualifuing as discontinued operations), excluding income from operating leases.
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Account Name FRPAccounts
Dividend Income Dividend Income
Interest Income lnterest incomer
Interest Expense Interest expensez
Interest Earning Assets (gross carrying amounts, before allowances) Due from Bangko Sentral ng pilipinas Due from Other Banks Due from Other Central Banks Financial Assets Held for Trading (HFf ) - Debt Securities Financial Assets HFT - Derivatives with positive Fair Value HFT - lnterest Rate Contracts (Stand-Alone and Embedded) Debt Securities Designated at Fair Value Through profit or Loss (FVPL) Other Financial Assets Mandatorily Measured at FVpL - Debt Securities Financial Assets at Fair Value Through Other Comprehensive lncome (FVOCI)- Debt Securities, Net of Amortization Debt Securities at Amortized Cost, Net of Amortization Loans to Bangko Sentral ng Pilipinas lnterbank Loans Receivable Loans and Fleceivables - Others - Net of Amortization Loans and Receivables Arising from Repurchase Agreements, Certificates of Assignment/participation with Recourse and Securities Lending and Borrowing Transactions Derivatives with positive Fair Value Held for Hedging Interest Rate Contracts (Stand-Alone and Embedded) Sales Contract Receivable - Net of Amortization Otherss Account Name FRP Accounts Other Operating lncome Gross Gains from Sale/ Derecognition of Non-Financial Assets Others4

Account Name FRP Accounts
Other operating expenses
Gross Losses from Sale/Derecognition of Non-Financial Assets Taxes and Licenses Provisionss Others6 Fee and Commission lncome Fees and Commissions lncome Fee and Commission Expenses Fees and Commissions Expenses AppendixSg/Q-45
Annex I
Tabfe 3: ftems to be included in the financial component (FC) Provisions related to operational loss events. All other operating expenses not included in other Bl-sc line items but of similar nature and from operation loss events (e.9., fines, penalties, settlements, replacement cost of damaged assets), excluding expenses from operating leases. All other profit/loss on the trading book not included in other Bl-FC line items but of similar nature. All other profit/loss on the banking book not included in other Bl-FC line items but of similar nature. Items FRP Accounts Net Profit (Loss)Trading Book Gains/(Losses) on Financial Assets and Liabilities Held for Trading Foreign Exchange Profi t/(Loss ) OthersT Net Profit (Loss) Banking Book Gains/(Losses) on Financial Assets and Liabilities Designated at Fair Value through Profit or Loss (FVPL) Cains/(Losses) on Other Financial Assets Mandatorily Measured at FVPL Gains/(Losses) from Sale/Redemption/ Derecognition of Financial Assets and Liabilities at FVOCI Gains/(Losses) from Sale/Redemption/Derecognition of Financial Assets and Liabilities at Amortized Cost Gains/(Losses) from Loans and Fleceivables Gains/(Losse5) from Sale/Redemption/Derecognition of Sale/Redemption/Derecognition of Investments in Unconsolidated Subsidiaries. Associates and Joint Ventures Gains/(Losses) on Fair Value Adjustment in Hedge Accounting Otherss

Items a. Income and expenses from insurance or reinsurance businesses.e b. Premiums paid and reimbursements/payments received from insurance or reinsurance policies purchased. c'Administrativeexpenses,inc|udingstaffexpenses,outsourcingree@ non-flnancial services (e.9. logistical, human resources, information technology - lT), and other administratlve rxpenleq (e.9. lT, utilities, telephone, travel, office supplies. postaoe). d. Flecovery of administrative expenses including recovery of paynents on behalf of customers (e.9. taxes debited to customers). e. Expenses of premises and fixed assets (except when these expenses result frorn operational loss events). f.Depreciation/amortizationoftangib|eandintangib|easse@atedto operating lease assets, Y{hich should be included in financial and operatinq lease exoenses). g. Provisions/reversal of provisions (e except for provisions related to operational loss events. h. Expenses due to share capital repayable on demand. i. lmpairment/reversal of impairment (e.g. on financial assets, non-Rninciat assets investments in subsidiaries, joint ventures and associates). j. Changes in goodwill recognized in profit or loss. k. Corporate income tax (tax based on profits including current tax and Oeferrea taxt Appendix5g/Q-4S
Annex I
Table 4: lncome statement items to be excluded from the Business lndicatorcalculation:
When the Fl acts as an insurance intermediary and, therefore, is not the insurance provider (i.e. the risk taker), the related income and expenses are not excluded from the Business Indicator. On the other hand, income and expenses from the Fl's insurance or reinsurance business are excluded. Note: The reference to insurance or reinsurance business is included to reflect the Basel Committee's framework and should be interpreted in accordance with applicable laws and regulations governing the activities of banks.

Appendix5g/Q-4S
Annexf,
General and Specific Criteria on Loss ldentification, Collection and Treatment Consistent with the principles under Sec. 146I46-Q (Operational Risk Management Framework) and Sec.1711171-Q (Reporting Governance Frameworl</Records), covered Fls shall ensure the integrity and accuracy of their internal loss data in calculating the operational risk capital charge for purposes of compliance with the Pillar I capital requirements. As such, covered Fls shall comply with the general and specific criteria on loss data identification, collection, and treatment as set out below:
A. General criteria on loss data identification, collection and treatment

1. Internally generated loss data calculations used for regulatory capital purposes
   _ must be based on a lO-year observation period.
   Z. lnternal loss data are most relevant when clearly linked to a covered Fl's current business activities, technological processes and risk management procedures. Therefore, a covered Fl must have robust and well-documented procedures and processes for the identification, collection and treatment of internal loss data. Such procedures and processes must be subject to:
   (i) validationr by an independent, suitably qualified individual/group prior to the use of the internal loss data in the operational risk capital requirement measurement methodology, supported by a detailed validation report; and (ii) regular independent reviews by competent internal audit or suitably qual ifi ed external third party.
2. For covered Fl's risk management and supervisory validation and/or review
   purposes, the Bangko Sentral shall require the covered Fl to map its historical internal annual loss data based on the loss event type categories as shown in App. 59/Q-45 Annex Kwith no loss thresholds.
3. Covered Fls must have processes to independently review the
   comprehensiveness and accuracy of loss data.
4. A covered Fl's internal loss data must be comprehensive and capture all
   activities and exposures from all appropriate sub-systems and geographic locations.
5. Covered Fls must collect information on the following:
   a. the gross loss amounts; b. reference dates of operational risk events, including i. the date when the event happened or first began (.date of occu rrence"), where available:
   ii. the date on which the Fl became aware of the event ("date of
   discovery");and
   iii. the date (or dates)when the event results in a loss, reserve or provision
   against a loss being recognized in the Fl's profit and loss (P&L) accounts ('date of accounting"). At a minimum, a covered Fl's validation and review mechanisms shall assess: (i) the adequacy and effectiveness of the Fl's governance, policies, and internal control framework governing the identification, collection, and treatment of internal loss data, to ensure the integrity, completeness, accuracy, and timeliness of internal loss data; and (ii) the reconciliation of reported loss events with the Fl's accounting records, risk management systems, and other relevant sources of information.
   Page I of3

AppendixSg/e-4s
AnnexJ
c. recoveries2 of gross loss amounts; and d. descriptive information about the drivers orcauses of the loss event, where the level of detail of any descriptive information should be commensurate
with the size of the gross loss amount.
7. Operational loss events related to credit risk and that are accounted for in credit
RWAs should not be included in the loss data set. operational loss events that relate to credit risk but are not accounted for in ciedit risk RWAs should be included in the loss data set.3 8' operational risk losses related to market risk are treated as operational risk for the purpose of calculating minimum regulatory capital under this framework and will be subject to the NSA for operational risk. B. specific criteria on loss data identification, collection, and treatment
l. ln building an acceptable loss data set from the available internal data, covered
Fls shall develop policies and procedures to address several features, including gross loss definition, reference date and grouped losses.
2. Gross loss is a loss before recoveries of any type. Net loss is defined as the loss after taking into account the impact of recoveries. The recoveryf is an
independent occurrence, related to the original loss event, separate in time. in which funds or inflows of economic benefits are received from a third party.
3. A covered Fl shall identifu the gross loss amounts, non-insurance recoveries, and
insurance recoveries for all operational loss events. However, recoveries can be used to reduce losses only after the Fl receives payment. Fleceivables do not count as recoveries. Verification of payments received shoutd be provided to supervisors upon request.
4. Covered Fls shall include the following items in the gross loss computation of
the loss data set:
Direct charges, including impairments and settlements, to the Fl's p&L accounts and write-downs due to the operational risk event; costs incurred as a consequence of the event, including external expenses with a direct link to the operational risk event (e.g., legal expenses directly related to the event and fees paid to advisors, attorneys, or suppliers) ano costs of repair or replacement, incurred to restore the position that was prevailing before the operational risk event; Provisions or reserves accounted for in the p&L against the potential operational loss impact; Tax effects (e.9. reductions in corporate income tax liability due to operational losses) are not recoveries for purposes of the NSA for operational risk. credit risk-related activities (e.g. defaults, non-payment, and deterioration) are not classified as operational risk. only process failures related to managing credit may be considered as operational risk. For example, a borrower that cannot repay a loan due to financial difficulty is considered credit risk while a bank employee who accidentally enters a wrong loan amount that caused a loss is considered operational risk. covered Fls shall include recoveries in their internal loss data only when such recoveries are clearly and directly related to a previously recorded operational loss event, and are realized, reliably measurable, and supported by appropriate documentation. Recoveries shall be recorded in the period in which they are received and used to reduce the gross loss amount to arrive at the net loss. However, the value of recoveries recognized shall not exceed the original loss and must not be used to offset losses from unrelated events or future losses. The related loss event must also fall within the lo-year calculation window used for the internal loss data set. (a) (b) (c)

Appendix 59/Q-45
Annexf,
(d) Pending losses or losses stemming from operational risk events with a definitive financial impact, which are temporarily booked in transitory and/or suspense accounts and are not yet reflected in the P&L. Pending losses should be included in the loss data set within a time period commensurate with the size and age of the pending item;and (e) Timing losses or negative economic impacts booked in a financial accounting period, due to operational risk events impacting the cash flows or financial statements of previous financial accounting periods. Timing losses should be included in the loss data set when they are due to operational risk events that span more than one financial accounting period and give rise to legal risk.s Covered Fls shall exclude the following items from the gross loss computation of the loss data set:
(a) Costs of general maintenance contracts on property, plant and equipment; (b) lnternal or external expenditures to enhance the business after the operational risk losses: upgrades, improvements, risk assessment initiatives and enhancements; and (c) Insurancepremiums, Covered Fls shall use the date of accounting for building the Ioss data set. For including losses related to legal events in the loss data set, the covered Fl should use a date no later than the date of accounting. For legal loss events, the date of accounting is the date when a legal reserve is established for the probable estimated loss in the P&1. Losses caused by a common operational risk event or by related operational risk events over time, but posted to the accounts over several years, should be allocated to the corresponding years of the loss database, in line with their accounting treatment. As a general rule, there will be no double counting of the same flnancial impacts in the calculation of operational losses. When a covered Fl makes a provision due to an operational loss event, such provision must be considered an operational loss immediately for the calculation of the loss component. When a charge-off (such as a settlement) eventually takes place later, only the difference between the initial provision and the charge-off (if any) should be added to the operational loss calculation. 6. 7. 8.

Appendixsg/Q-45
Annex K
Detailed Loss Event Type Classification
Event-type category
(Level l)
Definition Categories
(Level 2)
Activity Examples
(Level 3) lnternal fraud Losses due to acts ofa type intended to defraud. misappropriate property or circumvent regulations, law or company policy, excluding diversity/ discrimination events, which involve at least one internal party Unauthorized activity o Transactions not reported (intentional) o Transaction type unauthorized (with monetary loss) . Mismarking of position (intentional) Theft and fraud . Fraud /credit fraud /worthless deposits . Theft / extortion / embezzlement / robbery . Misappropriation of assets . Malicious destruction of assets . Forgery . Check kiting . Smuggling r Account takeover/ impersonation, etc. . Tax non-compliance / evasion (willful) . Bribes / kickbacks r lnsider trading (not on firm's account) External fraud Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party Theft and fraud . Theft lrobbery . ForgeU . Check kiting . Smuggling o Account takeover/ impersonation. etc. Systems security . Hacking damage . Theft of information (with monetarv loss) Employment practices and workplace safety Losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims, or from diversity / discrimination events Employee relations Compensation, benefit, termination issues Orqanized labor activitv o a Safe Environment . General liability (slip and fall etc.) . Employee health and safety rules events . Workers'compensation Diversity and discrimination All discrimination types Clients, products and business practices Losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product. Suitability, disclosure and fiduciary . Fiduciary breaches / guideline violations . Suitability / disclosure issues (know-your-customer, etc. ) . Retail customer disclosure violations . Breach of privacy . Aggressive sales o Account churning . Misuse of confidential information . Lender liabilitv lmproper business or market practices e Antitrust . lmproper trade / market practices
Page I of 2

Event-type category
(Level Il
Definition Categories
(Level 2)
Activity Examples
(Level 3) r Market manipulation o Insider trading (on firm's account) . Unlicensed activity . Money laundering, terrorism, and proliferation fi nancino Product flaws . Product defects (unauthorized, etc.) . Model errors Selection, sponsorship and exbosure . Failure to investigate client per guidelines J Exceeding client exposure limits Advisory activities . Disputes over performance of advisory activities Damage to physical assets Losses arising from destruction of or damage to physical assets caused by natural disaster or other events Disasters and other events o Natural disaster losses . Human losses from external sou rces (terrorism, va ndalism ) Business disruption and system failures Losses arising from disruption of business or system failures Systems . Hardware . Software . Telecommunications . Utility outaqe / disruptions Execution, delivery and process management Losses from failed transaction processing or process management, from relations with trade counterparties and vendors Transaction captu re, execution and maintenance . Miscommunication o Data entry, maintenance or loading error . Missed deadline or responsibility . Model / system maloperation . Accounting error / entity attribution error o Other task misperformance . Delivery failure r Collateral management failure o Fleference data maintenance Monitoring and reporting r Failed mandatory reporting obligation o Inaccurate external report (loss incurred ) Customer intake and documentation . Client permissions / disclaimers missing . Legal documents missing / incomplete Customer / client account management . Unapproved access given to accounts . Incorrect client records (loss incurred) . Negligent loss or damage of client assets Trade counterparties . Non-clientcounterparty misperformance . Miscellaneousnon-client counterDarW disoutes Vendors and suooliers a t Outsourcing Vendor disoutes
Appendix 59/Q-45
Annex K

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OPERATIONAI. RISX CAPIIAT CHARGE UNDER THE BASEI- Iil NEW SIANDARDIZED APPROACH METHODOLOGY In abslute amount Footnotes:
l/Net loss is the dtlerence between totol gr6s 169 ond totol recovedes. 2/The overage onnuol historicol l6s is.omputed lor o minimum ol 70 yeors ol high-qudlitydoto. recoveies. fhe reloted loss event must ldll within the lo-yeot interndl loss ddto colculdtionwindow. Attachment ll Item Account Nam€' Latt Year Year 2 Year3 Year 4 Yea.5 Year 5 Year 7 Yeart Year 9 Year 10 Totel Gros Loss- broken down rs lollMl Internal Fraud .2 External Fraud EmDloymenl Practices and Workplace Safew Clients. products & Eusiness Practices 5 Dama8e to Physacal Assets 5 Eusiness DisruDtion and Svstem Failures Execution, Oelirery & Process Manaaemen E. fotal Reaowdes'. broken diln rs toll Ll Internal Fraud
8.2 Ext€rnal Fraud
1.3 EmDlovment Practices and WorkDlace Safeh
Clients. Products & Business Practices
8,5 Damape to Phvsical Assets
1.5 Business disruotion and svstem feilures
.7 Execution. Deliveru & Process Manaeem€nl let Lossr/ Classification: G€NERAt Page 2 of 2