Circular RUNOR 1 - 143. Asset Classification for Investments with Pension and Retirement Funds. Ordered Text

BANCO CENTRAL DE LA REPÚBLICA ARGENTINA
__________________________________________________________________ COMUNICACION " A " 2269 18/11/94 __________________________________________________________________ TO FINANCIAL ENTITIES:
Ref.: Circular
RUNOR 1 - 143.
Asset Classification for Investments with Pension and Retirement Funds. Ordered Text

We address you to provide you with the ordered text of the regulations issued regarding the subject matter referenced, taking into account the provisions disseminated by Communications "A" 2229, 2248, 2255 and 2262:

"1. Establish that in order to comply with the classification requirements referred to in the first paragraph of Article 79 of Law 24.241, the elements mentioned in each case shall be taken into account:

1.1. Fixed-term deposits and/or current account deposits with resources from pension and retirement funds and from reserves (clause g) of Article 74, and Articles 77 and 89 of Law 24.241).

Financial entities that wish to be recipients of these resources, with a notice of no less than 10 calendar days prior to the date scheduled to begin that function, must provide regarding each type of deposit to be received - fixed-term, discriminated by term: less than one year and more than one year, and current account - the ratings, as a minimum, established in the common provisions. To this effect, the total amount that the set of pension and retirement fund administrators will make in deposits will be considered.

1.2. Securities included in clause b) of Article 74 of Law 24.241.

The issuers of these securities, who wish to have the possibility that they are acquired by pension and retirement funds, must provide regarding the securities the ratings, as a minimum, established in the common provisions. To this effect, the total of the issuances susceptible to being acquired with resources from pension and retirement funds will be considered.

• Common provisions for points 1.1. and 1.2.

a) Total deposits (in current account and fixed-term) or securities issuances not exceeding the equivalent of $ 10,000,000: one rating. b) Total deposits (in current account and fixed-term) or securities issuances exceeding the equivalent of $ 10,000,000: two ratings.

At least quarterly, the entities or issuers, as applicable, must have within the timeframe established in point 3. of this resolution the updated ratings that have been granted to them in order to continue receiving the aforementioned deposits or for the securities to continue being maintained as investments of the funds, respectively.

When the ratings show discrepancies greater than one level, the Central Bank may require that a rating from another company be provided.

1.3. Securities issued by foreign governments or international organizations (clause k) of Article 74 of Law 24.241).

The ratings formulated by at least two of the following risk rating agencies: Duff & Phelps, Fitch Investors Service, Moody's Investors Service and Standard & Poor's Corporation.

2. Provide that for the purposes foreseen in points 1.1 and 1.2., the Central Bank will delegate - with the exception of the situations contemplated in point 6. and when the entity opts for that alternative regime - the rating function to risk rating societies registered in the Registry enabled by the National Securities Commission that have been admitted by the Central Bank.

To this effect, said societies must submit a request expressing their interest in performing the ratings of the aforementioned instruments. Along with the request, they must ratify - under oath - that the incompatibilities mentioned in Articles 11 and 12 of Decree 656/92 are not present.

The Central Bank reserves the right to exclude rating companies when, in its opinion, it deems it appropriate.

In the case of rating deposits in financial entities, the evaluating companies must take into account the minimum guidelines contained in Annex I to this communication.

3. State that the rating societies will provide the corresponding rating reports for the assets indicated in points 1.2. and 1.3. of this communication to the Superintendence of Administrators of Pension and Retirement Funds, with a copy to the Central Bank, within 5 calendar days of their issuance.

In the case of the assets indicated in point 1.1. (fixed-term and/or current account deposits), such reports will be sent by the financial entities, observing the form and timeframe established in the previous paragraph.

Along with the copy to be sent to the Central Bank, a note signed by the president or legal representative of the rating society will be attached, in which it is expressly stated that said society and the persons performing the various functions indicated in Decree 656/92, comply with the provisions of Articles 17, 18 and 19 of that instrument, particularly regarding the rating of deposits and debts of the financial entity, regarding which they send the report.

The Central Bank will analyze the reports produced regarding the assets indicated in point 1.1. in order to verify compliance with the minimum analysis guidelines contained in the annex to this communication and will rule on the compliance with such guidelines.

While the Central Bank has not issued the corresponding communication to the entity and to the Superintendence of Administrators of Pension and Retirement Funds, the entities and rating companies must refrain from disseminating, totally or partially, the content and/or results of the reports.

4. Establish that until 12.31.94, the entities included in the Financial Entities Law are qualified to receive fixed-term and/or current account deposits from pension and retirement fund administrators, with resources from the funds and their reserves, provided that:

a) those deposits from the set of administrators - measured individually by each receiving entity - do not exceed 5% of the total of current account, savings, and fixed-term deposits.

The limit must be observed upon receiving each new deposit, with respect to the balance of the total computable deposits of the last day of the month immediately prior to the one in question.

b) the ratings referred to in point 1.1. have been presented to the Central Bank, as long as they do not have its approval.

The limit established in section a) will expire prior to the indicated date as soon as the Central Bank rules on the rating reports, as established in paragraphs 4th and 5th of point 3., from which moment the possibility of continuing to receive deposits and their collection limit will depend on the number and level of the ratings, according to what is provided in the common provisions.

5. Consider that it corresponds to assign to the "Rural Mortgage Certificates" and "Special Mortgage Certificates" issued by the Bank of the Argentine Nation, the same treatment applicable to a national public title of equal characteristics.

6. Establish that the Central Bank will be responsible for the rating, replacing the regime established in point 2. of this communication and when so requested by the included entities that wish to collect the deposits referred to in point 1.1., in the following cases:

a) local branches of foreign financial entities. b) financial entities that have guarantees or bonds extended by banks abroad that expressly guarantee the timely and proper repayment of deposits - principal and, if applicable, interest - constituted by pension and retirement fund administrators.

To this effect, the included entities must provide the Central Bank with at least two international ratings issued by some of the following international risk rating agencies, regarding the parent house of the branch operating in the country or the foreign bank that extends its guarantee:

• Duff & Phelps
• Fitch Investors Service
• International Bank Credit Analysis (IBCA)
• Moody's Investors Service
• Standard & Poor's Corporation
• Thompson Bank Watch

The extended ratings must expressly contemplate the case of deposits collected in the country under alternative economic scenarios.

The submission, with a copy of the rating reports, must be made to this Institution, within 5 calendar days of their issuance.

In cases where the rating of foreign banks is required, it can be understood that it may refer to the entity as such or to its debt instruments that do not have guarantees affecting the bank's assets.

7. Provide that the financial entity regarding which the local rating society issues an opinion on deposit and debt instruments must send a note to the Central Bank, upon obtaining each rating, in which it is expressly stated that said society is not affected by the incompatibilities established in clauses a) and e) of Article 17 of Decree 656/92, to the extent known by the entity.

8. Consider that it corresponds to assign to the deposits that are made in the Bank of the Argentine Nation the same treatment applicable to national public titles, so it will not be subject to the evaluation requirement by rating companies referred to in point 2. of this communication."

9. Establish that, until 11.01.94, it will be required that at least one of the ratings required regarding foreign securities referred to in point 1.3. of this communication must be formulated by Moody's Investors Service or by Standard & Poor's Corporation.

10. Clarify that the failure to submit on time the quarterly reports on the assets indicated in point 1.1., to which the common provisions applicable to that point refer, or the verification of non-compliance with the minimum analysis guidelines, regarding the reports received by the Central Bank, will determine that the entity must immediately cease the collection of resources."

We clarify that the reports provided by the risk evaluating societies must include the required rating regarding short-term deposits or debts and the corresponding rating for long-term obligations, as provided in section II "Rating System" of the minimum guidelines contained in Annex I.

On the other hand, as Annex II we enclose the grounds for the decisions adopted, contained in the aforementioned regulation.

We salute you very attentively.

BANCO CENTRAL DE LA REPÚBLICA ARGENTINA
Alfredo A. Besio Miguel A. Kiguel
Manager of Standards for Subgeneral Manager
Financial Entities Area of Economics and Finance

ANNEXES

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I B.C.R.A	MINIMUM GUIDELINES FOR THE RATING	Annex I to the
	OF FINANCIAL ENTITIES	Com. "A" 2269
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I. OBJECTIVE.

The objective of these guidelines is that the rating companies of deposits in financial entities that wish to receive or receive deposits from the Administrators of Pension and Retirement Funds (AFJP), analyze a minimum set of characteristics of the entities and clearly express their opinion on each of those characteristics as well as on the ability to pay the principal and interest of the debt, in the terms agreed.

To this effect, the rating company must evaluate the entity's ability to pay in the current macroeconomic scenario, as well as in those alternative scenarios that the company deems most probable.

These minimum guidelines do not constitute a manual for rating financial entities, since the rating company may give each of the elements mentioned in these guidelines the weight it deems appropriate and may also consider all other additional elements that, in its opinion, are necessary to define the rating.

In its rating, it must analyze each of the chapters and points mentioned below, following the order in which they are presented - to facilitate reading - and adding in each chapter or section the additional factors it considers relevant.

II. RATING SYSTEM.

The rating must be issued for short-term deposits or debts (payment period less than one year: Si) and long-term (payment period from one to five years: Li). If deemed necessary based on alternative macroeconomic scenarios anticipated by the company, it may discriminate between rating instruments in national currency and foreign currency.

The short-term rating does not necessarily coincide with the long-term rating, nor the national currency rating with the foreign currency rating. The following symbols must be used to refer to the ability to pay, which will entail the implication mentioned in each case. If discriminated between national and foreign currency, the letters P and D will be added, respectively, to each rating.

When the rating is equal to or lower than S8 or L8, as applicable, the rating agency must issue an opinion on the magnitude of the possible capital loss to which the creditor would be exposed.

S1, L1: Minimal probability of default of the agreed terms. Excellent ability to pay, even in the most unfavorable economic scenario foreseeable.
S2, L2: Very low probability of default of the agreed terms. Excellent ability to pay. In the most unfavorable economic scenario foreseeable, the risk of default is very low.
S3, L3: Very low probability of default of the agreed terms. Very good ability to pay. In the most unfavorable economic scenario foreseeable, the risk of default is low.
S4, L4: Low probability of default of the agreed terms if the current economic scenario is maintained. The ability to pay is maintained even under more unfavorable economic and financial conditions, but is reduced in the most unfavorable scenario.
S5. L5: Low probability of default of the agreed terms if the current economic scenario is maintained. The ability to pay is significantly reduced under more unfavorable economic and financial conditions, being low in the most unfavorable scenario. S6, L6: Low probability of default of the agreed terms if the current economic scenario is maintained. The ability to pay is significantly reduced under more unfavorable economic and financial conditions, being very low in the most unfavorable scenario. S7, L7: There are factors that may significantly increase the risk of default of the agreed terms, even in the current economic scenario. The ability to pay is low under more unfavorable economic and financial conditions, being extremely low in the most unfavorable scenario. S8, L8: There is a risk of default of the agreed terms, even in the current economic scenario. The ability to pay is very low under more unfavorable economic and financial conditions, being null in the most unfavorable scenario. S9, L9: There is a clear risk of default of the agreed terms in the current economic scenario. This is a speculative investment, with low ability to pay, even if more unfavorable economic scenarios did not occur.

S10, L10: Highly speculative, with high risk of default of the agreed terms.
S11, L11: In default.
S12, L12: Entities that, having requested the rating, do not supply the required information.

III. BASIC CHAPTERS OF THE RATING.

The three fundamental elements to consider for formulating the rating are:

1. ENTITY POSITIONING.

2. ENTITY SITUATION.

3. SENSITIVITY TO ALTERNATIVE SCENARIOS FOR THE ARGENTINE ECONOMY.

4. ENTITY POSITIONING.

In this chapter, the possible evolution of the Argentine financial system as well as the current and future positioning of the entity within the system as a whole must be analyzed. To this effect, among other things, these factors will be considered:

1. Evolution of the national financial system as a whole; perspectives of banking concentration and competition from non-financial national entities and/or foreign financial entities;

2. Evolution of the segment of the financial system in which the financial entity specializes;

3. Degree of competitiveness achieved by the entity in the products it offers;

4. Evolution of the different products and markets in which the entity operates; its impact on its competitiveness.

5. Difficulties experienced by the entity in its relationship with the B.C.R.A. during the last five years. Compliance with prudential regulations. Rehabilitation plans; their compliance. Existence of summaries; their possible economic impact. Assistance via rediscounting for illiquidity.

6. ENTITY SITUATION.

In this chapter, the fundamental qualitative and quantitative aspects that serve to determine the entity's repayment probability will be examined. Among them, the following will be analyzed:
A. Capitalization
B. Assets
C. Administration
D. Profits
E. Liquidity

In each case, it is necessary to analyze:
a. The evolution of each variable in the past, its current level and its probable evolution in the future, and b. The value of each variable in relation to the average value for financial entities of similar characteristics.

A. CAPITALIZATION.

In this section, factors that may be important to consider the level of backing that an entity provides with its capital to deposits must be analyzed, including among others:

1. Relationship between capital and total assets, and between capital and risk assets;

2. Quality of capital: its composition; participation of the different components; participation of subordinated debt in the total;

3. Ability of current shareholders to increase capital to meet potential requirements; in the case of companies listed on capital markets, the recent volatility of the company's stock quotation must be analyzed, in relation to the market average, as well as its history of stock placements, in order to evaluate its possibility of resorting to such markets to increase its capital;

4. Entity's experience with subordinated debt issuances; possibilities of resorting to this instrument to increase capital;

5. Possibility of reducing total assets without major losses, maintaining an adequate level of profitability, in order to meet capital requirements without having to increase capital;

6. Existence of explicit guarantees on operations in the case of public banking.

B. ASSETS.

In this section, all factors that make up the quality of the bank's assets must be taken into account, including among others:

1. Composition of assets: immobilized assets, public securities, private securities, loans, bonds, others;
2. Concentration by clients and economic groups;
3. Sectoral concentration;
4. Regional concentration;
5. Currency mismatch: currency in which assets are expressed versus the currency in which the cash flow backing them is expressed;
6. Guarantees backing risk assets; percentage of the portfolio covered by preferred guarantees; quality and valuation of guarantees;
7. Sensitivity of cash flows backing loans to modifications in the level of activity, and to changes in relative prices;
8. Loans to companies and linked economic groups;
9. Operations registered in off-balance sheet accounts, and in particular derivative products; risk introduced;
10. Maturity mismatch between active and passive portfolios, at fixed and floating rates: interest rate risk;
11. Central Bank risk indicator for loans in national and foreign currency; implicit average rate; its relationship with the implicit average rate for the system;
12. Quality of assets. Analysis of credit files of the main debtors. Weighted risk of the portfolio, based on the different factors enumerated above;
13. Irregular portfolio over total portfolio; percentage of the irregular portfolio covered by guarantees;

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14. Provision level; portfolio written off; relationship between provisions and portfolio written off; provision/profit ratio; provisions established versus provisions required by Central Bank regulations;

15. Ratio of net irregular portfolio to provisions/average annual profit of recent periods; same on net equity;

16. Growth rate of risky assets: absolute and relative to the risky portfolio of the financial system as a whole.
    C. MANAGEMENT.
    In this section, some aspects capable of informing about the organization and decision-making processes of the entity will be analyzed. Among them:

17. Suitability of general management and the administrative body; shareholding control: harmony in decisions;

18. Decision-making process: granting of loans; classification of agreed loans; systems for measuring global portfolio risk. Frequency and characteristics of decision review. Delegation of functions by activity and by branches;

19. Personnel policy: methods of staff recruitment; training system; qualification and promotion system; evaluation of current staffing; professional background and experience in the financial system of senior managers; turnover of managerial staff;

20. Internal audit: control mechanisms implemented; level of execution of such controls;

21. External audit: review of audit reports, control mechanisms implemented and level of execution of such controls; relationship with the Board of Directors and Management;

22. Information: information system for decision-making; quality, horizon and relevance of information used for decision-making;

23. Risk tolerance level in operations assumed by the bank, control systems or limits for risk assumed by operations, product,
    business units, etc.;

24. Ability to maintain consolidated control of the financial entity and its subsidiaries;

25. Ability of Management to accurately understand the risks associated with derivative products;

26. Participation of the bank in other financial or non-financial companies; role played by such companies in the strategy and results of the entity;

27. Shareholders' participation in other companies; credit assistance policy to affiliated companies; compliance with Central Bank regulations;

28. Compliance with Central Bank regulations, especially prudential ones; mechanisms developed for compliance with such regulations.
    D. PROFITS.
    In this section, some factors capable of informing about the evolution of the entity's profits will be examined. Among them:

29. Level of profits relative to net equity, irregular portfolio (net of provisions), and total assets;

30. Evolution of profits: variability of quarterly profits.

31. Composition of profits: by financial intermediation, by services, by other concepts;

32. Entity costs: main cost items.
    E. LIQUIDITY.
    In this section, some factors capable of informing about the liquidity position of the financial entity will be examined. Among them:

33. Availability relative to total deposits: legal requirements, technical requirements, surplus;

34. Private and public securities traded in institutional markets, relative to total liabilities;

35. Access to credit lines from other local and foreign financial entities;

36. Maturity structure of liabilities; relationship with the three previous concepts;

37. Mismatch between assets and liabilities; its impact on liquidity;

38. Concentration of deposits; participation of AFJPs in the entity's total deposits;

39. Analysis of alternative scenarios and their impact on liquidity: run on the entity and run on the financial system.

40. SENSITIVITY TO ALTERNATIVE SCENARIOS FOR THE ARGENTINE ECONOMY.
    The projection of the entity's cash flow will be carried out in, at least, the context of three alternative economic scenarios:
    a. The current one; b. A negative scenario that, in the opinion of the rating company, has a probability of occurring greater than one third, and
    c. An even more negative scenario that, for the rating company, has a very low probability of occurring.
    In all three cases, the economic and financial conditions characterizing each scenario must be described and how this impacts the projected cash flow and the payment capacity of the analyzed entity.

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I	FUNDAMENTOS DE LAS DECISIONES VINCU	B.C.R.A.
I	LADAS CON LA CALIFICACION DE ACTI-	Anexo II a la
I	VOS PARA INVERSIONES CON FONDOS DE	Com. "A" 2269
I	JUBILACIONES Y PENSIONES
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1. Article 74 of Law 24.241 on Pensions and Retirement defines the destinations in which administrators may invest the assets of Pension and Retirement Funds, determining, in each case, the maximum percentages of allocation of the fund's assets.
   Among the admitted investments are:
   subsection b): securities issued by provinces, municipalities, state autarchic bodies and national, provincial and municipal state-owned enterprises; subsection g): time deposits in financial entities covered by Law 21.526; and subsection k): securities issued by foreign states or international organizations. The investment options contained in this article are also usable to apply the reserve resources that administrators must maintain as indicated in article 89 of the legal instrument.
2. For its part, article 79 establishes that such investments must be previously qualified by the Central Bank as suitable to be acquired with the resources of pension and retirement funds, taking into account for this purpose, among other aspects, guarantees, term, patrimonial liability of issuing entities, and any other requirement aimed at safeguarding the safety and profitability of investments.
   Complementarily, the Central Bank is authorized to delegate this qualification task to societies registered in the registry of risk rating societies kept by the National Securities Commission.
   Also in the cited article, it is provided, in the last paragraph, that the Superintendency of Administrators of Pension and Retirement Funds will determine what degree of qualification can access to integrate the range of investments of pension and retirement funds.
3. Article 77 of Law 24.241 establishes that resources that do not need to be immediately applied to the fixed investment destinations will be deposited in banking entities in checking accounts that will have as their sole purpose to carry out all fund movements related to contributions and their investments and payments.
   To this end, the Central Bank must qualify the entities that can be custodians, to which end it may delegate the function to risk rating societies registered in the registry opened at the National Securities Commission.
4. Given the cited legal framework, it has been deemed convenient for this Institution to delegate the qualification function to risk rating companies, registered in the Registry of the National Securities Commission, that are admitted by the Central Bank.
   To this end, the requirements that evaluating companies wishing to qualify the instruments of financial entities must observe are established, both with the purpose of being admitted as such by the Central Bank and at the time of issuing their opinions, which essentially aim to verify the non-existence of incompatibilities for the performance of the delegated function. In the case of the qualification of deposits in financial entities, minimum guidelines that must be taken into account for the work are established. The delegation of the qualifying function of financial entities finds its basis in the circumstance that for the task it is necessary to define, among other aspects, various alternative macroeconomic scenarios whose nature would be incompatible if they were pointed out or considered by the Central Bank if it assumed the function.
5. The number of qualifications to be held has been linked to the magnitude of the deposits or issuances, considering the costs involved in the qualification requirement.
   Regarding the qualification requirements of titles issued by foreign states or international organizations, the Central Bank will take into consideration the qualifications granted by international risk evaluation agencies of recognized prestige. Similar criteria will be observed in the case of local branches of foreign financial entities. On the other hand, the possibility is raised that first-tier foreign banks guarantee and/or specifically endorse the return of deposits that "AFJPs" make in local financial entities with pension and retirement funds. This determines the convenience of specifically considering this situation in relation to the qualification required by law, admitting to substitute the requirement of having qualifications from local evaluating companies. In both this case and the situation of branches of foreign entities, it is a matter of providing qualification alternatives according to the option formulated by the entities.
6. Without prejudice to the qualification requirement established regarding financial entities and given the time required for its implementation, all entities are qualified as suitable to be custodians until the end of December 1994 to the extent that the deposits -checking and time deposits- they receive from administrators do not exceed 5% of the total of checking, savings, and time deposits of the same entity, and that they have qualification reports presented to the Central Bank.
   Regarding this, it is established that this Institution will analyze the qualification reports provided by the entities -on topics that basically relate to compliance with the minimum guidelines fixed for the evaluation of entities- and will issue an opinion thereon, which will then be communicated to the presenting entity and to the Superintendency of Administrators of Pension and Retirement Funds that, based on what is provided in the Law, must determine the eligibility of the custodians. While the Central Bank has not yet issued an opinion, both the entities and their raters must refrain from disseminating the content or result of the reports. In this way, it is ensured that intermediaries can decide in a timely manner, based on these elements, whether they incorporate into the regime or, in their case, remain in it. This general authorization and the imposed limits must expire prior to 31.12.94 once the Central Bank issues its opinion on the compliance with the aforementioned minimum guidelines in those reports. In these cases, the authorization to receive deposits from AFJPs will depend on whether the entities have the qualifications required at the minimum level that is determined. Furthermore, given that according to article 2° of its Organic Charter (Law 21.799), the operations performed by the Banco de la Nación Argentina benefit from the guarantee of the Nation and that these are national public titles by the legal nature of the issuer, Mortgage Certificates Rural and Special issued by that entity are classified as eligible, treatment that can also be extended to the deposits made therein.
7. The Superintendency of Administrators of Pension and Retirement Funds has transmitted the existence of operational problems that prevent it from carrying out, in the case of securities of foreign governments or international organizations, the analysis of qualifications coming from foreign evaluating companies other than "Moody's" or "Standard & Poor's", so until 1.11.94 it will be required to have, at least, one qualification issued by one of those two agencies.