RegAlert2012-11-09 | A 5369Added
Circular LISOL 1-566 / CONAU 1-997: Minimum Capital of Financial Entities, Distribution of Results, Consolidated Supervision, and Amendments
The Central Bank of the Republic of Argentina amends the regulations on minimum capital for financial entities, effective January 1, 2013, for credit and operational risk sections, and February 1, 2013, for other provisions. The resolution introduces new capital requirements for credit risk from securitizations, mandates consolidated supervision on a monthly and quarterly basis, and excludes interest rate risk capital requirements. It also establishes a transition period until December 2013 for entities with lower capital requirements, requiring them to apply differences to cancel franchises, integrate operational risk, or reduce credit risk requirements for specific productive investments and housing loans.
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"2012 – Year of Homage to Dr. D. Manuel Belgrano" COMMUNICATION “A” 5369 09/11/2012
TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 566
CONAU 1 - 997
Minimum capital of financial entities. Distribution of results. Consolidated supervision. Amendments.
____________________________________________________________ We address you to inform you that this Institution has adopted the following resolution:
“1. Replace Sections 3., 4. and 8. of the regulations on “Minimum capital of financial entities” with those attached in Annex I to this communication.
2. Establish that the provisions of point 1. related to Sections 3. and 4. will be in effect from 1.1.13, while those related to Section 8. will be in effect from 1.2.13.
3. Incorporate, effective from 1.1.13, into the regulations on “Minimum capital of financial entities”, the section attached in Annex II to this communication.
4. Establish that the provisions referred to “securitizations”, included in the preceding points, will apply to new operations contracted by financial entities from 1.1.13.
5. Incorporate as the second paragraph of Section 4. of the regulations on “Distribution of results” the following:
“From 1.1.13, for the purposes of calculating the minimum capital position for the verifications provided in these regulations, the capital requirement for credit risk from securitizations shall be calculated on all operations outstanding as of the calculation date.”
6. Replace, effective from 1.1.13., point 9.2. of Section 9. of the regulations on “Minimum capital of financial entities” with the following:
“9.2. Consolidated base.
Without prejudice to individual compliance, controlling financial entities subject to consolidated supervision shall observe the regulations on minimum capital on a monthly consolidated basis and, additionally and independently, on a quarterly basis.”
7. Replace, effective from 1.1.13, point 5.2.2.1. of Section 5. of the regulations on “Consolidated supervision” with the following:
“5.2.2.1. Minimum capital.”
8. Provide that, for the purposes of determining the computable net worth liability, from 1.2.13. instruments of capital that cease to meet the criteria to be considered additional level one capital (CAn1) or supplementary net worth (PNc) in accordance with the provisions established in point 1. of this communication will begin to be excluded.
For these purposes, while they maintain the conditions under which their inclusion in the RPC was previously admitted, the amount resulting from applying the methodology in effect on that date to the book values of the instruments at the end of each month will be computed. Their recognition as RPC will be limited to 90% of the value thus obtained from that date, with this limit decreasing by 10 percentage points every twelve months. This limit will be applied separately to each instrument - whether it is computed in CAn1 or in PNc.-
9. Provide that, effective until December 2013, if as a result of the application of the provisions established in this communication a lower requirement results than the requirement determined for its integration on 31.1.13, the financial entity must compute the latter and apply that difference to the following month in which that situation is observed to the destinations detailed below successively and based on the order of precedence indicated:
i) Cancellation of franchises granted for the integration of the requirement for credit risk. ii) Integration of the proportion of the operational risk requirement not effected by the application of the schedule established in point 10.3.2. of Section 10. “Transitional provisions” of the regulations on “Minimum capital of financial entities”. iii) Reduction of the credit risk requirement on financings that the entity grants from that date whose destination, currency and term are those provided for in points 3.1. and 3.3. of the regulations on “Credit line for productive investment” (when they have not been imputed as the minimum application of that regime) and/or mortgage loans for the family home, sole and permanent occupation, for the term of the financings. The accumulated amount of the reduction of franchises and that of the increases in operational risk requirement referred to in items i) and ii) at the end of each month cannot be recovered in the following ones.
10. Repeal, effective from 1.1.13, the provisions on minimum capital for interest rate risk - Section 5. of the regulations on “Minimum capital of financial entities” - and any other measure related to that matter provided for in the regulations issued by this Institution. This, without prejudice to the fact that financial entities must continue to manage this risk, which will be subject to review by the Superintendence of Financial and Exchange Entities, which may determine the need to integrate greater regulatory capital.”
Likewise, we inform you that we will subsequently send you the sheets that, in replacement of those previously provided, should be incorporated into the respective ordered texts as a consequence of the measure adopted.
We salute you attentively.
CENTRAL BANK OF THE ARGENTINE REPUBLIC
Matías A. Gutiérrez Girault Alfredo A. Besio
Manager of Issuance of Norms
General Manager of Norms
ANNEX
Section 3. Minimum capital for credit risk.
3.1. Requirement.
It will be determined by applying the following expression:
CRC = k x [0,08 x (APRc + no DvP) + DvP + RCD] + INC + IP
where:
CRC: capital requirement for credit risk. k: factor linked to the rating assigned to the entity according to the evaluation carried out by the Superintendence of Financial and Exchange Entities, taking into account the following scale:
Assigned Rating Value of “k”
1 1
2 1,03
3 1,08
4 1,13
5 1,19
For this purpose, the last rating reported for the calculation of the requirement to be integrated in the third month following that in which the notification takes place will be considered. Until it is communicated, the value of “k” will be equal to 1,03.
APRc: risk-weighted credit assets, determined by summing the values obtained after applying the following expression:
A x p + PFB x CCF x p
where:
A: computable assets/exposures.
PFB: computable concepts not recorded in the balance sheet (“off-balance sheet items”), whether or not accounted for in order accounts.
CCF: credit conversion factor. p: risk weight, as a proportion.
B.C.R.A. Sections 3., 4. and 8. of the regulations on “Minimum capital of financial entities”.
Annex I to
Com. “A”
no DvP: operations without delivery against payment. Amount determined by summing the values obtained after applying to the operations included the corresponding risk weight (p) in accordance with what is established in point 3.8.
DvP: failed delivery against payment operations (for the purposes of these regulations, they include failed payment against payment - PvP - operations). Amount determined by summing the values obtained after multiplying the current positive exposure by the applicable capital requirement established in point 3.8.
RCD: requirement for credit risk of counterparty in over-the-counter (“OTC”) derivative operations, determined in accordance with what is established in point 3.9.
INC: increase for the following excesses:
- in the ratio of immobilized assets and other concepts (Section 4. of the respective regulation);
- to the limits of fragmentation of credit risk and financings to related clients;
- to the limits of credit grading (Section 3. of the respective regulation); and
- to the limits on financial assistance to the non-financial public sector - point 12 of Communication “A” 3911 (text according to point 3. of Communication “A” 4546)-.
In this matter, the provisions contained in Section 2. of the regulations on “Minimum capital defaults and technical ratios. Applicable criteria” will apply, unless what is provided in Section 3. of those regulations is applicable.
The credit exposure resulting from the following will also be computed in this expression:
i) the sum of positions not covered by contracts to hedge price variations of commodity products -“commodities”-. Positions sold to clients that do not correspond to the hedges acquired by the financial entity will be considered uncovered positions, regardless of the underlying and/or the client, ii) the use of the expanded credit lines referred to in points 4. and 5. of Communication “A” 4838 and complementary (for the excesses over the limits established in points 7. and 8. of Communication “A” 3911 and amendments) regarding the financial assistance granted and/or the holdings of debt instruments of financial trusts or fiduciary funds referred to in point 5.1. of Section 5. of the regulations on “Financing to the non-financial public sector” and point 3.2.4. of Section 3. of the cited regulation computed according to the following schedule, which will operate from when the works have begun to be used economically or the equipment generates income for the trust or fiduciary fund through tariffs, rates, fees or other similar concepts.
Computation as “INC” of the use of the expanded line -in % of said use- From the 25 First month 50 Seventh month 100 Thirteenth month
IP: increase for the expansion of the general limit of the global net negative foreign currency position, in accordance with the provisions contained in point 2.1. of Section 2. of the regulations on “Global net foreign currency position”.
The non-financial public sector cited in these regulations is that defined in Section 1. of the regulations on “Financing to the non-financial public sector”.
3.2. Exclusions.
3.2.1. Guarantees granted in favor of the Central Bank of the Argentine Republic and for direct obligations.
3.2.2. Concepts that must be deducted for the purposes of calculating the computable net worth liability.
3.2.3. Financings and guarantees, sureties and other liabilities granted by branches and local subsidiaries of foreign financial entities, on behalf and order of their head office or their branches in other countries or of the controlling entity, provided that the following requirements are observed:
3.2.3.1. The regulations of the country where the head office or controlling entity is located, the latter defined according to the provisions in effect in that jurisdiction, must cover supervision on a consolidated basis of the branches or local subsidiaries.
3.2.3.2. The entity must have an international risk rating included in the “investment grade” category, granted by one of the rating agencies admitted by the regulations on “Evaluation of financial entities”.
3.2.3.3. In the case of financings, these must be attended to by the branches or local subsidiaries only with funds coming from lines assigned to them by the aforementioned foreign intermediaries.
If the assistance is granted in a currency different from that of the foreign resources, the local entity cannot assume the exchange rate risk.
3.2.3.4. In the case of guarantees granted locally, there must be counter-guarantees extended by the head office or its branches in other countries or by the foreign controlling entity, whose enforcement operates unrestricted upon simple request of the branch or local subsidiary and in an immediate manner to its eventual execution by the beneficiary.
3.3. Computation of included concepts.
3.3.1. Individual and monthly consolidated basis.
The concepts included - except those mentioned in the following paragraph - will be computed on the basis of the monthly averages of daily balances of the month prior to that corresponding to the determination of the requirement (capital, interest, premiums, updates -by the Reference Stabilization Coefficient “CER”- and quotation differences, as applicable, net of provisions for uncollectible risk and devaluation and of the accumulated depreciation and amortization attributable to them and other regularization accounts, without deducting 100% of the minimum required amount of the provision for uncollectible risk on the portfolio corresponding to debtors classified “in normal situation” - points 6.5.1. and 7.2.1. of the regulations on “Classification of debtors” - and the financings that are covered with preferred guarantees “A”).
The operations referred to in points 3.8. and 3.9. (DvP, no DvP and RCD) will be computed on the basis of balances at the end of each month.
3.3.2. Quarterly consolidated basis.
The balances at the end of the quarter will be considered, applying the corresponding provisions established in other aspects.
3.4. Definition of retail portfolio.
Financings belonging to the retail portfolio - for the purposes of computing the minimum capital for credit risk - will be considered those that fully meet the following:
3.4.1. Orientation criterion.
The financing is granted to individuals or to micro, small and medium enterprises (MSMEs), in the latter case in accordance with the regulations on “Determination of the condition of micro, small and medium enterprise”.
3.4.2. Product criterion.
The exposures must be instrumented as revolving financings, pawn loans, personal loans, financial leases and/or be financings to MSMEs. Revolving financings are understood to be those financings in which borrowers are authorized to make withdrawals and repayments within limits agreed in a credit line, and which include credit cards and overdrafts on current accounts.
Mortgage loans secured by residential housing, equity participations in MSMEs and the holding of debt instruments issued by such companies are excluded.
3.4.3. Concentration criterion.
The portfolio must be diversified. To this effect, the total exposure with each debtor must not exceed 0.2% of the total retail portfolio of the entity without considering financings with more than 90 days of delay.
3.4.4. Limit.
The maximum exposure to the same debtor must not exceed the following amounts:
3.4.4.1. Individuals - consumer portfolio -: $ 200,000;
3.4.4.2. MSMEs (including financings to individuals for the development of their professional activity): $ 6,000,000.
3.5. Risk weights.
3.5.1. Values.
The ones established in Section 4. will be applied.
3.5.2. Criteria for application.
3.5.2.1. The term “exposure” covers all financings granted by the entity -in its different modalities, such as loans, holdings of securities, sureties, guarantees and other contingent liabilities-, including those arising from operations carried out in the securities, currencies and derivatives markets.
3.5.2.2. A central counterparty (CCP) is understood to be the clearing house that intervenes between the parties to a financial contract negotiated in one or more markets, acting as buyer for every seller and as seller for every buyer, thereby guaranteeing the future execution of the contracts in question.
3.5.2.3. For the purposes of recognizing the coverage of credit risk, what is provided in Section X. (Annex II to this communication) will be taken into account.
3.5.2.4. In the event that an exposure could be subject to different specific risk weights, the highest one will be applied.
3.5.2.5. The highest individual weight corresponding to the assets that integrate it will be applied to holdings of units in common investment funds.
3.5.2.6. The treatment granted to the exposure to the non-financial public sector will not apply to operations with counterparties to which the Central Bank of the Argentine Republic has granted the treatment provided for non-financial private sector persons. In these cases, they must be considered as exposures to non-financial private sector companies.
3.6. Treatment of securitizations.
A “securitization position” is understood to be the exposure to a securitization (or re-securitization), traditional or synthetic, or to a structure with similar characteristics.
Exposure to the risks of a securitization can arise, among others, from the following concepts: holding of securities issued within the framework of the securitization - that is, debt titles and/or participation certificates, such as Asset-Backed Securities (“ABSs”) and Mortgage-Backed Securities (“MBSs”)-, credit enhancements, liquidity facilities, interest rate or currency “swaps” and credit derivatives.
Securitization positions of the non-financial public sector are excluded, which will receive the treatment provided for in point 2. of Section 4.
3.6.1. Concepts.
3.6.1.1. Traditional securitization: is a structure in which cash flows from a set of underlying exposures are used to service at least two stratified risk positions -or tranches- with different degrees of credit risk or subordination.
The subordination of the tranches determines the distribution of losses during the validity period of the operation.
3.6.1.2. Synthetic securitization: is a structure with at least two stratified risk positions -or tranches- that reflect different degrees of credit risk or subordination, in which the credit risk of a set of underlying exposures is transferred, in whole or in part, through the use of credit derivatives or guarantees.
3.6.1.3. Re-securitization: is a structure in which the risk associated with a set of underlying exposures is segmented and at least one of them is an exposure to a securitization.
3.6.1.4. Credit enhancement: is a contractual agreement whereby a financial entity retains or assumes a securitization position for the purpose of providing a certain degree of credit protection to the other parties involved in the operation.
3.6.1.5. The underlying exposures to the securitization may include, among other concepts: loans, commitments assumed by the entity, securitization positions, debentures and shares. The underlying set may include one or several exposures.
3.6.1.6. Early amortization clause: is a mechanism that, once activated, allows investors to obtain reimbursements before the initially fixed maturity of the issued securities. For the purposes of the capital requirement, an early amortization clause will be considered controlled if it fully meets the following conditions:
i) The financial entity has an adequate capital and liquidity plan that allows it to meet the early amortization.
ii) While the operation lasts, including the amortization period, there is the same proportional distribution of interest, capital, expenses, losses and recoveries based on the relative participation of the financial entity and investors in the amounts to be collected pending at the beginning of each month.
iii) A amortization period is established in the contract such that -if the mechanism is activated- it allows it to reimburse or recognize in default situation at least 90% of the total pending debt at the start of the early amortization period.
iv) The reimbursement is not more accelerated than what would allow a linear amortization scheme during the amortization period referred to in item iii).
An early amortization clause that does not meet these conditions will be considered uncontrolled.
3.6.1.7. Liquidity facility: is a contractual agreement whereby a financial entity makes a credit line available to a securitization program for the purpose of covering eventual mismatches between the payments of the underlying exposures and the financial service of the securities issued within the framework of said securitization.
3.6.2. Originating financial entity.
3.6.2.1. An entity is an originator of a securitization if it meets any of the following conditions:
i) Originates the underlying exposures included in the securitization.
ii) Sponsors a securitization in which the underlying exposures are acquired from third parties, that is, manages or organizes the program, places the securities or provides liquidity and/or credit enhancements.
3.6.2.2. When calculating risk-weighted assets, the originating entity may exclude the exposures subject to securitization only if the entirety of the following operational requirements is met -having to compute capital requirement for the securitization positions it retains-:
i) The credit risk associated with the securitized exposures has been transferred to one or more third parties.
ii) The transferor entity does not maintain effective or indirect control (such as through a controlled company) over the transferred exposures.
They have been isolated from the transferor for legal purposes such that they are out of its reach and that of its creditors, even in cases of liquidation or bankruptcy. These conditions must be backed by a legal opinion.
It is considered that the transferor maintains effective control of the transferred exposures if:
a) it can repurchase them in order to realize its benefits, or
b) It is obliged to retain its risk.
The cedent's maintenance of the administration of the underlying exposures will not imply indirect control over them. iii) The issued securities must not be obligations of the cedent. Consequently, investors who purchase the securities shall only have rights against the underlying set of exposures. iv) The transfer is made to a "Special Purpose Entity" ("SPE") and investors may encumber or alienate their securities without restriction. In the country, these programs will be implemented in the legal form of a trust, in accordance with the current legal regulations on this matter - Law 24.441 -. v) Exclusion options must satisfy the conditions stipulated in point 3.6.4. vi) The securitization must not contain clauses by which:
a) the originator is obliged to alter the underlying exposures in order to improve their weighted average credit quality, unless this is achieved through their sale - at market prices - to unrelated third parties; b) the financial entity must increase its first-loss position - that is, its exposure to the tranche that absorbs losses in the first instance - or increase the credit enhancements provided, after the start of the operation; or c) the yield payable to parties other than the originator, such as investors or third-party providers of credit enhancements, is increased in response to a deterioration in the credit quality of the underlying exposures.
3.6.3. Due diligence requirements.
3.6.3.1. The entity holding the securitization position must understand at all times the characteristics of its risk, regardless of whether they are recorded on or off the balance sheet, as well as the risk characteristics of the underlying exposures to such position.
3.6.3.2. The entity must have access at all times to information on the payment behavior of the underlying exposures. This information must include, to the extent applicable according to the type of operation:
- type of exposure;
- percentage of overdue financings (with detail at 30, 60, 90 days and remainder);
- percentage of the initial underlying debt cancelled early;
- financings under judicial management;
- type of property - such as residential or commercial real estate -;
- occupancy rate of the properties;
- classification of debtors, in accordance with the guidelines established in the regulations on "Classification of debtors";
- average ratio of disbursed amount to property value ("LTV"); and
- geographic and sectoral diversification.
In the case of re-securitizations, the entity must have - in addition to the information referred to the underlying securitizations, such as the name and credit quality of the issuer, the structure of each operation and the underlying securities - information on the characteristics and performance of the exposures underlying the corresponding securitizations.
3.6.3.3. The entity must understand all the structural characteristics of the securitization programs to which it is exposed that may significantly affect its exposure, such as the contractual payment cascade ("waterfall") and credit or liquidity enhancements.
When any of these due diligence requirements are not met, the securitization position must be weighted at 1250%, with the limit set forth in point 3.6.5.4.
3.6.4. Treatment of exclusion options.
An exclusion option ("clean-up call") is one that allows rescuing securitization positions before all underlying exposures have been cancelled by the debtors. In the case of traditional securitizations, this option is usually exercised through the repurchase of outstanding securitization positions, once the balance of the set of underlying exposures or of the securities in circulation falls below a certain level. The presence of an exclusion option will not generate any capital requirement provided that all of the following requirements are met:
3.6.4.1. The exercise of such option is not mandatory, but is subject to the discretion of the originating entity.
3.6.4.2. The exclusion option is not structured with the aim of preventing investors and/or providers of credit enhancements from absorbing losses, nor with the object of providing any other type of credit enhancement.
3.6.4.3. It can only be exercised when 10% or less of the original value of the underlying portfolio or of the issued securities remains outstanding.
All securitization operations that include an exclusion option that does not meet all of the criteria indicated above will result in a capital requirement for the originating entity. In the case of traditional securitizations, the underlying exposures will be treated as if they were not securitized. In addition, the financial entity must deduct from the level one ordinary capital (COn1) the total amount in concept of gain on sale resulting from the securitization operation, in accordance with what is established in point 8.4.1.17. of Section 8.
If an exclusion option, after having been exercised, has served as a credit enhancement, it will be considered that the financial entity has provided implicit credit support - that is, not contractually contemplated - and will receive the treatment established in point 3.6.5.2.
3.6.5. Criteria to be observed in the calculation of the minimum capital requirement.
3.6.5.1. The entity must maintain the capital requirement corresponding to all its securitization positions, including those arising from the provision of credit coverage to a securitization operation, the investment in debt securities and/or participation certificates, the retention of a subordinated tranche and the extension of a liquidity facility or a credit enhancement, in accordance with what is established in the following points. In the case of originating financial entities, repurchased securitization positions will have the same treatment as retained positions.
3.6.5.2. When the financial entity implicitly supports a securitization - that is, any direct or indirect credit support provided that does not result from its contractual obligations, such as the replacement of credits in place of delinquent underlying assets - it must maintain the capital required for all underlying exposures to that securitization as if they had not been securitized. In addition, it must report in the notes to the financial statements for publication:
i) that it has provided non-contractual credit support, and ii) the effect on its capital requirement.
Likewise, it must deduct from the level one ordinary capital (COn1) the total amount in concept of gain on sale resulting from the securitization operation, in accordance with what is established in point 8.4.1.17. of Section 8.
3.6.5.3. The risk-weighted asset corresponding to a securitization position is calculated by multiplying the amount of the position by the corresponding risk weight.
In the case of off-balance sheet positions, a credit conversion factor (CCF) must be applied in accordance with what is provided in point 3.7.2., multiplying the resulting amount - that is, the credit equivalent - by the corresponding risk weight provided for in Section 4.
3.6.5.4. If it is an originating entity, the requirement resulting from a securitization position will not be greater than that which it would be obliged to observe if the entity maintained all of its underlying exposures.
3.6.6. Senior securitization positions.
A senior securitization position is understood to be the tranche of the securities issued in the securitization operation that is in the first place of priority for the purpose of receiving the corresponding payments.
The entity that holds or guarantees a senior position in a traditional securitization may apply the "look-through" treatment to determine the risk weight, provided that the composition of the underlying set of exposures is known at all times. Interest rate or currency "swaps" will not be considered for the purpose of determining whether a position is senior at the time of applying this treatment. In the look-through treatment, such senior position will receive the weighted average risk weight of the underlying exposures, subject to review by the Superintendence of Financial and Exchange Entities. In the case that the financial entity cannot determine the risk weights of the underlying exposures, the senior position must be weighted at 1250%.
3.6.7. Second-loss or better positions in ABCP ("Asset Backed Commercial Paper") programs.
In securitizations where the issued securities have an original maturity of up to one year (ABCP program), positions that absorb losses in the second or subsequent instance - except those included in point 3.6.6 - will be subject to the greater risk weight resulting from comparing the value of 100% and the greater risk weight corresponding to the underlying exposures to the securitization. This to the extent that all of the following requirements are met:
3.6.7.1. From an economic point of view, the first-loss position provides credit protection to the remaining positions, for an amount equivalent to the capital requirement that the underlying would generate.
3.6.7.2. From the evaluation carried out by the financial entity, it is concluded that its credit risk is equivalent to investment grade.
3.6.7.3. The financial entity does not retain the first-loss position.
3.6.8. Treatment of admissible liquidity facilities - agreements or liquidity lines -.
Admissible liquidity facilities are considered to be off-balance sheet securitization positions that satisfy all of the following requirements:
3.6.8.1. The documentation of the facility must identify and clearly establish the circumstances in which it can be used. It may only be used up to an amount whose total amortization - coming from the liquidation of the underlying exposures and any credit enhancement - is probable. In addition, the facility must not cover any loss incurred in the underlying set of exposures before it has been used, nor be structured in such a way that there is certainty that it will be used.
3.6.8.2. The granting of the facility is subject to an evaluation of the quality of the assets that prevents it from being used to cover underlying exposures that are in default.
3.6.8.3. The facility may not be used after all applicable credit enhancements have been exhausted.
3.6.8.4. The repayment of the facility must not be subordinate to the right of any holder of program securities, nor be subject to deferrals or exemptions.
The maximum risk weight corresponding to the underlying exposures covered by the facility is applied to the amount of the credit equivalent of the position - resulting from multiplying the amount of the facility or line by the corresponding CCF (point 3.7.2.1.).
3.6.9. Treatment of securitizations with early amortization clauses.
The originating financial entity must observe a capital requirement for the participation of other investors when:
3.6.9.1. it sells exposures to a structure containing an early amortization clause; and
3.6.9.2. the sold exposures are of a revolving nature.
In the case of securitization structures where the underlying set includes revolving and term exposures, the entity must apply the treatment corresponding to early amortization to the part of the underlying set that contains revolving exposures. Entities must not observe a capital requirement for early amortization clauses in any of the following circumstances:
a) Structures with credit replacement in which the underlying exposures are not revolving and the exercise of early amortization prevents the entity from incorporating new exposures. b) Operations with revolving exposures that contain early amortization clauses that replicate term structures - that is, the risk of the underlying facilities does not return to the entity -. c) Structures in which investors are fully exposed to future funding requirements by borrowers, even after an early amortization event has occurred. d) The early amortization clause only comes into force due to events unrelated to the securitized exposures or to the originating entity, such as changes in tax regulations. The capital requirement for the participation of investors is determined by multiplying: (a) the amount of the investors' participation by (b) the corresponding CCF (as indicated in point 3.7.2.) and by (c) the risk weight corresponding to the underlying exposure that would apply if the exposures had not been securitized. The capital requirement for all securitization positions with an early amortization clause - held by the financial entity and third parties - is subject to the maximum established in point 3.6.5.4. In addition, financial entities must deduct from the level one ordinary capital (COn1) the total amount in concept of gain on sale resulting from the securitization operation, in accordance with what is established in point 8.4.1.17. of Section 8.
3.6.10. Other securitization positions.
In the rest of the cases, including also synthetic securitizations, the total capital requirement for securitization positions is obtained by applying a risk weight of 1250%.
3.7. Credit Conversion Factors (CCF).
3.7.1. General items.
Off-balance sheet operations - including commitments for financings and correspondent lines to entities abroad, guarantees granted, sureties granted on deferred payment checks, documentary credits and acceptances, documents rediscounted in other financial entities and other credit agreements - will be converted into credit equivalents using the following credit conversion factors (CCF), applying then the risk weights established in Section 4. and taking into account - if applicable - the provisions established in Section X.:
| Concept | CCF - in % - |
|---|---|
| a) Direct credit substitutes, such as general debt guarantees - including "stand-by" letters of credit used as financial guarantees - and acceptances and endorsements with liability. | 100 |
| b) Contingent items related to customer commercial operations - such as those derived from guarantees of compliance with commercial obligations. | 50 |
| c) Short-term commercial letters of credit - that is with a residual term of up to one year - self-liquidating that cover the movement of goods - such as documentary credits secured by the underlying documentation -. Both the issuing bank and the confirmer must apply the CCF and weight the items based on the counterparty on whose behalf the risk is assumed. | 20 |
| d) Sales of assets with liability for the cedent (they will be weighted according to the asset and not based on the counterparty). | 100 |
| e) Commitments to acquire assets not recorded in the balance sheet (they will be weighted according to the asset and not based on the counterparty). | 100 |
| f) Short-term securities issuance lines ("Note issuance facility" - "NIF" -) and revolving securities underwriting lines ("Revolving underwriting facility" - "RUF" -). | 50 |
| g) Other commitments with a contractual maturity of up to one year. | 20 |
| h) Other commitments with a contractual maturity greater than one year. | 50 |
| i) Commitments that can be cancelled discretely and unilaterally by the financial entity, or that are cancelled automatically in case of deterioration of the debtor's solvency. | 0 |
3.7.2. Off-balance sheet items linked to securitization operations.
3.7.2.1. Admissible liquidity facilities and cash advances by the financial entity acting as paying agent.
Admissible liquidity facilities will receive a CCF of 50%, regardless of their maturity.
Cash advance facilities provided by the financial entity acting as paying agent to ensure a continuous flow of payments to investors - to the extent that they can be cancelled discretely and unilaterally, have the right to full reimbursement of the advance granted and that right has priority in collection over any other right over the flows generated by the underlying exposures - will receive a CCF of 0%. Financial entities may offer a single securitization program various types of facilities that can be used in different circumstances. Given their different activation mechanisms, it may happen that the facilities provided by a financial entity overlap and that the use of one facility prevents - in part - the use of another. In this case, it will not be necessary for the financial entity to maintain an additional capital requirement as a consequence of the overlap, but it must compute a single capital requirement for the position covered by overlapping facilities attributing it to the facility to which the greater CCF corresponds.
3.7.2.2. Controlled early amortization clauses.
For retail portfolio credit lines, a CCF of 40% or 90% will be applied, depending on whether the credit line is uncommitted or committed, respectively.
If they are credit lines that do not correspond to the retail portfolio, the CCF to be applied will be 90%.
A credit line is considered uncommitted when it contains clauses that enable the entity to discretely and unilaterally cancel the possibility of use of the respective margins.
3.7.2.3. Uncontrolled early amortization clauses.
The CCF to be applied to credit lines will be 100%.
3.7.2.4. Other securitization positions recorded in off-balance sheet accounts.
Securitization positions recorded in off-balance sheet accounts not reached by the previous points will receive a CCF of 100%.
3.8. Capital requirement for counterparty credit risk for failed and non-DvP operations.
In operations with securities, gold or foreign currency pending settlement, the exposure to counterparty credit risk occurs from the date of the operation, regardless of when it is recorded or accounted for. Entities must develop, implement and improve systems to adequately monitor the exposure to counterparty credit risk arising from these operations and obtain information that allows intervention at the appropriate time. Operations concluded under the delivery versus payment (DvP) modality - which implies the simultaneous exchange of securities for cash - expose entities to the risk of loss due to positive current exposure - defined as the positive difference between the value of the operation at the agreed settlement price and its value at the current market price -. Operations in which cash is delivered without receiving the corresponding consideration (securities, gold or foreign currency), or conversely, in which the agreed effects are delivered without the corresponding payment of cash - that is, non-DvP operations - expose entities to the risk of loss due to the total value of the cash paid or of the effects delivered. This point details the calculation of the capital requirement to cover both types of risk. This includes operations subject to daily valuation at market prices and daily margin replenishment carried out through regulated clearing houses and central counterparty entities (CCP). Operations that could not be settled are not included.
3.8.1. Failed DvP operations.
When the consideration is not received within five business days from the settlement date, the capital requirement must be calculated by multiplying the positive current exposure at the end of the month of the operation by the corresponding factor, as indicated in the following table:
| Business days after the agreed settlement date | Applicable capital requirement |
|---|---|
| Between 5 and 15 | 8% |
| Between 16 and 30 | 50% |
| Between 31 and 45 | 75% |
| 46 or more | 100% |
3.8.2. Non-DvP operations.
The financial entity that has made the payment/delivery will consider its exposure as a loan if at the end of the day it has not yet received the relevant consideration, applying the weights established in Section 4.
If by the fifth business day the agreed consideration has not yet been finalized, the financial entity that has made the payment/delivery will assign a weight of 1250% to the amount equivalent to the value transferred plus the replacement cost, if any. This treatment will be applicable as long as there is credit exposure for this concept.
3.9. Capital requirement for counterparty credit risk in OTC derivative operations.
The requirement computed in this section - based on the Current Exposure Method ("CEM") - applies only to OTC derivatives, as securities financing transactions ("SFT") - such as repo operations - whose value depends on market valuations and are commonly subject to margin agreements, are covered in Section X.
3.9.1. Exposure to counterparty credit risk.
Financial entities must calculate the current replacement cost by valuing the contracts at market prices and adding a factor that reflects the potential future exposure over the remaining life of the contract, according to the following expression:
EAD = CR + EPF where:
EAD: counterparty credit risk exposure.
CR: total replacement cost, resulting from the sum of the market price value of all contracts with the counterparty with positive value - contracts with negative value are taken as null -.
EPF: potential future exposure, resulting from multiplying the nominal - notional - balance of each contract with the counterparty by the corresponding "factor", which will depend on the type of instrument and its residual term, according to the following table:
| Residual Term | Interest Rate | Foreign Currency and Gold | Equities | Precious Metals (except gold) | Other Basic Products ("Commodities") |
|---|---|---|---|---|---|
| Up to 1 year | 0% | 1% | 6% | 7% | 10% |
| Between 1 and 5 years | 0.5% | 5% | 8% | 7% | 12% |
| More than 5 years | 1.5% | 7.5% | 10% | 8% | 15% |
When calculating the EPF, the following criteria will be taken into consideration:
i) In the case of contracts with multiple cash flow exchanges -such as "swaps"-, the factors must be multiplied by the number of remaining payments in the contract. ii) In the case of contracts where the exposure is settled on defined payment dates and the terms are adjusted so that the market value of the contract is zero on those dates, the residual maturity will be the time remaining until the next adjustment date. If they are interest rate contracts with a residual maturity greater than one year that meet the aforementioned criteria, the additional amount will be subject to a minimum of 0.5%. iii) "Forwards", "swaps", purchased options, and similar derivatives that do not correspond to any of the categories contemplated in the previous table will be considered as other "commodities" basic products. iv) In the case of interest rate "swaps" (cash flow exchange) with both legs variable in the same currency, the EPF will not be calculated. The exposure will be valued exclusively based on its market price. v) The factors must be multiplied by the effective notional amounts and not by the apparent ones (for example, when the declared notional amount is covered or leveraged by the structure of the operation itself, financial entities must use the effective notional amount when determining the EPF). vi) In the case of single-name credit derivative operations, assigned to the trading portfolio based on the accounting valuation criterion, the EPF will be calculated by applying the following factors -regardless of their residual maturity-:
| Protection Buyer | Protection Seller | |
|---|---|---|
| Total Return Swap | ||
| "Admissible" Reference Obligation | 5% | 10% |
| "Non-admissible" Reference Obligation | 5% | 10% |
| Credit Default Swap | ||
| "Admissible" Reference Obligation | 5% | 10% |
| "Non-admissible" Reference Obligation | 5% | 10% |
The "admissible" category includes debt securities issued by the non-financial public sector, Multilateral Development Banks, and financial entities. vii) When the credit derivative is a first-to-default basket hedge operation, the factor will be determined by the obligation with the worst credit quality in the basket. In the case of second-to-default and subsequent hedge operations, the underlying exposures will be assigned according to their credit quality -that is, the second worst credit quality will determine the factor corresponding to a second-to-default credit derivative.
The EAD will be zero for credit derivatives acquired to hedge an exposure in the investment portfolio or an exposure to counterparty credit risk. It will also be zero for credit default swaps sold to which the financial entity assigns the treatment of guarantees granted in the investment portfolio, and which are therefore subject to a credit risk requirement for the total notional.
3.9.2. Hedging of counterparty credit risk.
Financial entities may reduce the exposure to counterparty credit risk as a result of the recognition of assets received as collateral, for which they must use the comprehensive approach. Under this approach, the adjusted counterparty credit risk exposure (EAD*) is determined according to the following expression:
EAD* = [EAD - C x (1 - Hc - Hfx)]
where:
EAD*: value of the credit risk exposure, adjusted by the value of the asset received as collateral.
C: market value of the asset received as collateral.
Hc: haircut corresponding to the asset received as collateral.
Hfx: haircut corresponding to the currency mismatch between the collateral and the guaranteed operation.
3.9.3. Credit Valuation Adjustment (CVA).
In addition to the default exposure determined in point 3.9.2., financial entities must observe a capital requirement for the risk of losses derived from valuing at market prices the expected counterparty risk -losses known as "credit valuation adjustments", CVA-. Entities will not observe this capital requirement when it comes to securities financing operations -such as repo operations- and in operations carried out with a central counterparty (CCP).
The CVA capital requirement corresponding to each counterparty i is determined according to the following expression for a one-year risk horizon:
K(CVA) = 2.33 x [ 0.75 x Σ(wi x (Mi - MiCobertura) x EADiTotal - MiCobertura x Bi) + 0.5 x Σ(wind x (Mi - Mind) x Bind) ] / Σ(wi x Mi)
where:
- wi: weight applicable to counterparty i, established at 0% for the non-financial public sector and Central Bank, and at 3% for the rest of the counterparties -except that they are foreign entities that are not "investment grade", in which case a weight of 10% will be applied to them-.
- EADiTotal: default exposure of counterparty i -including the effect of the collateral asset-, to whose value the discount factor (1-exp(-0.05 x Mi))/(0.05 x Mi) is applied.
- Bi: notional value of the credit default swaps contracted -aggregated, if there is more than one exposure- that reference counterparty i, used to cover CVA risk, to whose amount the discount factor (1-exp(-0.05 x MiCobertura)) / (0.05 x MiCobertura) is applied.
- Bind: full notional value of one or more "index CDS" credit default swaps contracted, used to cover CVA risk, to whose amount the discount factor (1-exp(-0.05 x Mind)) / (0.05 x Mind) is applied.
- wind: weight applicable to the coverages provided by "index CDS" credit default swaps, established at 0% for the non-financial public sector and Central Bank, and at 3% for the rest of the counterparties -except that they are foreign entities that are not "investment grade", in which case the weight will be 10%-.
- Mi: weighted average residual maturity (measured in years) of the notional amounts in transactions with counterparty i.
- MiCobertura: residual maturity (measured in years) of the hedging instrument with notional Bi (if it were several exposures, the quantities MiCobertura x Bi must be added).
- Mind: residual maturity (measured in years) of the index ("index CDS") used as coverage. If there were more than one hedging position, it will be the weighted average residual maturity of the notional amounts.
3.9.4. EAD in force for a counterparty.
It is the greater value between zero and the EAD* with the counterparty, net of the credit valuation adjustments corresponding to that counterparty (CVA) that the entity had already charged to results -that is, CVA charges-. This CVA loss is calculated without offsetting with the debit valuation adjustments (DVA) that had been charged to results. If the DVA had not been charged to results separately from the CVA, when determining the current EAD*, the loss incurred by CVA net of DVA will be counted. This reduction of the EAD* by the incurred CVA losses does not apply for the determination of the capital requirement for CVA risk.
3.9.5. Calculation of the capital requirement.
The capital requirement for counterparty credit risk in OTC derivative operations (RCD) will be equal to the sum for all counterparties of (i) the requirement corresponding to the current EAD -adjusted by collateral assets (current EAD*)- and (ii) the capital requirement for the credit valuation adjustment -K(CVA)- that is determined, in both cases, for each of the counterparties:
RCD = 8% x p x EAD* vigente + K(CVA)
where:
p: counterparty risk weight, as a proportion.
EAD* vigente: current counterparty credit risk exposure, adjusted by the value of the collateral asset.
K (CVA): capital required by the credit valuation adjustment.
Section 4. Risk Weighting Table.
| Concept | Weight - in % - |
|---|---|
| 1. Liquidity. | |
| 1.1. Cash in hand, in transit (when the financial entity assumes responsibility and risk of transport) and in ATMs. | 0 |
| 1.2. Current and special accounts at the Central Bank of the Argentine Republic and payment orders charged to the B.C.R.A. | 0 |
| 1.3. Minted gold or bars of "good delivery", counting in the latter case with the seal of any of the refineries, smelters, assay offices, former assay offices and former smelters included in the list made public by the B.C.R.A. | 0 |
| 1.4. Cash items that are in the process of being received (checks and drafts for collection), cash in cash-in-transit companies and cash in custody at financial entities. | 20 |
| 2. Exposure to governments and central banks. | |
| 2.1. To the B.C.R.A. in pesos and whose source of funds is in that currency. | 0 |
| 2.2. To the non-financial public sector in pesos and whose source of funds is in that currency. | 0 |
| 2.3. To the non-financial public sector for operations contemplated in point 2.2. securitized. | 0 |
| 2.4. To the non-financial public sector for financing granted to beneficiaries of the social security system or to public employees -in both cases with discount code-, provided that such operations are denominated in pesos, the source of funds is in that currency and the installments do not exceed, at the time of the agreements, thirty percent (30%) of the borrower's income and that of the cohabiting family group. | 0 |
| 2.5. To the non-financial public sector for operations contemplated in point 2.4. securitized. | 0 |
| 2.6. To the non-financial public sector and the B.C.R.A.-. Others. | 100 |
| 2.7. To other sovereign states (or their central banks) and other entities of the non-financial public sector of those states. | 100 |
| 2.8. To the Bank for International Settlements, the International Monetary Fund, the European Central Bank and the European Community. | 0 |
| 3. Exposure to Multilateral Development Banks (MDBs). | |
| 3.1. Exposure to the following entities: International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), Asian Development Bank (ADB), African Development Bank (AFDB), European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IDB), European Investment Bank (EIB), European Investment Fund (EIF), Nordic Investment Bank (NIB), Caribbean Development Bank (CDB), Islamic Development Bank (IDB) and Council of Europe Development Bank (CEB). | 0 |
| 3.2. Others. | 100 |
| 4. Exposure to domestic financial entities. | |
| 4.1. Exposures denominated in pesos -whose source of funds is in that currency- for operations whose original contractual term is up to 3 months. | 20 |
| 4.2. Others. | 100 |
| 5. Exposure to foreign financial entities. | 100 |
| 6. Exposure to companies and other legal entities of the country and abroad -including exchange entities, insurers, stock exchanges and companies of the country to which the treatment of the non-financial private sector is granted based on what is established in Section 1. of the rules on "Financing to the non-financial public sector"-. | 100 |
| 7. Exposures included in the retail portfolio. | |
| 7.1. Financing to individuals -when the total of the installments for the entity's financing does not exceed, at the time of the agreements, thirty percent (30%) of the borrower's income and that of the cohabiting family group- and to SMEs. | 75 |
| 7.2. Others. | 100 |
| 8. Exposures guaranteed by reciprocal guarantee societies or public guarantee funds registered in the Records authorized at the B.C.R.A. | 50 |
| 9. Mortgage financing with first-degree guarantee, and whatever its degree of precedence provided that the entity is the creditor in all degrees, on residential housing. | |
| 9.1. Single, family and permanent occupation. | |
| 9.1.1. Regarding credit support that does not exceed 75% of the appraised value of such properties. | 35 |
| 9.1.2. On the amount that exceeds 75% of the appraised value of such properties. | 100 |
| The condition of single, family and permanent occupation housing must be accredited in the terms stated in the loan contract or in the deed by which the mortgage guarantee was constituted. | |
| 9.2. Others. | |
| 9.2.1. Regarding credit support that does not exceed 75% of the appraised value of such properties. | 50 |
| 9.2.2. On the amount that exceeds 75% of the appraised value of such properties. | 100 |
| 10. Mortgage financing with first-degree guarantee, and whatever its degree of precedence provided that the entity is the creditor in all degrees, on assets other than residential housing. | |
| 10.1. Up to the amount equivalent to 50% of the market value of the property or 60% of the amount of the mortgage credit, whichever is lower. | 50 |
| 10.2. On the rest of the financing referred to in point 10.1. | 100 |
| 11. Loans with more than 90 days overdue. | |
| 11.1. Mortgage financing with first-degree guarantee on residential housing -single, family and permanent occupation-. | |
| 11.1.1. With specific provisions equal to or greater than 20% of the outstanding balance. | 50 |
| 11.1.2. With specific provisions less than 20% of the outstanding balance. | 100 |
| 11.2. Mortgage financing on residential housing not contemplated in point 11.1. | |
| 11.2.1. With specific provisions equal to or greater than 50% of the outstanding balance. | 50 |
| 11.2.2. With specific provisions equal to or greater than 20% and less than 50% of the outstanding balance. | 75 |
| 11.2.3. With specific provisions less than 20% of the outstanding balance. | 125 |
| 11.3. Loans or uncovered tranches with guarantees from Section X., and mortgage financing not contemplated in points 11.1. and 11.2. | |
| 11.3.1. With specific provisions less than 20% of the outstanding balance. | 150 |
| 11.3.2. With specific provisions equal to or greater than 20% and less than 50% of the outstanding balance. | 100 |
| 11.3.3. With specific provisions equal to or greater than 50% of the outstanding balance. | 50 |
| 11.4. Part of the financing covered with admissible guarantees. The provisions of Section X. must be taken into account. | |
| 12. Equity participations in companies. | 150 |
| 13. Securitization positions. The provisions of points 3.6. and 3.7.2. of Section 3. must be taken into account. | |
| 14. Failed DvP and non-DvP operations. The provisions of point 3.8. of Section 3. must be taken into account. | |
| 15. Exposure to central counterparty entities (CCP) -with the exception of the cases contemplated in point 3.8. of Section 3.-. | 0 |
| 16. Operations with derivatives not included in point 15. The provisions of point 3.9. of Section 3. must be taken into account. | |
| 17. Other assets. | 100 |
Section 8. Computable Equity Liability
8.1. Determination.
The computable equity liability of financial entities, for the purposes of the regulatory norms of the prescriptions of articles 30 and 32 of the Financial Entities Law and other provisions of the Central Bank of the Argentine Republic that refer to that concept, will arise from the following expression:
RPC = PNb + PNc
where:
RPC: computable equity liability -total regulatory capital-.
PNb: basic net equity -level one capital-.
PNb = COn1 - CDCOn1 + CAn1 - CDCAn1
where:
COn1: ordinary level one capital.
CDCOn1: concepts deductible from ordinary level one capital.
CAn1: additional level one capital.
CDCAn1: concepts deductible from additional level one capital.
PNc: complementary net equity -level two capital-, net of the corresponding deductions (CDPNc).
8.2. Computable Concepts.
8.2.1. Ordinary level one capital (COn1).
It comprises the following items of net equity:
8.2.1.1. Share capital -excluding shares with preferential equity-.
8.2.1.2. Non-capitalized contributions -excluding issue premiums-.
8.2.1.3. Equity adjustments.
8.2.1.4. Retained earnings -excluding the special reserve for debt instruments-.
8.2.1.5. Unassigned results. The positive result of the last closed fiscal year will be computed once the auditor's report is available.
8.2.1.6. Other results -positive and negative- under the following terms:
i) 100% of the results recorded up to the last quarterly accounting statement that has an auditor's report, corresponding to the last closed fiscal year and for which the auditor has not yet issued their opinion. ii) 100% of the results of the current fiscal year recorded at the close of the last quarterly accounting statement, once it has an auditor's report. iii) 50% of the gains or 100% of the losses, from the last quarterly or annual accounting statement that has an auditor's report or opinion. These percentages will be applied to the accumulated net balance calculated at the close of each month, as long as what is provided in the two previous paragraphs does not apply. iv) 100% of the losses that are not considered in the accounting statements, corresponding to the quantification of the facts and circumstances reported by the auditor, in accordance with what is provided in the Minimum Standards on external audits regarding the reports with the results of the limited reviews of the accounting statements, at the close of each quarter. For the purposes of computing the 100% of the results recorded up to the last quarterly or annual balance, the respective accounting statement with the auditor's report must be presented to the BCRA on the date when the presentation of the monthly balance is mandatory.
8.2.1.7. Issue premiums resulting from instruments included in the COn1.
In addition, in cases of consolidation, it includes:
8.2.1.8. Minority participations. Ordinary shares issued by subsidiaries subject to consolidated supervision and held by third parties, that meet the criteria established in point 8.3.5.
To the concepts cited in the preceding points, the deductible concepts provided for in point 8.4.1. and, if applicable, in point 8.4.2. will be subtracted.
8.2.2. Additional level one capital (CAn1).
8.2.2.1. Instruments issued by the financial entity that meet the requirements provided for in point 8.3.2. and are not already included in the COn1.
8.2.2.2. Issue premiums resulting from instruments included in the CA n1.
In addition, in cases of consolidation, it includes:
8.2.2.3. Instruments issued by subsidiaries subject to consolidated supervision held by third parties, that meet the criteria for their inclusion in the CAn1 and that are not included in the COn1, observing the criteria established in point 8.3.5.
To the concepts cited in the preceding points, the deductible concepts provided for in point 8.4.2. will be subtracted, if applicable.
8.2.3. Complementary net equity -level two capital- (PNc).
It comprises the following concepts:
8.2.3.1. Instruments issued by the financial entity that observe the requirements provided for in point 8.3.3. -not included in the PNb-.
8.2.3.2. Issue premiums resulting from instruments included in the PNc.
8.2.3.3. Provisions for uncollectible risk on the portfolio corresponding to debtors classified as "in normal situation" (points 6.5.1. and 7.2.1. of the rules on "Classification of debtors") and on the financing that is covered with preferred guarantees "A", without exceeding 1.25% of the assets weighted by credit risk.
In addition, in cases of consolidation, it includes:
8.2.3.4. Instruments issued by subsidiaries subject to consolidated supervision held by third parties, that meet the criteria for their inclusion in the PNc and that are not included in the PNb, observing the criteria established in point 8.3.5.
To the concepts cited in the preceding points, the deductible concepts provided for in point 8.4.2. will be subtracted, if applicable.
8.3. Criteria related to computable concepts.
8.3.1. Ordinary level one capital (COn1).
For a share to be considered within the CO n1, the financial entity must refrain from creating, upon its issuance, any expectation that the share will be repurchased, redeemed or amortized, and the contractual terms must not contain any clause that could originate such expectation.
8.3.2. The instruments included in the CAn1 must observe the following requirements:
8.3.2.1. Be fully subscribed and integrated.
8.3.2.2. Be subordinated to depositors, unsecured creditors and to the subordinated debt of the financial entity.
They must provide that, in the event of the entity's bankruptcy and once the total of the debts with the other creditors has been satisfied -including contractually subordinated debt-, the holders of debt instruments computable at this level of capital will have precedence in the distribution of funds only and exclusively with respect to the shareholders -whatever the class of shares-, with express waiver of any general or special privilege.
8.3.2.3. Not be insured or covered by any guarantee of the issuer or a related party, nor be the object of any other agreement that improves the legal or economic order of precedence in collection in the event of the entity's bankruptcy.
8.3.2.4. Not provide for payment of any kind in concept of capital, except in the event of liquidation of the entity, when appropriate. They cannot have clauses
8.3.2.5. The financial entity may redeem them - after a minimum of five years from their issuance -, provided that:
i) it has prior authorization from the Superintendence of Financial and Currency Entities to exercise the call option; ii) it refrains from generating expectations that it will exercise the call option; and iii) it replaces the instrument with regulatory capital of equal or higher quality and under conditions that are sustainable for its income generation capacity, or demonstrates that - once the call option is exercised - its RCR exceeds the minimum capital requirements by at least 20%.
8.3.2.6. Any capital restitution will require prior authorization from the Superintendence of Financial and Currency Entities, and the financial entity must not have or create the expectation in the market that it will obtain such authorization.
8.3.2.7. Discretion in the payment of dividends/interest coupons:
i) the financial entity may - at all times and at its sole discretion - cancel payments in the form of dividends or interest; ii) the aforementioned shall not constitute a breach of contract nor impose restrictions on the financial entity, except in relation to dividend distributions to ordinary shareholders.
8.3.2.8. The payment of dividends/coupons shall be made from distributable items, under the terms of Section 3 of the rules on "Distribution of Results".
8.3.2.9. Do not incorporate a dividend/coupon that is periodically adjusted based, in whole or in part, on the credit risk of the financial entity.
8.3.2.10. Have not been purchased by the financial entity - nor by any entity it controls or over which it exercises significant influence -.
8.3.2.11. Have not been purchased with the direct or indirect financing of the financial entity.
8.3.2.12. Do not possess characteristics that hinder recapitalization, such as requiring the financial entity to compensate the investor if a new instrument is issued at a lower price during a specified period.
The instruments that are part of the liability must absorb losses - once a predetermined trigger event is reached - through:
i) their conversion into ordinary shares; or
ii) a mechanism that assigns losses to the instrument.
8.3.3. The instruments included in Tier 2 Capital (PNc) must observe the following requirements:
8.3.3.1. Be fully subscribed and paid-in.
8.3.3.2. Be subordinated to depositors and unsecured creditors of the financial entity.
8.3.3.3. Not be secured or covered by any guarantee from the issuer or an affiliate, nor be subject to any other agreement that improves the legal or economic order of priority in repayment in the event of the entity's bankruptcy.
8.3.3.4. Maturity:
i) original maturity term not less than five years; ii) no clauses for increasing stepped remuneration or other incentives for early amortization; iii) from the beginning of each of the last five years of life of each issuance, the computable amount shall be reduced by 20% of the issued nominal value.
8.3.3.5. The financial entity may redeem them - after a minimum of five years from their issuance -, provided that:
i) it has prior authorization from the Superintendence of Financial and Currency Entities to exercise the call option; ii) it refrains from generating expectations that it will exercise the call option; and iii) it replaces the instrument with regulatory capital of equal or higher quality and under conditions that are sustainable for its income generation capacity, or demonstrates that - once the call option is exercised - its RCR exceeds the minimum capital requirements by at least 20%.
8.3.3.6. The investor shall have no right to accelerate the repayment of future payments provided for (income coupon or amortization), except in the event of bankruptcy or liquidation.
8.3.3.7. May not incorporate a dividend/coupon that is periodically adjusted based, in whole or in part, on the credit risk of the financial entity.
8.3.3.8. Have not been purchased by the financial entity - nor by any entity it controls or over which it exercises significant influence -.
8.3.3.9. Have not been purchased with the direct or indirect financing of the financial entity.
8.3.4. Additional requirements that the instruments referred to in points 8.3.2. and 8.3.3. must observe to guarantee their loss absorption capacity.
8.3.4.1. Their terms and conditions must include a provision pursuant to which the instruments must absorb losses - through a haircut or by their conversion into ordinary capital - in the event that any of the events set forth in point 8.3.4.4. occur.
8.3.4.2. If there is compensation to the holders of these instruments for the haircut carried out - as a consequence of loss absorption - it must be carried out immediately and only with ordinary shares, in accordance with the applicable legislation.
8.3.4.3. The financial entity must always have the necessary authorizations to be able to immediately issue the corresponding amount of shares, in order to what is stipulated in the terms and conditions of the instrument, when any of the events referred to in point 8.3.4.4. occur.
8.3.4.4. Triggering Events.
The circumstance that makes operative the provision referred to in point 8.3.4.1. will be that any of the following events occur:
i) when the solvency and/or liquidity of the financial entity is affected, the Central Bank of the Argentine Republic rejects the regularization and rehabilitation plan presented by it - Article 34 of the Financial Entities Law - or revokes its authorization to operate - Article 44, subsection c) of the Financial Entities Law - or authorizes its restructuring in defense of depositors - Article 35 bis of the Financial Entities Law, first paragraph -, whichever occurs first; or ii) the decision to capitalize the financial entity with public funds - or an equivalent support measure provided by the Deposit Guarantee System -, within the framework of the application of Article 35 bis of the Financial Entities Law due to its affected liquidity and solvency.
The issuance of new shares as a result of the occurrence of any of such events must take place prior to any capitalization with public funds - or equivalent support measure - referred to in subsection ii).
8.3.5. Minority interests (do not confer control) and other instruments computable as capital issued by subsidiaries subject to consolidated supervision held by third parties.
8.3.5.1. Ordinary shares issued by subsidiaries subject to consolidated supervision.
A minority interest may be recognized in Tier 1 Common Equity (COn1) of the financial entity if the instrument originating it observes all requirements for its classification as ordinary share for RCR purposes.
The amount to be recognized in the COn1 of the entity will be the amount of the minority interest in the COn1 of the subsidiary net of the COn1 excess of the subsidiary that corresponds to minority shareholders.
The COn1 excess of the subsidiary is calculated as the COn1 of the subsidiary net of the lesser of the following amounts:
i) its minimum COn1 requirement plus its capital conservation buffer; ii) the portion corresponding to the subsidiary of the minimum COn1 requirement plus the capital conservation buffer, both computed on a consolidated basis.
The COn1 excess attributable to minority shareholders will result from multiplying the COn1 excess of the subsidiary - determined as stated above - by the percentage of COn1 held by minority shareholders.
8.3.5.2. Tier 2 Capital (PNb) issued by subsidiaries subject to consolidated supervision.
Instruments held by third parties that make up the PNb of a subsidiary subject to consolidated supervision may be recognized in the PNb of the financial entity if they observe all requirements for their classification as PNb for RCR purposes.
The amount to be recognized in the PNb of the financial entity will be the amount of the minority interest in the PNb of the subsidiary net of the PNb excess of the subsidiary that corresponds to minority investors.
The PNb excess of the subsidiary is calculated as the PNb of the subsidiary net of the lesser of the following amounts:
i) its minimum PNb requirement plus its capital conservation buffer; ii) the portion corresponding to the subsidiary of the minimum PNb requirement plus the capital conservation buffer, both computed on a consolidated basis.
The PNb excess attributable to minority investors will result from multiplying the PNb excess of the subsidiary - determined as stated above - by the percentage of PNb held by minority investors.
The amount of this PNb that will be admissible as Tier 1 Additional Capital (CAn1) excludes the amounts recognized as COn1 in accordance with point 8.3.5.1.
8.3.5.3. Admissible capital in the RCR issued by subsidiaries subject to consolidated supervision.
Instruments held by third parties that make up the RCR of a subsidiary subject to consolidated supervision may be recognized in the RCR of the financial entity if they observe all requirements for their classification as PNb or PNc.
The amount to be recognized in the RCR of the financial entity will be the amount of the minority interest in the RCR of the subsidiary net of the RCR excess of the subsidiary that corresponds to minority investors.
The RCR excess of the subsidiary is calculated as the RCR of the subsidiary net of the lesser of the following amounts:
i) its minimum RCR requirement plus its capital conservation buffer; ii) the portion corresponding to the subsidiary of the minimum RCR requirement plus the capital conservation buffer, both computed on a consolidated basis.
The RCR excess attributable to minority investors will result from multiplying the RCR excess of the subsidiary - determined as stated above - by the percentage of RCR held by minority investors.
The amount of this RCR that will be admissible as Tier 2 Capital (PNc) excludes the amounts recognized in COn1 in accordance with point 8.3.5.1. and the amounts recognized in CAn1 in accordance with point 8.3.5.2.
8.4. Deductible Items.
8.4.1. Deductible items from Tier 1 Common Equity (CDCOn1).
8.4.1.1. Tax credits from the application of the minimum presumed income tax - net of provisions for devaluation risk - that exceed 10% of the PNb corresponding to the previous month.
8.4.1.2. Balances in correspondent accounts with financial entities abroad that do not have an international risk rating included in the "investment grade" category, granted by any of the rating agencies admitted by the rules on "Evaluation of Financial Entities".
This deduction will be made based on the highest balance recorded in each bank during the month to which the determination of the RCR corresponds.
To this end, balances in correspondent accounts registered with the following will not be deducted:
i) The head office of local branches of foreign banks or their branches and subsidiaries in other countries. ii) Foreign banks or other financial institutions that exercise control over local financial entities constituted as joint-stock companies. iii) Other foreign banks authorized to participate in the regimes of reciprocal payment and credit agreements to which the Central Bank of the Argentine Republic has adhered, as well as their branches and subsidiaries, even if they are not included in those agreements. iv) Branches and subsidiaries of local financial entities. v) Balances that, on a temporary and circumstantial basis, originate from client operations, such as those related to foreign trade operations or other types of credit ordered by third parties that do not imply patrimonial liability for the entity.
8.4.1.3. Credit instruments (securities, certificates of time deposits, and others) that are not physically in the possession of the entity, unless their registration or custody of registration certificates or book-entry securities is entrusted to:
i) Central Bank of the Argentine Republic, for operations channeled through the Central Registry and Settlement of Public Liabilities and Financial Trusts ("CRyL"). ii) Caja de Valores S.A. iii) Clearstream, Euroclear and Depositary Trust Company ("DTC"). iv) Deutsche Bank, New York.
In the event that deductible assets are maintained in accordance with this provision, the entity must record the existence of such items in a note to the quarterly and annual financial statements, quantifying the amount that is not admitted for the purpose of determining the RCR.
8.4.1.4. Securities issued by governments of foreign countries, whose international risk rating is lower than that assigned to national public securities of the Argentine Republic, and that do not have markets where they trade habitually with relevant values.
This deduction will be made based on the amount of the highest balance recorded during the month to which the determination of the RCR corresponds.
To this end, mandatory investments that must be made by the branches or subsidiaries - subject to the consolidated supervision regime - of local financial entities due to requirements imposed by the monetary or control authority of the country where they operate will not be considered.
8.4.1.5. Securities and other debt instruments, contractually subordinated to other liabilities, issued by other financial entities.
This deduction will be made based on the amount of the highest balance recorded during the month to which the determination of the RCR corresponds.
8.4.1.6. Participations linked to the application of the deferral of tax payments, incorporated until 19.2.99, or subsequently when they come from irrevocable subscription commitments instrumented until that date, from the month following the expiration of the legal unavailability period or the lapse of the tax benefits, according to the pertinent legal and regulatory provisions.
8.4.1.7. Shareholders.
8.4.1.8. Real estate, regardless of the date of their incorporation into the assets, intended or not for the operation of the entity, whose accounting registration is not backed by the pertinent deed of transfer of ownership duly registered in the respective Real Estate Registry, except those acquired through judicial auction.
The deduction will be equivalent to 100% of the value of said assets from their incorporation into the assets, until the month prior to the regularization of that situation.
The Superintendence of Financial and Currency Entities may dispose of exclusions in this matter, to the extent that they do not undermine the objective of the deduction.
8.4.1.9. Goodwill - including those contemplated in the valuation of significant investments in the capital of financial entities not subject to consolidated supervision -.
8.4.1.10. Organization and development expenses and other intangibles, net of respective accumulated amortization.
8.4.1.11. Items pending allocation - Debit Balances - Others.
8.4.1.12. Upon request by the Superintendence of Financial and Currency Entities and with effect from the date indicated in each case, financial entities must deduct the amounts of the assets included, when the elements made available to the acting inspectors reveal that the accounting registrations made by the entities do not accurately reflect the economic and legal reality of the operations or that actions or schemes have been carried out to distort or disguise the true nature or scope of the operations.
The impact on the RCR resulting from the application of the aforementioned will determine the obligation to verify the classification of the different rules that use the aforementioned liability as a base, from the month in which the request takes effect, and, if applicable, the resulting charges must be deposited within 10 business days, counted from the date of notification of the request. In the event of deposit outside the fixed term, the pertinent late interest arising from the application of each infringed rule must be paid.
8.4.1.13. Differences due to insufficiency in the constitution of the minimum provisions for uncollectible risk determined by the Superintendence of Financial and Currency Entities, to the extent that they have not been accounted for, with effect at the close of the month following that in which the entity receives the notification referred to in the first paragraph of point 2.7. of Section 2. of the rules on "Minimum Provisions for Uncollectible Risk".
8.4.1.14. Participations in companies whose corporate purpose is the development of the following activity:
i) Financial assistance through financial leasing operations of durable capital goods and real estate acquired for that purpose ("leasing") or on credits arising from sales ("factoring"). ii) Temporary acquisition of participations in companies to facilitate their development, with the aim of subsequently selling the holdings. Granting financing and advice in planning and management to those companies.
The computation will be made net of provisions for devaluation risk.
8.4.1.15. The excess over the limits for the encumbrance of assets as collateral, as provided in Section 3. of the rules on "Encumbrance of Assets as Collateral".
8.4.1.16. The highest balance of credit assistance granted in the month, when the advances provided for in point 3.2.5. of Section 3. of the rules on "Financing of the Non-Financial Public Sector" exceed the authorized limit and/or are not cancelled within the terms provided therein.
8.4.1.17. Gains from sales related to securitization operations, as appropriate in accordance with points 3.6.4., 3.6.5.2. and 3.6.9. of Section 3., and for operations of sale or assignment of portfolios with recourse to the assignor.
This deduction will be computed to the extent that credit risk subsists and in the proportion in which the capital requirement for the underlying exposures or sold/assigned portfolio with recourse is maintained.
8.4.1.18. In the case of liabilities for derivative instruments accounted for at fair value, unrealized gains and losses due to variations in the credit risk of the financial entity. Valuation adjustments for own credit risk will be deducted exclusively (- or +, as appropriate); offsetting of such adjustments with those from the counterparty's credit risk is not permitted.
8.4.1.19. Investments in the capital of financial entities subject to consolidated supervision.
i) Participations in financial entities, except when exemptions apply so as not to deduct them. ii) Participations in foreign financial entities.
In such cases, they will be net of provisions for devaluation risk and, when they concern controlled financial entities and it is appropriate to apply what is provided in point 8.2.1.6. - subsection iii) -, of 50% of the profits of these in proportion to the respective participation.
8.4.2. Deductible items applicable, as appropriate, to the different levels of capital.
8.4.2.1. Investments in instruments computable as regulatory capital of financial entities not subject to consolidated supervision, when the entity holds up to 10% of the ordinary share capital of the issuer.
Criteria:
i) Investments include direct, indirect, and synthetic participations. For these purposes, indirect participation is understood as the investment of a financial entity in another entity or company not subject to consolidated supervision, which in turn has a participation in the capital of another financial entity or company that it does not consolidate with the first. Synthetic participation refers to the investment that a financial entity makes in an instrument whose value is directly related to the value of the capital of another financial entity or company not subject to consolidated supervision. ii) The net long position is included; that is, the gross long position minus the short position in the same underlying exposure, when this has the same duration as the long position or its residual life is at least one year. iii) Holdings of securities subscribed for placement within five business days may be excluded.
When the total of these participations in the capital of financial entities - which individually represent less than 10% of the COn1 of each issuing financial entity - exceeds 10% of the COn1 of the financial entity - net of corresponding deductions -, the amount above this 10% must be deducted from each level of capital according to the following methodology:
i) Amount to be deducted from COn1: total excess over 10% multiplied by the proportion that COn1 holdings represent over the total capital participations. ii) Amount to be deducted from CAn1: total excess over 10% multiplied by the proportion that CAn1 holdings represent over the total capital participations. iii) Amount to be deducted from PNc: total excess over 10% multiplied by the proportion that PNc holdings represent over the total capital participations.
If the financial entity lacks sufficient capital to effect the deduction of a particular level of capital, the remainder will be deducted from the immediate superior level.
Amounts below the threshold, which are not deducted, are risk-weighted or considered for the computation of the market risk requirement, as appropriate.
8.4.2.2. Investments in instruments computable as regulatory capital of financial entities not subject to consolidated supervision, when the entity holds more than 10% of the ordinary share capital of the issuer or when the issuer is a subsidiary of the financial entity.
Criteria:
i) Investments include direct, indirect, and synthetic participations. ii) The net long position is included; that is, the gross long position minus the short position in the same underlying exposure, when this has the same duration as the long position or its residual life is at least one year.
iii) Holdings of securities subscribed for placement within five business days may be excluded.
The amount of these participations -taking into account the type of instrument involved- must be deducted from each of the corresponding levels of the financial entity's capital.
If the financial entity lacks sufficient capital to effect the deduction from a particular level, the remainder will be deducted from the next immediate higher level.
8.5. Limits.
With respect to the elements mentioned below (net of the corresponding deductible concepts), the following minimum limits must be observed:
8.5.1. CET1: amount resulting from multiplying 4.5% by the RWA.
8.5.2. AT1: amount resulting from multiplying 6% by the RWA.
8.5.3. T2: amount resulting from multiplying 8% by the RWA.
Risk-Weighted Assets (RWA) are considered to be the amount resulting from multiplying by 12.5 the minimum capital requirement defined in point 1.1. of Section 1.
Failure to comply with any of these minimum limits will be considered a failure to meet the minimum capital integration requirement, corresponding to the application of what is provided in point 1.4. of Section 1. of these rules and Section 1. of the rules on "Minimum Capital Failures and Technical Ratios. Applicable Criteria".
8.6. Capital Contributions.
For all regulations related to capital, its integration, and increase, including those related to regularization and recovery plans, and without prejudice to what is provided in point 1.1. of Section 1. of Chapter V of Circular CREFI - 2 (text according to Communication "A" 4510) regarding the negotiation of shares or irrevocable contributions for future capital increases, contributions must be made in cash. Exceptionally, with prior authorization from the Superintendency of Financial and Exchange Entities, contributions may be admitted in:
8.6.1. national public securities;
8.6.2. monetary regulation instruments of the Central Bank;
8.6.3. deposits and other obligations arising from financial intermediation by the entity.
In the cases covered by points 8.6.1. and 8.6.2., contributions must be recorded at their market value. Instruments are understood to have market value when they have habitual quotation on regulated stock exchanges and markets in the country or abroad where they are traded, with relevant transactions in whose amount, the eventual liquidation of holdings cannot significantly distort their quotation.
In the cases of point 8.6.3., contributions must be recorded at their market value -with the scope defined in the previous paragraph- or, when dealing with financial entities that make a public offering of their shares, at the price set by the competent control authority of the corresponding market. Contributions of this type of instrument will not be admitted when the previously mentioned conditions are not verified. When dealing with deposits and other obligations arising from financial intermediation by the financial entity that do not have authorization to be traded in regulated secondary markets in the country or abroad, contributions will be admitted at their book value -capital, interest, adjustments, foreign currency exchange differences, and, if applicable, issuance discounts-, in accordance with the rules of the Central Bank of the Argentine Republic. In the case of computable debt instruments such as AT1 or T2, when admitting contributions, the provisions of point 8.3.4. must be taken into account. In no case shall the capitalization of debt imply a limitation or suspension of the right of preference established in article 194 of the Commercial Companies Law, so the provisions of article 197 of said law will not apply. The decision to capitalize the concepts indicated in points 8.6.1 to 8.6.3. by the Shareholders' Meeting (or equivalent authority) will be "ad referéndum" of its approval by the Superintendency of Financial and Exchange Entities or, if applicable, by the Central Bank of the Argentine Republic -as provided in point 1.1. of Section 1. of Chapter V of Circular CREFI - 2-, a circumstance that must be exposed in a note to the financial statements of the following periods -quarterly or annually, as applicable-, in the terms established by the Superintendency of Financial and Exchange Entities. Until approval of the contributions has been notified to them and to the extent that these have been accounted for, they will be deducted from the respective component of the T2 capital of the financial entity. When the accounted contributions come from the capitalization of subordinated debt or instruments representing debt that can be considered -totally or partially- as an integral part of the T2 capital, the treatment that would correspond to apply in the matter if they had remained registered accountingly as liabilities will be maintained.
8.7. Procedure.
The request for authorization of capital contributions with the instruments referred to in points 8.6.1. to 8.6.3. must be accompanied by a copy of the Shareholders' Meeting minutes (or equivalent authority) certified by a public notary, in which such decision is recorded and that, to adopt it, the Meeting had at its disposal the special report of the external auditor established for cases where the contribution includes the debt instruments indicated in the following paragraph. When dealing with capital contributions referred to in point 8.6.3., the debt instruments must be registered in the last annual or quarterly balance sheet, as applicable, immediately preceding the date of convocation of the relevant Shareholders' Meeting. Such financial statement must have the intervention of the external auditor provided for each case according to the applicable rules in the matter and have been previously presented to this Institution and be accompanied by a special report from said auditor, prepared in the terms specifically established in the Minimum Standards on External Audits issued by the Superintendency of Financial and Exchange Entities.
Section X. Coverage of Credit Risk.
X.1. General Characteristics.
For the purpose of calculating the capital requirement for credit risk, coverage provided by assets, personal guarantees, and credit derivatives that meet the requirements established in this section will be recognized.
No credit exposure -including loans, securities, and contingent liabilities that give rise to securitization positions- in which credit risk coverages (CRC) recognized in this section are used, will generate a capital requirement higher than that assigned to another identical operation that does not have such coverages. The methods for recognizing such coverage are as follows:
X.1.1. Simple or weight substitution method:
- Mandatory for the calculation of personal guarantees and credit derivatives.
- Optional for assets admitted as collateral for operations registered in the investment portfolio.
X.1.2. Integral or exposure reduction method: - Mandatory for assets admitted as collateral for operations registered in the trading portfolio -such as OTC derivatives and repo operations (REPO agreements) included in said portfolio-.
- Optional for assets admitted as collateral for operations registered in the investment portfolio.
Entities must opt for a single method for assets admitted as collateral for operations registered in the investment portfolio and can only change the method used with 6 months' notice to the Superintendency of Financial and Exchange Entities. The documentation related to CRC must observe the current legal requirements in the matter -obligating all parties in all relevant jurisdictions-, and financial entities must carry out the necessary monitoring to guarantee its compliance.
X.2. Treatment of assets admitted as collateral.
Admitted collateral will be considered all assets included in points X.2.2.1. and X.2.3.1. -according to the adopted method-.
X.2.1. General Requirements.
B.C.R.A. Section X. "Coverage of Credit Risk" of the rules on "Minimum Capital of Financial Entities".
Annex II to
Comm. "A"
X.2.1.1. The instrumentality of the guarantee must ensure that the entity has the right to liquidate or take possession of the asset legally and at all times in the event of default, insolvency, or the opening of bankruptcy, extrajudicial preventive agreement, or liquidation (or other event stipulated in the operation documentation) of the counterparty (and, where applicable, the custodian of the asset received as collateral). In addition, entities must comply with all necessary legal requirements to ensure their right to liquidate or take possession of the asset. X.2.1.2. There must be no substantial positive correlation between the credit quality of the counterparty and the value of the collateral -for example, securities issued by the counterparty or a related party are not admissible-. X.2.1.3. Financial entities must have clear and robust procedures that ensure compliance with the necessary legal requirements to declare the counterparty's default and liquidate the collateral quickly. X.2.1.4. When the asset received as collateral is held in custody, financial entities must adopt the necessary measures to ensure that the custodian separates it from other assets, whether own or third-party. X.2.1.5. A capital requirement will be applied to financial entities located in any of the positions of an operation guaranteed with an asset -such as repo operations-, even when acting as an agent in the organization of the operation and guaranteeing to a client that a third party will fulfill its obligations.
X.2.2. Simple or weight substitution method.
With this method, when financial entities accept assets as collateral, the counterparty's risk weight is substituted -partially or totally- by the risk weight of the asset through which the exposure is covered -partially or totally-.
X.2.2.1. Assets admitted as collateral. i) Cash deposited in the financial entity, as well as deposit certificates -or similar instruments- issued by the financial entity itself. ii) Minted gold or bars of "good delivery", in the latter case having the seal of any of the refining, smelting, assaying, former assaying, and former smelting firms included in the list published by the B.C.R.A. iii) Securities issued by the non-financial public sector and monetary regulation instruments of the Central Bank, to which a risk weight of 0% corresponds. iv) Shares (and bonds convertible into shares) included in a main stock index. v) Units of common investment funds, when:
- their value is determined and published daily; and
- their investment is limited to the assets included in this point.
X.2.2.2. Application.
To have the CRC recognized, the exposure must be covered throughout the contractual term and the asset received as collateral must be valued at market prices with a minimum monthly frequency.
The part of the exposure covered will receive the risk weight corresponding to the asset received as collateral -subject to a minimum of 20%-. The uncovered part will be subject to the weight corresponding to the type of exposure in question. The risk weight of the covered part of the exposure may be lower than 20% in the following cases:
i) Repo operations will be subject to a weight of 0% when the conditions provided in point X.2.3.3. are satisfied. ii) Repo operations in which the counterparty is not an essential market participant but which satisfy the remaining conditions established in point X.2.3.3., will be subject to a weight of 10%. iii) OTC derivative operations subject to daily valuation at market prices and without currency mismatch with the asset received as collateral, will be subject to the following weights:
- Guaranteed by cash: 0%.
- Guaranteed by securities issued by the non-financial public sector to which a risk weight of 0% corresponds: 10%.
iv) Operations in which the exposure and the asset received as collateral are denominated in the same currency and the mentioned asset is cash deposited in the financial entity, or securities issued by the non-financial public sector and monetary regulation instruments issued by the Central Bank of the Argentine Republic to which a risk weight of 0% corresponds and whose market value has been subject to a 20% haircut, will be subject to a weight of 0%.
X.2.3. Integral or exposure reduction method.
With this method, financial entities must adjust the values of the exposure and the asset received as collateral, in order to take into account possible future variations in their market value. The amount resulting after performing this volatility adjustment will be higher in the case of the exposure -with the exception of loans granted in cash- and lower in the case of the collateral -except when constituted by a deposit in the same currency as the exposure-. When the exposure and the asset received as collateral are denominated in different currencies, the amount of the mentioned asset adjusted for volatility must also be adjusted -by applying a haircut- to consider possible future fluctuations in exchange rates.
The risk-weighted asset will be calculated as the difference between the amount of the exposure -adjusted for volatility- and the value of the asset received as collateral -after applying the corresponding haircuts- multiplied by the counterparty's risk weight.
X.2.3.1. Assets admitted as collateral. i) The assets admitted in the simple or weight substitution method (point X.2.2.1.). ii) Shares (and bonds convertible into shares) that are not included in a main stock index, but that trade on a recognized stock exchange. iii) Units of common investment funds whose investment is limited to the shares detailed in subsection ii).
X.2.3.2. Application.
The value of the exposure adjusted for credit risk coverage, E*, will be calculated as follows:
E* = Max {0, [E x (1 + He) - C x (1 - Hc - Hfx)]} where:
E*: value of the exposure after CRC.
E: value of the exposure, which will be market value if registered in the trading portfolio or cost plus yield if registered in the investment portfolio.
He: haircut applicable to the exposure.
C: value of the asset received as collateral at market price.
Hc: haircut applicable to the received asset.
Hfx: haircut for currency mismatch between the asset received as collateral and the exposure.
Financial entities using this method must use the following haircuts, which assume: i) daily valuation at market prices, ii) daily margin replenishment, and iii) a maintenance period of 10 business days:
| Type of Asset | Haircut |
|---|---|
| Shares in main stock indices | 15% |
| Other shares | 25% |
| Common investment funds | The highest haircut corresponding to any security that makes up the fund. |
| Cash in the same currency | 0% |
| Type of Asset | Haircut |
|---|---|
| Securities issued by the non-financial public sector and monetary regulation instruments of the BCRA, with residual maturity: | |
| ≤ 1 year | 0.5% |
| > 1 year and ≤ 5 years | 2% |
| > 5 years | 4% |
For the application of the aforementioned haircuts, the following situations must also be taken into account:
i) In operations in which the financial entity lends non-admitted instruments -such as private debt securities-, the haircut applied to the exposure will be 25%. ii) When the exposure and the asset received as collateral are denominated in different currencies, the haircut for exchange rate risk will be 8%, also based on a maintenance period of 10 business days and daily valuation at market prices. In the cases of repo operations, other operations carried out in the capital market -such as with OTC derivatives and margin financing- and loans guaranteed by securities, the haircut will depend on: i) the frequency of revaluation and margin replenishment and ii) the minimum maintenance period. For these operations, the minimum maintenance period will be established as follows:
| Type of Operation | Condition | Minimum Maintenance Period (TM) |
|---|---|---|
| Repo operations | Daily margin replenishment | 5 business days |
| Other operations carried out in the capital market | Daily margin replenishment | 10 business days |
| Loans guaranteed by securities | Daily revaluation | 20 business days |
When the maintenance period (TM) or the period elapsed between margin replenishments or market price valuations differs from those established in the previous table, the haircuts will be modified using the following formula:
H = H10 * (NR / TM) where:
H: haircut.
H10: standard haircut based on a period of 10 business days -according to the type of instrument-.
NR: number of business days between two consecutive margin replenishments or between two consecutive asset revaluations, as applicable.
TM: minimum maintenance period -according to the type of operation-.
X.2.3.3. Repo operations eligible for zero haircut.
Repo operations in which the counterparty is an essential market participant and additionally satisfy all of the following conditions may receive a zero haircut:
i) The exposure and the asset received as collateral consist of cash or securities issued by the non-financial public sector subject to a risk weight of 0%. ii) The exposure and the asset received as collateral are denominated in the same currency. iii) The term of the operation is one business day or the exposure and the asset received as collateral are valued daily at market prices and are subject to daily margin replenishment. iv) When one of the parties fails to replenish margins, the time required between the last market price valuation prior to default and the liquidation of the asset cannot exceed four business days. v) The operation is settled through a system previously verified for this type of operations. vi) The operation documentation is the standard documentation for repo operations with the securities in question. vii) The operation documentation contemplates that, in the event that one of the parties fails to fulfill the obligation to deliver cash or securities or to replenish the margin or any other obligation, the operation will be immediately cancellable. viii) In the event of any default event, the financial entity retains the unrestricted and legally enforceable right to immediately take possession of the asset and liquidate it to collect its claims. To these effects, the following are considered essential market participants:
- Non-financial public sector and Central Bank.
- Financial entities.
- Common investment funds, when their regulation establishes capital requirements or leverage limits.
- Central Counterparty Entities (CCP).
X.3. Treatment of personal guarantees (and counter-guarantees) and credit derivatives.
X.3.1. Common Operational Requirements. i) It must represent a direct credit right against the provider of the protection and explicitly refer to concrete exposures, so that the scope of the coverage is defined clearly and precisely. Except for non-payment by the buyer of the protection of a debt arising from the credit protection contract, said contract must be irrevocable, and cannot contain any other clause that allows the protection provider to unilaterally cancel the credit coverage or increase its cost in the event of deterioration of the credit quality of the covered exposure. ii) It must be unconditional: the protection contract must not contain any clause that escapes the direct control of the financial entity and that allows the protection provider to be exempt from paying promptly in the event that the original counterparty defaults on what is owed.
X.3.2. Specific Operational Requirements for Personal Guarantees (and Counter-Guarantees) -such as sureties and guarantees-. i) In the event of counterparty default, the financial entity can take timely action against the guarantor regarding pending payments according to the documentation regulating the operation. The guarantor can make a single payment covering the total amount contemplated in the documentation, or assume the future payment of the counterparty's obligations covered by the guarantee. The financial entity must have the right to receive any of these payments from the guarantor without having to initiate legal action against the counterparty to pay its debts. ii) The guarantee is an explicitly documented obligation assumed by the guarantor. iii) The guarantor covers any payment that the debtor is obliged to make pursuant to the documentation regulating the operation, such as the notional amount, the constitution of margins, etc., except when the guarantee covers only the capital, in which case it will be considered that interest and other uncovered payments are not guaranteed.
X.3.3. Specific Operational Requirements for Credit Derivatives.
X.3.3.1. The credit events specified by the contracting parties must include, at minimum: i) non-payment of overdue amounts according to the terms of the underlying obligation that are in force at the time such non-payment occurs; ii) opening of bankruptcy, extrajudicial preventive agreement, liquidation, insolvency, or inability of the debtor to meet its debts, or its non-payment or written acceptance of its general inability to satisfy them at maturity -as well as similar events-; and iii) restructuring of the underlying obligation involving the forgiveness or the
X.3.3.2. Deferral of payment of principal, interest and/or commissions, and which implies a loss.
X.3.3.2. It will be admitted that the credit derivative covers obligations that do not include the underlying obligation, that is, that there is a mismatch between the latter and the reference obligation of the credit derivative - obligation used for purposes of determining the amount of cash to be settled or the obligation to be delivered - provided that: i) the reference obligation is of a similar or lower category than the underlying obligation; ii) both are issued by the same debtor and iii) there are reciprocal clauses in case of default or legally enforceable acceleration clauses.
X.3.3.3. The validity period of the credit derivative cannot be less than any grace period necessary to determine that the underlying obligation has effectively been defaulted due to non-payment.
X.3.3.4. Credit derivatives that allow for cash settlement will be recognized to the extent that there is a solid valuation process that allows the loss to be estimated reliably. It will be necessary to establish with precision the period during which valuations of the underlying obligation can be obtained after the credit event. If the reference obligation specified in the credit derivative, for purposes of cash settlement of the hedge, were different from the underlying obligation, the provisions established in point X.3.3.2 shall apply.
X.3.3.5. If it were necessary for the buyer of the protection to transfer the underlying obligation to the provider of the protection in order to proceed with the settlement of the credit protection, the terms of the underlying obligation must provide that the necessary consent to carry out said transfer cannot be refused without good cause.
X.3.3.6. The parties responsible for determining whether a credit event occurred must be clearly identified. This responsibility will not rest solely with the seller of protection, but its buyer may inform the seller about the occurrence of a credit event.
X.3.3.7. A mismatch between the underlying obligation and the obligation used for purposes of determining whether a credit event has occurred is permitted provided that: i) the latter is of a similar or lower category than the underlying obligation; ii) both obligations are issued by the same debtor and iii) there are legally enforceable cross-default or cross-acceleration clauses. When the restructuring of the underlying obligation is not contemplated by the credit derivative, but the requirements included in points X.3.3.1 to X.3.3.7 are met, partial recognition of the credit derivative will be permitted. If the amount of the credit derivative were lower than or equal to that of the underlying obligation, up to 60% of the value of the coverage may be counted. If the amount of the credit derivative were higher than that of the underlying obligation, coverage may be counted up to 60% of the value of the underlying obligation.
Only credit default swaps and total return swaps that provide credit protection equivalent to guarantees will be recognized, with the following exception: when a financial entity purchases credit protection through a total return swap and accounts for the net payments received under the swap as net income, but does not account for the impairment in the value of the protected asset, the credit protection will not be recognized.
X.3.4. Eligible guarantors (and counter-guarantors) and providers of credit protection.
When guarantees or credit derivatives are direct, explicit, irrevocable and unconditional, credit protection provided by the following entities will be recognized, when their risk weighter is lower than that of the counterparty:
X.3.4.1. Non-financial public sector.
X.3.4.2. Financial entities.
X.3.4.3. Reciprocal guarantee societies and public guarantee funds, registered in the Records authorized by the Central Bank of the Argentine Republic.
X.3.5. Application.
A substitution approach will be applied. Only guarantees issued - or protection provided, in the case of credit derivatives - by entities with a risk weighter lower than that of the counterparty will entitle to a lower capital requirement. The uncovered portion will maintain the risk weighter of the counterparty underlying the exposure, while the covered portion will be assigned the risk weighter of the guarantor or provider of protection, taking into consideration the following:
X.3.5.1. Proportional coverage.
When the guaranteed amount, or with respect to which credit protection is held, is lower than the amount of the risk exposure, and to the extent that the guaranteed and non-guaranteed portions have the same priority for collection - that is, the financial entity and the guarantor share losses pro rata - a proportional reduction in the capital requirement will be admitted. That is, the protected portion of the exposure will receive the treatment applicable to eligible guarantees/credit derivatives and the remainder will be considered as uncovered.
X.3.5.2. Deductibles.
Deductibles below which no compensation will be received in case of loss are equivalent to first-loss positions and must be weighted at 1250%.
X.3.5.3. Currency mismatch.
When the credit protection and the exposure are denominated in different currencies, the portion of the exposure considered protected will be reduced by applying an Hfx hair cut as follows:
GA = G x (1 – Hfx)
where:
GA : amount of credit protection adjusted for currency mismatch.
G: nominal amount of credit protection.
Hfx: hair cut for currency mismatch between the credit protection and the exposure of 8% (assuming a maintenance period of 10 business days and daily valuation at market prices).
The hair cut must be increased proportionally using the square root of time formula, depending on the frequency of valuation of the credit protection, as described in point X.2.3.2.
X.4. Maturity mismatch.
Maturity mismatch occurs when the residual term of the CRC is less than that of the underlying exposure; both terms must be measured conservatively.
When the simple approach is used to treat assets received as collateral, maturity mismatch will not be admitted.
For the rest of the cases - personal guarantees (and counter-guarantees), credit derivatives and collateral assets computed with the comprehensive method - if there is a maturity mismatch, the CRC that has an original maturity of less than one year or a residual maturity not greater than three months will not be recognized. When in these cases the computation of the CRC is feasible, its recognition will be partial, applying the following adjustment:
Pa = P x (t – 0,25) / (T – 0,25)
where:
Pa: value of the CRC adjusted for maturity mismatch.
P: value of the credit protection adjusted for any applicable hair cut. t: min (T, residual term of the credit protection), expressed in years.
T: min (5, residual term of the exposure), expressed in years.
In the case of securitization positions, when the covered positions have different residual terms, the longest one must be used.
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Source: Banco Central de la Republica Argentina — original document · Summary generated with machine assistance and reviewed before publication; the authoritative text is the regulator's original document. How RegAlert works
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