Instruction No. 26/2016 of 16 November on Liquidity Risk Governance

INSTRUCTION NO. 26/16 of 16 November SUBJECT: LIQUIDITY RISK GOVERNANCE

Considering the provisions of Notice No. 07/2016 of 22 June on Risk Governance, Financial Institutions must adopt functions, policies, and risk management processes for the identification, assessment, monitoring, control, and reporting of liquidity risk; Under these terms, and under the combined provisions of paragraphs d) and f) of Article 21 and paragraph d) of paragraph 1 of Article 51, both of Law No. 16/10 of 15 July – Law of the National Bank of Angola, and Article 90 of Law No. 12/15 of 17 June – Law of the Bases of Financial Institutions.

I DETERMINE:

1. Definitions Without prejudice to the definitions established in the Law of the Bases of Financial Institutions, for the purposes of this Instruction, the following shall be understood: 1.1 Risk factor: aspect or characteristic that influences risk. In risk assessment, the characteristics of financial products and markets, borrowers, and processes in force at Institutions are relevant, among others. 1.2 Contingency funding plan: compilation of policies, processes, and action plans to respond to major disruptions in the Institution's capacity to finance part or all of its activities in a timely manner and at a reasonable cost. 1.3 Risk position: exposure to an asset, an off-balance sheet item, or a financial derivative instrument, plus income of any nature not yet received that is reflected accounting-wise as receivables, regardless of whether they are due or overdue, in accordance with the criteria of the Chart of Accounts Manual for Financial Institutions. 1.4 Funding risk: arising from financing under less favorable conditions or the absence of available financing forms, due to the Institution's specific condition, the market, or a combination of both. 1.5 Market liquidity risk: arising from a position that cannot be liquidated at market price due to lack of liquidity in the same.

CONTINUATION OF INSTRUCTION NO. 26/2016 Page 2 of 9 2. Identification 2.1 Institutions must define and identify the liquidity risk and its concentration to which they are exposed, at the level of all their legal entities, foreign branches, agencies, and in relation to the group as a whole. 2.2 In the process referred to in the previous point, Institutions must consider liquid assets and financial flows, anticipating market liquidity risk, funding risk, and the possible link between them. 2.3 Institutions must identify vulnerabilities resulting from their financing structure and assets, ensuring that their long-term financing is not concentrated in illiquid assets and considering the possible early repayment of certain redeemable debt instruments before maturity.

CONTINUATION OF INSTRUCTION NO. 26/2016 Page 3 of 9 2.4 Institutions must monitor their financing sources, analyzing factors that could trigger sudden fund withdrawals or deterioration in access to financing sources, establishing limits for funding risk concentration, among others. 2.5 Institutions holding positions in various countries and different currencies must have access to diverse financing sources for the same. 2.6 Institutions must develop a set of quantitative or qualitative indicators that support the risk identification or emerging vulnerability process associated with liquidity risk and the determination of possible mitigation measures. 2.7 The indicators mentioned in the previous point must consider, at a minimum, the following aspects: a) rapid asset growth, especially when financed with potentially volatile liabilities; b) growing concentration in assets and liabilities; c) growth in currency mismatches; d) widening of credit-default-swap spreads on the Institution's debt; e) difficulties in accessing long-term financing. 2.8 Institutions must identify events that could impact market perception of their solidity, in order to maintain financing sources and ensure confidence in their ability to meet obligations.

CONTINUATION OF INSTRUCTION NO. 26/2016 Page 4 of 9 3. Assessment 3.1 Institutions must assess risk positions, on and off-balance sheet, that could affect cash flow inflows and outflows, including interdependencies between different risk positions, notably those with implications for funding and market liquidity risk. 3.2 Institutions must ensure that risk positions are assessed in accordance with applicable accounting standards, taking into account that these assessments may be affected by extreme conditions. 3.3 Institutions must ensure that criteria for liquidity risk assessment are documented, approved, periodically reviewed, and adjusted according to market conditions or other Institution-specific circumstances, and criteria may include: a) maturity of assets and liabilities; b) off-balance sheet items with uncertain cash flows; c) availability of alternative financing sources.

CONTINUATION OF INSTRUCTION NO. 26/2016 Page 5 of 9 4. General Monitoring and Control Requirements 4.1 Institutions must actively monitor and control their exposure to liquidity risk and financing needs. 4.2 Institutions must mitigate reputation risk when liquidity problems arise by maintaining effective relations with counterparties, external rating agencies, and other stakeholders, establishing contingency funding plans, liquidity reserves, and ensuring multiple financing sources. 4.3 Institutions must frequently test their capacity to secure financing promptly, identify the most important factors affecting this capacity, and monitor them carefully to ensure that financing acquisition estimates remain valid. 4.4 Institutions must diversify available financing sources in the short, medium, and long term, including this information in funding plans and maintaining a continuous presence in predominant financing markets.

CONTINUATION OF INSTRUCTION NO. 26/2016 Page 6 of 9 4.5 Funding plans must consider correlations between financing sources and market conditions and include limits by counterparty, instrument type, currency, and geographic location. 4.6 Institutions must adopt intra-day and daily liquidity management objectives that allow them to identify and prioritize obligations in order to be able to meet them when they arise, considering how their liquidity risk profile changes with financial flows and new contractual obligations agreed throughout the day.

CONTINUATION OF INSTRUCTION NO. 26/2016 Page 7 of 9 5. Monitoring and Control - Stress Testing 5.1 Institutions must establish stress tests for a set of extreme but possible short- and long-term scenarios, to identify interdependencies that may only arise under extreme conditions. 5.2 For the purposes of the previous point, Institutions must consider in their stress tests, among others, the following scenarios: a) default by debtors and/or borrowers; b) total/partial withdrawal of deposits; c) cancellation of credit lines; d) difficulties in accessing foreign liquidity.

CONTINUATION OF INSTRUCTION NO. 26/2016 Page 8 of 9 6. Monitoring and Control - Limits System 6.1 The limits system established in accordance with paragraph 7 of Article 7 of Notice No. 07/2016 of 22 June on Risk Governance must be compatible with the size, complexity, and sophistication of risk management systems, as well as the experience and competence of the Institution's staff. 6.2 The limits system must be developed to support the daily liquidity management of various business lines and include measures that ensure the institution can continue to operate during periods of extreme market conditions. 6.3 Institutions must adopt ratios for current liquidity risk management, taking into account their net positions, the nature of products, maturities, currencies, and significant markets, individually and aggregated, adopting sufficiently conservative assumptions. 6.4 The limits system must enable the calculation of the liquidity position on an intra-day, daily, and other extended temporal periods basis, to facilitate daily liquidity risk management and monitor compliance with established policies, procedures, and limits.

CONTINUATION OF INSTRUCTION NO. 26/2016 Page 9 of 9 7. Monitoring and Control - Contingency Funding Plan 7.1 Institutions must develop a contingency funding plan that unequivocally defines the strategy to be followed in cases of liquidity shortage. 7.2 The contingency funding plan must, among others: a) establish responsibilities for its implementation; b) define the decision-making process; c) specify procedures for effective internal coordination and communication between different business lines and locations; d) define the communication plan with the National Bank of Angola; e) reference potential additional intra-day liquidity sources that may be used during liquidity crises; f) describe occasional liquidity lending operations and potential reputational problems related to accessing them; g) take into account liquidity risk concentration. 7.3 The contingency funding plan must be reviewed regularly, at least annually, to ensure its effectiveness and operational viability, and adjusted whenever necessary, according to the results of stress tests referred to in point 5.1 of paragraph 5 of this Instruction.

8. Reporting 8.1 Institutions must define, formalize, implement, and periodically review policies and procedures for reporting, which must be appropriate to their nature, size, complexity, and risk profile. 8.2 In internal reporting, Institutions must provide the main results of the identification, assessment, monitoring, and control stages of liquidity risk and its concentration to the governing body and management staff, which must include, at a minimum: a) summary of the Institution's aggregate liquidity situation; b) trends in liquidity risk exposure; c) compliance with liquidity risk policies, processes, and limits, as well as situations where limits were exceeded, identifying the reasons and staff responsible for approval; d) stress test results. 8.3 In external reporting, Institutions must define, formalize, and implement policies and processes to transmit comprehensive information to stakeholders, which must include, at a minimum: a) qualitative information on: i. liquidity risk factors to which the institution is exposed; ii. monitoring of the diversification of its financing sources; iii. concepts used in the Institution's liquidity risk assessment, including additional metrics; iv. how market asset liquidity risk is reflected in the Institution's liquidity management framework; v. how stress tests are being used; vi. summary of the Institution's contingency funding plan; vii. the Institution's policy for maintaining liquidity reserves; b) quantitative information on: i. size and composition of the Institution's liquidity reserve; ii. additional collateral requirements as a consequence of a downward risk assessment review; iii. values of internal ratios and other metrics monitored by management staff; iv. limits associated with such metrics; v. breakdown, by maturity, of off-balance sheet and balance sheet positions; vi. liquidity ratio and observation ratios, calculated in accordance with the Instruction on liquidity risk. 8.4 The frequency of reporting must reflect the materiality and nature of liquidity risk sources, especially regarding their volatility, and be properly set out in the policies and processes provided for in point 8.1 of this paragraph. 8.5 Reports prepared on an extraordinary basis cannot be used as a substitute for regular reporting.

9. Sanctions Non-compliance with the mandatory provisions established in this Instruction constitutes a regulatory offense punishable under the Law of the Bases of Financial Institutions.

10. Transitional Provisions Institutions must comply with the provisions of this Instruction in accordance with the transitional provisions of Notice No. 07/2016 of 22 June on Risk Governance.

11. Doubts and Omissions Doubts and omissions resulting from the interpretation and application of this Instruction are resolved by the National Bank of Angola.

12. Entry into Force This Instruction enters into force on the date of its publication.

PUBLISH Luanda, 16 November 2016 THE GOVERNOR VALTER FILIPE DUARTE DA SILVA