Minimum Capital of Financial Entities. Guidelines for Risk Management in Financial Entities. Amendments

"2015 - YEAR OF THE BICENTENNIAL OF THE CONGRESS OF FREE PEOPLES" COMMUNICATION "A" 5867 30/12/2015 TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 656
RUNOR 1 - 1169
Minimum Capital of Financial Entities. Guidelines for Risk Management in Financial Entities. Amendments.
____________________________________________________________ We address you to inform you that this Institution has adopted the following resolution:

“1. Approve, with effect from 1.3.16, the measures comprising the new text of Section 6. of the regulations on “Minimum Capital of Financial Entities” contained in the annex attached to this communication.
2. Substitute, with effect from 1.3.16, points 1.1., 3.1., 5.1.1., 5.1.2., 7.3. and 9.2. of the regulations on “Minimum Capital of Financial Entities”:

“1.1. Requirement.
The minimum capital requirement that financial entities must have integrated shall be equivalent to the highest value resulting from the comparison between the basic requirement and the sum of those determined by credit risk, market risk - requirement for daily positions of included assets - and operational risk.”

“3.1. Requirement.
It shall be determined applying the following expression:
CRC = (k x 0,08 x APRc) + 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 Currency 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
To this effect, the last rating reported for the calculation corresponding to the integration by the third month following that in which the notification takes place shall be considered. Until communicated, the value of “k” shall be equal to 1,03.
APRc: risk-weighted credit assets, determined by the sum of the values obtained after applying the following expression:
A x p + PFB x CCF x p + no DvP + (DVP + RCD+ INC(fractionation)) x 12,5 where:
A: computable assets/exposures.
PFB: computable items not recorded in the balance sheet balances (“off-balance sheet items”), whether or not accounted for in off-balance accounts.
CCF: credit conversion factor. p: risk weight, as a fraction of one. no DvP: operations without delivery against payment. Amount determined by the sum of the values obtained after applying to the included operations the corresponding risk weight (p) in accordance with point 3.8.
DvP: failed delivery against payment operations (for the purposes of these regulations, these include failed payment against payment operations - PvP -). Amount determined by the sum of the values obtained by multiplying the current positive exposure by the applicable capital requirement established in point 3.8. RCD: capital requirement for counterparty credit risk in over-the-counter (“OTC”) derivative operations, determined in accordance with point 3.9. INC(fractionation):
increase for excesses against the following limits:

• equity participation in companies: 15%;
• total equity participations in companies: 60%.
  The established maximum limits shall apply to the computable net worth of the financial entity on the last day prior to the one corresponding, in accordance with the regulations on “Fractionation of credit risk”.
  INC: increase for the following excesses:
• in the relationship of immobilized assets and other concepts (Section 4. of the respective regulation);
• against the limits established in the regulations on “Fractionation of credit risk” (Section 5. and point 8.2. of Section 8., excluding those computed for the determination of INC (fractionation)); and
• against the credit grading limits (Section 3. of the respective regulation).
  In this matter, the provisions contained in Section 2. of the regulations on “Minimum capital defaults and technical ratios. Applicable criteria” shall apply, unless the provisions of Section 3. of those regulations apply.
  This expression shall also include the credit exposure resulting from:
  i) the sum of positions not covered by contracts to hedge price variations of commodity products -“commodities”-. Uncovered positions shall be considered those sold to customers that do not correspond to the hedges acquired by the financial entity, regardless of the underlying and/or the customer, ii) the use of credit quotas expanded as referred to in points 5.3.1.1. ii), 5.3.4.1. iii) and 5.3.4.2. iii) of Section 5. of the regulations on “Fractionation of credit risk” (considering, where applicable, the provisions of point 11.1. of Section 11. of the cited regulations) regarding the financial assistance granted and/or holdings of debt instruments of financial trusts or fiduciary funds as 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 shall operate from the time the works or equipment have begun to be used economically or the trust/fiduciary fund generates income through tariffs, fees, charges or other similar concepts.

Computation as “INC” of the use of the expanded quota -in % of such use From the 25th First month 50 Seventh month 100 Thirteenth month IP: increase for the expansion of the general limit of the global net negative position in foreign currency, in accordance with the provisions contained in point 2.1. of the regulations on “Global net position in foreign currency”. 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.”

“5.1.1. Simple or substitution of weights:

• Mandatory for the computation of personal guarantees and credit derivatives.
• Optional for assets admitted as collateral for operations recorded in the investment portfolio.”

“5.1.2. Integral or exposure reduction:

• Mandatory for assets admitted as collateral for operations recorded 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 recorded in the investment portfolio.”

“7.3. New entities.
The monthly minimum capital requirement for operational risk corresponding to the first month shall be equivalent to 10% of the sum of the requirements determined by credit and market risks -in this case, for the positions of the last day- of that month.
From the second up to the thirty-sixth month, the monthly requirement shall be equivalent to 10% of the average of the requirements determined for the months elapsed up to the calculation period -inclusive-, resulting from considering the risks mentioned in the preceding paragraph, according to the following expression:
where for each month t:
CRCt: capital requirement for credit risk.
RMp,t: capital requirement for market risk for the positions of the last day of month t. n: number of months elapsed up to the month of calculation -inclusive- (2 ≤ n ≤ 36).
From the thirty-seventh month, the monthly requirement shall be calculated in accordance with points 7.1. and 7.2.”

“9.2. Consolidated basis.
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, quarterly.
For the purposes of compliance with the regulations on minimum capital for market risk, for each level of sub-consolidation, sold and bought positions in the same instrument (currency, stock, or bond) must be consolidated and reported in net terms, regardless of the branch or subsidiary in which they are registered. This implies consolidating the total positions of subsidiaries in which the entity does not have 100% ownership. Consequently, the “offsetting rules” for this risk shall apply on a consolidated or sub-consolidated basis, as applicable. However, when there are obstacles to the rapid repatriation of benefits from a foreign branch or subsidiary or legal or administrative difficulties for the adequate management of risks on a consolidated basis, individual positions shall be incorporated into the calculation without netting them with other positions in the rest of the group.”

3. Substitute, with effect from 1.3.16, the second paragraph of point 8.5. of the regulations on “Minimum Capital of Financial Entities” with the following:
   “The risk-weighted assets (RWA) result from applying the following expression:
   RWA = RWAc + [(RM+RO) x 12,5] where:
   RWA: risk-weighted assets.
   RWAc: risk-weighted credit assets, determined in accordance with point 3.1.
   RM: capital requirement for market risk, determined in accordance with Section 6.
   RO: capital requirement for operational risk, determined in accordance with Section 7.”

4. Substitute, with effect from 1.3.16, points 1.2.5. and 1.2.6. of the regulations on “Guidelines for Risk Management in Financial Entities” with the following:
   “1.2.5. Trading portfolio: that constituted by positions in monetary regulation instruments of the Central Bank of the Argentine Republic and other financial instruments, which verify the provisions of point 6.1.2. of the regulations on “Minimum Capital of Financial Entities”.
   1.2.6. Investment portfolio: that constituted by positions in monetary regulation instruments of the Central Bank of the Argentine Republic and other financial instruments, which do not fall under point 1.2.5.”

5. From the entry into force of the provisions contained in this communication and until 31.8.16, financial entities must calculate extra-accountingly the market risk requirement in accordance with the methodology in force at the date of issuance of this communication and consider, for the purpose of determining the requirement referred to in point 1.1. of the regulations on “Minimum Capital of Financial Entities”, the capital requirement for market risk that results in a higher amount.”

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 adopted measure.

Finally, we remind you that on this Institution’s website www.bcra.gob.ar, accessing “Legal and Regulatory Framework - Ordered Texts - Normative Orders”, you will find the modifications made with texts highlighted in special characters (strikethrough and bold).
We salute you attentively.
CENTRAL BANK OF THE ARGENTINE REPUBLIC
Darío C: Stefanelli Agustín Torcassi
Principal Manager of Issuance and Normative Applications General Manager of Regulations

ANNEX

6.1. Requirement.
Market risk is defined as the possibility of suffering losses in positions recorded on and off-balance sheet due to adverse fluctuations in market prices.
The capital requirement for market risk (RM) shall be the arithmetic sum of the capital requirements for interest rate risk (RT), equities (RA), exchange rate (RTC) and options (ROP).
RM = RT + RA + RTC + ROP
For its determination, entities must employ the Standard Measurement Method provided for in point 6.1.4.

6.1.1. General considerations.
6.1.1.1. The risks subject to this capital requirement are the risks of positions in instruments -securities and derivatives- attributed to the trading portfolio -defined in point 6.1.2.- and the risks of positions in foreign currencies, in this case regardless of the portfolio -investment or trading- to which they are attributed.
6.1.1.2. The capital requirement for exchange rate risk shall apply to the total position in each foreign currency.
6.1.1.3. The capital requirement for securities shall be computed with respect to instruments attributed to the trading portfolio, which must be valued prudently (at market prices -“marked to market”- or model -“marked to model”-), in accordance with point 6.9.
6.1.1.4. Instruments whose yield is determined based on the Reference Stabilization Coefficient (“CER”) shall be considered at a fixed rate.
6.1.1.5. Regardless of whether they are registered in the trading portfolio or the investment portfolio, items that must be deducted for the purpose of calculating the computable net worth shall be excluded from the computation of the capital requirement for market risk.

6.1.2. Trading portfolio.
6.1.2.1. The trading portfolio consists of positions in financial instruments incorporated into the entity’s equity with the purpose of trading them or hedging other elements of said portfolio. A financial instrument may be attributed to the trading portfolio -for the purpose of the capital requirement for market risk- if its trading is free from all restriction or if it is possible to obtain full hedging of the instrument. Additionally, the portfolio must be managed actively and positions valued daily with adequate precision.
B.C.R.A.
Section 6. of the regulations on “Minimum Capital of Financial Entities”.
Annex to
Com. “A”

6.1.2.2. Positions held for trading purposes are those held for short-term sale or with the purpose of obtaining benefits from short-term price fluctuations, real or expected, or through price arbitrage. They include both positions that entities retain for themselves and those acquired as a result of providing services to customers or “market making”.
6.1.2.3. Entities must have clearly defined policies and procedures to determine which exposures to include or exclude from the trading portfolio in order to calculate their capital requirement, thereby ensuring that the criteria for the trading portfolio established in these regulations are met. Policies and procedures must take into account the entity’s capacity to manage risks and the practices it employs to do so. Verification of compliance with policies and procedures must be fully documented and subject to periodic internal audits.

6.1.3. Treatment of counterparty credit risk in the trading portfolio.
6.1.3.1. Entities must calculate the capital requirement for counterparty credit risk of OTC derivative operations and securities financing transactions (“Securities Financing Transactions” -SFT-) -such as repo operations (REPO agreements)- recorded in the trading portfolio separately and in addition to the calculation of capital requirements for general market risk and specific risk of the underlying assets. To this effect, they must apply the methods and weights that apply when these operations are recorded in the investment portfolio.
6.1.3.2. All assets included in the trading portfolio that verify the conditions provided for in point 2.3. of the regulations on “Allocation of assets as collateral” shall be admitted as collateral for repo operations recorded in said portfolio. However, when dealing with instruments that do not satisfy the definition of assets admitted as collateral for operations recorded in the investment portfolio, specified in point 5.2.3.1., a haircut of 25% shall be applied.
6.1.3.3. The capital requirement for counterparty credit risk of over-the-counter (“OTC”) derivative operations shall be computed in accordance with point 3.9. for operations recorded in the investment portfolio.
6.1.3.4. Regardless of the portfolio in which they are registered, repo operations (REPO agreements) shall be subject to the capital requirement for counterparty credit risk in accordance with Section 5.

6.1.4. Measurement of market risks.
6.1.4.1. The Standard Measurement Method is based on a sum of components that separately capture specific risk and general market risk of positions in securities.
6.1.4.2. To calculate the capital requirement for option price risk, entities may use the simplified approach (provided for in point 6.5.2.) or the delta-plus method (established in point 6.5.3.), as applicable.

6.1.4.3. For the calculation of the capital requirement for market risk, operations shall be computed from the date of their execution, including forward purchases and sales. Entities must meet the requirements at the close of each business day.
The Superintendence of Financial and Currency Entities will verify that balances at the close of each reporting period are not distorted to declare lower risk positions and the quality of systems for the management of intraday exposure risks.

6.2. Capital requirement for interest rate risk.
The capital requirement for interest rate risk must be calculated with respect to debt securities and other instruments attributed to the trading portfolio, including non-convertible preferred shares.
A security sold and repurchased forward in a passive repo operation or other type of securities financing operation shall be treated as if it were still owned by the transferring entity; that is, it will receive the same treatment as a security in portfolio.
Convertible preferred shares at a predetermined price into ordinary shares of the issuer shall be treated according to how they are traded, as debt securities or as equities.
The requirement is obtained as the sum of two requirements calculated separately: one for the specific risk of each instrument, whether it is a sold or bought position, and another for general market risk -linked to the effect of interest rate changes on the portfolio-, in which bought and sold positions in different instruments can be offset. For derivative instruments, the provisions established in point 6.2.3. shall apply.

6.2.1. Capital requirement for specific risk.
The capital requirement for specific risk aims to protect the entity against adverse movements in the price of a security caused by factors related to its issuer. For its calculation, only opposite positions regarding the same issue, including positions in derivatives, may be netted.

6.2.1.1. The capital requirements for specific risk regarding issuer risk shall be as follows:

Issuer Capital requirement for specific risk
0,25% Residual term ≤ 6 months
1% Residual term > 6 months and ≤ 24 months
BCRA, National Government, provincial, municipal and Autonomous City of Buenos Aires governments in pesos, when their funding source is in that currency.
Bank for International Settlements, International Monetary Fund, European Central Bank and European Community and Multilateral Development Banks from point 4.3.1.
1,6% Residual term > 24 months
BCRA and non-financial public sector.
Others.
8% Other sovereigns and their central banks. 8% Financial entities from the country and abroad. 8% Instruments with authorized public offering issued by companies and other legal entities from the country and abroad -including currency entities, insurers, entities regulated by the CNV and trustees of non-financial trusts-. 8% Non-financial private sector. Others. 12% i) The non-financial public sector category has the scope defined in Section 1. of the regulations on “Financing to the non-financial public sector”. ii) To the categories “BCRA, National Government, provincial, municipal and Autonomous City of Buenos Aires governments”, “BCRA and non-financial public sector. Others” and “Other sovereigns and their central banks” shall be attributed all classes of public bonds and instruments of regulation or monetary policy.

6.2.1.2. Capital requirement for specific risk in securitization positions.
i) The capital requirement for specific risk of securitization positions held in the trading portfolio shall be 8% of the risk-weighted amount of net securitization positions attributed to that portfolio, applying to this effect the weighted average risk weight resulting from observing the provisions of points 3.6.6. and 3.6.7., multiplied by a concentration ratio. The concentration ratio is obtained from the sum of the nominal values of all tranches divided by the sum of the nominal values of the subordinated or pari passu tranches relative to the tranche in which the position is held.

When the entity cannot determine the capital requirement for specific risk according to the established methodology or the concentration ratio is equal to or greater than 12.5%, a risk weight of 1250% must be applied to the net position.

ii) Positions that, in accordance with the provisions of this point, entail a risk weight of 1250% may be excluded from the calculation of the capital requirement for general market risk.

6.2.1.3. Capital requirement for specific risk limited to the maximum possible loss.

Entities may limit the capital requirement for specific risk of an individual position, both in a credit derivative and in a securitization, to the maximum possible loss, which shall be calculated:

i) For a sold position, as the change that would occur in the value of the position if the underlying debtors became free of default risk.

ii) For a purchased position, as the change that would occur in the value of the position if all underlying debtors defaulted with zero recovery.

The maximum possible loss must be calculated for each individual position.

6.2.1.4. Capital requirement for specific risk of positions hedged with credit derivatives.

i) Both sides of a transaction (purchased and sold) may be fully offset when:

a) the instruments on both sides are identical; or

b) an instrument (purchased cash position) is hedged with a total return "swap", or vice versa, and the reference obligation of the "swap" and the underlying position - i.e., the cash position - coincide exactly. A mismatch between the maturity dates of the underlying position and the total return "swap" is permitted.

In these cases, neither side of the transaction is subject to a capital requirement for specific risk.

ii) Specific risk may be offset when the values on both sides always move in opposite directions, even if not substantially to the same extent, and the following conditions are met concurrently:

a) a purchased cash position is hedged with a credit default "swap" or with a credit-linked instrument ("credit linked note"), or vice versa;

b) the reference obligation, the maturity of the reference obligation and the credit derivative, and the denomination currency of the underlying position coincide exactly;

c) the basic characteristics of the credit derivative - such as the definitions of credit events, settlement mechanisms, etc. - do not cause the price variations of the derivative to deviate significantly from the price fluctuations of the cash position;

d) the transaction transfers risk, taking into account the effect of clauses that restrict hedging, such as fixed payments and materiality thresholds.

In these cases, 80% of the specific risk of the side of the transaction with the higher capital requirement may be offset, while the capital requirement for specific risk for the other side will be zero.

iii) Partial offset of specific risk will be recognized when the values on both sides of the transaction are negatively correlated. This occurs when:

a) the position is that indicated in subsection b) of item i) and, although the reference obligation and the underlying position do not coincide, it satisfies the conditions set forth in point 5.3.3.2.; or

b) the position is that indicated in subsection a) of item i) or in item ii), but the denomination currency or the maturity of the credit protection does not coincide with that of the underlying asset - without prejudice to the fact that currency mismatches must be taken into account for the purpose of calculating the capital requirement for exchange rate risk; or

c) the position is that indicated in item ii), but there is an asset mismatch between the cash position and the credit derivative. However, the asset of the cash position is included among the obligations that, according to the credit derivative documentation, may be delivered by the protection buyer in the event of a credit event.

iv) An nth-to-default credit derivative is a credit default "swap" in which the payment of coverage or indemnification occurs when the nth default takes place in a basket of underlying reference instruments, after which the transaction is settled and terminated.

a) The capital requirement for specific risk for a first-to-default credit derivative shall be the lesser of the sum of the capital requirements for specific risk for the reference credit instruments in the basket and the maximum possible payment for a credit event provided for in the contract.

When the entity has a position in one of the reference credit instruments of a first-to-default credit derivative and the derivative provides coverage to the position, it may reduce by up to the covered amount the capital requirements for specific risk for both the credit instrument and the part of the derivative related to said instrument.

When the entity has multiple risky positions in reference credit instruments, it may make such reduction only for the reference credit instrument with the lowest capital requirement for specific risk.

b) The capital requirement for specific risk for an nth-to-default credit derivative with "n" greater than 1 is the lesser between the sum of the capital requirements for specific risk for the reference credit instruments in the basket - excluding the (n-1) obligations with the lowest capital requirements for specific risk - and the maximum possible payment for a credit event provided for in the contract. In these cases, offsetting capital requirements for specific risk is not permitted.

c) Entities must calculate the capital requirement for each net position in nth-to-default credit derivatives regardless of whether they have a purchased or sold position; that is, regardless of whether they obtain or provide protection.

In the cases set forth in items i) to iii), the higher of the capital requirements for specific risk of each side of the transaction - that is, of the credit protection and the underlying asset - shall be taken. In the cases provided for in item iv), financial entities must sum the capital requirement for specific risk of each side of the position.

6.2.2. Capital requirement for general market risk: residual maturity method.

6.2.2.1. The capital requirement shall be obtained as the sum of the following four components:

i) The absolute value of the net weighted position, purchased or sold, in the entire trading portfolio.

ii) A percentage of the positions offset within each time band - vertical disallowance - in accordance with the provisions of point 6.2.2.5.

iii) Percentages of positions offset across different time bands - horizontal disallowance - in accordance with the provisions of point 6.2.2.6.

iv) If applicable, the net change in options positions in accordance with the provisions of point 6.5.

6.2.2.2. Capital requirements shall be calculated separately for positions in pesos and in each foreign currency. When the total of operations in a foreign currency is not significant - residual foreign currencies - the entity may net the positions, purchased or sold, to the bands of a single scale. In such case, it must sum the individual net positions within each band, regardless of whether they are purchased or sold, in order to determine the amount of the gross position in these residual foreign currencies.

6.2.2.3. Purchased and sold positions in debt securities and derivative instruments shall be allocated to maturity scales divided into 15 or 13 time bands, depending on whether the instrument's coupon is less than 3% or not. Fixed-rate instruments shall be assigned according to their residual maturity and variable-rate instruments according to the time remaining until the next interest adjustment. The risk weight of variable-rate instruments will depend on whether the coupon income for the current period - or, if not yet available, the last one paid - represents a yield of less than 3% annually. Opposite positions for the same amount in the same species may be excluded, as well as closely related derivatives ("swaps", "forwards", futures and "forward rate agreements" - FRAs-) that meet the conditions established in item i) of point 6.2.3.5.

6.2.2.4. Positions allocated to each time band must be weighted by a factor that reflects their sensitivity to changes in interest rates, according to the following table:

Zone	Coupon < 3%	Coupon >= 3%	Risk Weight	Assumed Change in Yield (for delta-plus method, point 6.5.3.)
Months	0-1	0-1	0.00%	1.00
	1-3	1-3	0.20%	1.00
	3-6	3-6	0.40%	1.00
	6-12	6-12	0.70%	1.00
Years	1-1.9	1-2	1.25%	0.90
	2	1.9-2.8	2-3	1.75%	0.80
	2.8-3.6	3-4	2.25%	0.75
	3.6-4.3	4-5	2.75%	0.75
	4.3-5.7	5-7	3.25%	0.70
	5.7-7.3	7-10	3.75%	0.65
	7.3-9.3	10-15	4.50%	0.60
	9.3-10.6	15-20	5.25%	0.60
	10.6-12	More than 20	6.00%	0.60
	12-20		8.00%	0.60
	More than 20		12.50%	0.60

• For the purpose of allocating a position to the maturity scale when the residual maturity or the time remaining until the next interest adjustment, as applicable, is equal to the limit between two bands, the allocation shall be made to the time band closest to the calculation date.

6.2.2.5. Weighted positions must be offset (purchased/sold) within each time band, to obtain a net position. However, since each band includes different instruments and maturities, to reflect basis risk and time gap risk, an additional requirement equivalent to 10% of the lesser of the offset positions (in absolute value) shall be applied - vertical disallowance.

6.2.2.6. As a result of the provisions of point 6.2.2.5., a set of net purchased positions, a set of net sold positions, and vertical disallowances will be obtained. Then, entities may perform two series of horizontal offsets: first, between the net positions within each of the three zones in which the time bands are grouped, and then, between the net positions of the three zones. These offsets are subject to the following horizontal disallowance scale - additional requirements - expressed as percentages of the positions being offset:

Zone	Band within zone	Disallowance percentage between adjacent zones	Disallowance percentage between zones
1 and 3	Months	0-1	40%
		1-3	40%
		3-6	40%
		6-12	40%
	Years	1-2-3	100%
		3-4	30%
		4-5	40%
		5-7	40%
		7-10	40%
		10-15	40%
		15-20	40%
		More than 20	40%
			30%

• For the purpose of allocating a position to the maturity scale when the residual maturity or the time remaining until the next interest adjustment, as applicable, is equal to the limit between two bands, the allocation shall be made to the time band closest to the calculation date.

6.2.2.7. In the case of residual currencies - insignificant positions - referred to in point 6.2.2.2., the gross positions in each time band shall be subject to the risk weights established in point 6.2.2.4., without offset.

6.2.3. Treatment of interest rate derivatives.

6.2.3.1. The measurement system must cover all interest rate derivatives and off-balance sheet instruments in the trading portfolio sensitive to changes in rates - such as FRAs, bond futures, interest rate "swaps" and "cross-currency swaps", and forward foreign exchange positions.

Options shall be treated in accordance with the provisions of point 6.5.

6.2.3.2. Calculation of positions.

Derivatives must be converted into positions in the corresponding underlying and the capital requirements for specific risk and general market risk described above shall be applied. To determine the market value of the underlying notional, the provisions established in point 6.9. for prudent valuation shall be followed.

6.2.3.3. Futures and forward contracts, including FRAs.

These instruments shall be considered as a combination of a purchased and a sold position in a government bond. The term of a future or an FRA shall be the period from now until delivery or exercise of the contract plus - when applicable - the life of the underlying instrument. In cases where a range of instruments can be delivered to fulfill the contract, the entity may choose which bond, among those that can be delivered, to insert into the maturity scale, taking into account the applicable conversion factors. In the case of a future on a corporate bond index, positions shall be included at the market value of the instruments comprising the underlying portfolio.

6.2.3.4. "Swaps".

"Swaps" shall be considered as two notional positions in government bonds with the maturities corresponding to each case.

An interest rate "swap" under which the entity receives a variable interest and pays a fixed interest shall be considered as a purchased position in a variable-rate instrument maturing on the next interest rate reset date and a sold position in a fixed-rate instrument maturing equivalent to the residual term of the "swap". In the case of "swaps" that pay or receive an interest rate, variable or fixed, in exchange for another reference price - such as a stock index - the interest rate component shall be allocated to the band corresponding to the maturity or rate adjustment date and the equity component shall give rise to the capital requirement for equity positions.

Each side of a currency "swap" shall be allocated to the maturity scale of the corresponding currency.

6.2.3.5. Capital requirement for derivatives.

i) Allowed offset between offset positions.

Purchased and sold, real or notional, positions in identical instruments may be excluded from the calculation of specific risk and general market risk. Instruments are considered identical if they have the same issuer, coupon, currency, and maturity. Similarly, if they correspond exactly, futures or "forwards" and their underlyings may be excluded, without ceasing to count the side of the transaction that represents the time to maturity of the forward contract.

When the future or "forward" allows for the delivery of a range of instruments, exclusion is only possible to the extent that the entity can easily identify the underlying bond whose delivery is most convenient for the intermediary with the sold position and demonstrate that the price changes of the cheapest-to-deliver bond and the future or "forward" are closely aligned.

Exclusion or offset of positions in different currencies is not permitted, so the sides of currency "swaps" and forward contracts on currencies must be treated as notional positions in the relevant instruments and included in the calculation corresponding to each currency.

Likewise, entities may exclude opposite positions in the same category of instruments if they consider them offset, even in the case of positions in the delta value of an option. For exclusion to apply, the positions must refer to the same underlyings, have the same nominal value, and be denominated in the same currency.

Subject to the same conditions, sides of different "swaps" may also be offset.

Additionally:

a) when dealing with futures, exclusion will only apply if the notional and underlying instruments refer to identical products and their maturities do not differ by more than 7 calendar days;

b) when dealing with "swaps" and FRAs, the reference rate for variable interest positions must be identical and there must be a close correspondence between the coupons (within a margin of 15 basis points);

c) in the cases of "swaps", FRAs and "forwards", the next interest reset date or maturity - when dealing with fixed coupon or "forward" positions - must occur:

• less than one month: on the same day;
• between one month and one year: with a maximum discrepancy of seven calendar days between those dates;
• at one year: with a maximum discrepancy of thirty calendar days between those dates.

ii) Capital requirement for specific risk.

Currency and interest rate "swaps", FRAs, currency "forwards", and interest rate futures or futures on an interest rate index are not subject to specific risk capital requirements. However, in the case of futures where the underlying is a debt security or an index representing a basket of debt securities, the specific risk capital requirement shall be applied according to the credit risk of the issuer, as established in point 6.2.1.

iii) Capital requirement for general market risk.

The capital requirement for general market risk applies to all positions in derivative instruments - in the same way that it also applies to cash positions - with the sole exception of positions that are offset with identical instruments, as established in item i) of this point.

6.3. Capital requirement for risk of equity positions.

The capital requirement for the risk of holding equity positions in the trading portfolio applies to purchased and sold positions in ordinary shares, convertible debt securities that behave like shares, and commitments to acquire or sell shares, as well as any other instrument that has market behavior similar to that of shares, excluding non-convertible preferred shares, to which the interest rate risk capital requirement described in point 6.2 shall be applied. Purchased and sold positions in the same species may be calculated on a net basis.

6.3.1. Capital requirement for specific risk and general market risk.

The capital requirement for holding shares shall be obtained as the sum of two requirements calculated separately: one for the specific risk of the position in a given share, whether it is a sold or purchased position, and another for the general market risk resulting from holding such position in the market.

Specific risk is equivalent to the gross position in shares - that is, the sum of all purchased positions and all sold positions - while general market risk is the difference between the total purchased positions and the total sold positions in each national market where the entity holds shares - that is, the total net position in each national market.

The capital requirement for specific risk and general market risk shall be 8% of each risk, as defined in the preceding paragraph.

6.3.2. Treatment of equity derivatives.

Except for options on shares and stock indices, which are treated in point 6.5., other equity derivatives and off-balance sheet positions sensitive to changes in market prices must be included in the calculation of the requirement. This includes futures, "forwards" and "swaps", both on individual shares and on stock indices. Derivatives shall be converted into positions in their corresponding underlying.

6.3.2.1. Calculation of positions.

For the calculation of requirements for specific risk and general market risk, positions in derivatives must be converted into notional:

i) Futures and "forwards" on individual shares shall be declared at the market price of the underlying.

ii) Futures on stock indices shall be declared at the market value of the notional of the underlying share portfolio.

iii) Equity "swaps" shall be considered as two notional positions.

iv) Options on shares and stock indices shall be excluded along with their underlyings - if the simplified method is used - or incorporated into the general market risk measure - if the delta-plus method is used.

6.3.2.2. Capital requirement for equity derivatives.

i) Capital requirement for specific risk and general market risk.

Each position offset with an identical share or stock index may be fully netted, resulting in a single net position, sold or purchased, on which the capital requirements for specific risk and general market risk shall be applied.

The interest rate risk of the derivative shall be calculated in accordance with point 6.2.

ii) Capital requirement for indices.

In addition to the general market risk capital requirement, an additional capital requirement of 2% of the net position, purchased or sold, in contracts on indices calculated on diversified share portfolios shall be applied for the purpose of covering factors such as execution risks. The Superintendence of Financial and Foreign Exchange Entities shall review that the 2% weight is applied only to well-diversified indices and not, for example, to sectoral indices.

iii) Arbitrage.

a) In the case of the following arbitrage strategies related to futures, the additional 2% capital requirement of the preceding subsection ii) may be applied to only one of the indices (the opposite position being exempt):

• when the entity takes the opposite position in exactly the same index but at different maturities or markets;
• when the entity maintains the opposite position in contracts with the same date but in different, although similar, indices, for which purpose it must have available to the Superintendence of Financial and Foreign Exchange Entities evidence that both indices contain sufficient common components to justify such offset.

b) A capital requirement of 4% shall be applied to positions arising from arbitrage strategies, in which a future on a broad index is matched with a basket of shares and, additionally, it is verified that:

• the strategy has been adopted deliberately and is monitored and managed in a specialized manner;
• the composition of the basket of shares represents at least 90% of the index if it is decomposed into its notional components;
• the 4% capital requirement, which reflects divergence and execution risks, is equivalent to a 2% requirement on the gross value of positions on each side. The requirement applies even if all shares are held in proportions identical to those of the index. Any excess value of the shares composing the basket above the value of the future, or any excess value of the future over the value of the basket, will be considered as an open position, bought or sold.
  c) Offsetting may be performed—i.e., capital requirements may not be applied—to opposite positions, even if they are in different markets or in share deposit certificates, only if all conversion costs, if any, are taken into account. Any exchange rate risk arising from these positions must be calculated as established in point 6.4.

6.4. Capital requirement for exchange rate risk.
This section establishes the minimum capital necessary to cover the risk of holding positions in foreign currency, including gold.

6.4.1. The calculation of the capital requirement for exchange rate risk requires, first, quantifying the exposure in each currency and then estimating the risks inherent to the combination of bought and sold positions in different currencies.

6.4.2. Measurement of exposure in each currency.

6.4.2.1. The net open position in each currency will be calculated as the sum of:
i) The net spot position, formed by all assets minus all liabilities at spot, including accrued interest, denominated in the currency in question. ii) The net forward position, formed by amounts receivable minus amounts payable for forward exchange operations, including foreign exchange futures and the principal of currency swaps not included in the spot position. iii) Guarantees granted (and similar instruments), unless they can be cancelled discretely and unilaterally by the financial entity or are cancelled automatically in case of deterioration of the debtor's solvency. iv) At the entity's discretion, future net unaccrued income and expenses that have been fully hedged. v) The net delta equivalent of the entire portfolio of foreign exchange options, when the entity does not use the simplified method for calculating the capital requirement for option positions as provided in point 6.5.2.

6.4.2.2. When the foreign currency or gold forms part of a forward contract—to deliver or receive a certain amount—the exposure to interest rate or exchange rate risk on the other side of the contract will be calculated in accordance with points 6.2. and 6.4.2.1.

6.4.2.3. Accrued interest and other income receivable and payable will be included in the position, whether they correspond to instruments in the trading or investment portfolio. Entities may exclude expected future income and expenses not yet accrued unless the amounts are certain and have been hedged. The decision to include future income and expenses must be adopted consistently, as it will not be permitted to select only expected future flows that reduce the position.

6.4.2.4. Forward positions in foreign currency and gold will be valued at current spot exchange rates in the market, unless the entity uses net present value for the management of such positions, in which case current interest rates and spot exchange rates will be used. To determine the amount of the net open position in each foreign currency, entities may exclude positions included in the deductible items to determine the computable equity.

6.4.3. Measurement of risk in a portfolio with multiple positions, in foreign currency and gold.
Shorthand method.
The nominal amount (or net present value) of the net position in each currency and in gold will be converted to pesos at the spot exchange rate, for which the reference exchange rate for the US dollar disseminated by this Institution, valid at the close of operations for the day, will be used. If they are foreign currencies other than the US dollar, they will be converted to this currency using the swap rates communicated by the trading desk of the Central Bank of the Argentine Republic. For consolidation purposes, insignificant positions of branches and subsidiaries abroad may be replaced by the limit the entity has set internally for each currency; in these cases, the limits must be summed, regardless of their sign, to the net open position in the corresponding currency. Furthermore, entities must provide evidence that they permanently monitor the correspondence between the limits and the real positions. The total net position will be obtained by summing:

• the greater of the absolute values of the sum of the net sold positions and the sum of the net bought positions; and
• the absolute value of the net position in gold, sold or bought.
  The capital requirement will be 8% of the total net position.

6.5. Capital requirement for option positions.

6.5.1. Entities that only buy options—and provided that the market value of the entire options portfolio does not exceed 5% of their computable equity (RPC) from the previous month—or whose positions in sold options are covered by bought options with exactly the same contractual conditions, may use the simplified method provided in point 6.5.2. In all other cases, they must use the delta-plus method contemplated in point 6.5.3.

6.5.2. Simplified method.
Options and their underlying assets, at spot or forward, will be subject to a capital requirement that incorporates both general market risk and specific risk under the following terms:

6.5.2.1. Capital requirement for a bought position in the underlying and bought in the put option, or for a sold position in the underlying and bought in the call option.
The capital requirement will be the market value of the underlying multiplied by the sum of the requirements for specific risk and general market risk applicable to the underlying, minus the intrinsic value of the option—the amount by which it is “in-the-money”, with a zero floor. For options with a residual maturity of more than six months, the exercise price will be compared with the future price and not with the current price. If the entity cannot perform this calculation, it must consider that the intrinsic value of the option is zero. When it is not clear which side of an operation constitutes the underlying—as is the case with exchange operations—the asset to be received if the option is exercised will be taken. In cases where the market value of the underlying is zero—as occurs with certain derivatives referred to interest rates (“caps” and “floors”) and options whose underlying asset is a “swap” (“swaptions”)—the notional value will be taken.

6.5.2.2. Bought call option or bought put option.
The capital requirement will be the lesser of the market value of the underlying multiplied by the sum of the requirements for specific risk and general market risk applicable to the underlying, and the market value of the option.
The book value may be used for options on currencies not included in the trading portfolio.

6.5.3. Delta-plus method.
The delta-plus method uses the sensitivity parameters or “Greek letters” associated with options to determine the delta equivalent of each position.
To the delta equivalent of the position, the standard methodology of points 6.2. to 6.4. will be applied, for the purpose of calculating the capital requirement for general market risk for options, to which additional requirements are added for the coverage of gamma risk—which measures the rate of change of the delta coefficient against variations in the price of the underlying—and vega risk—which measures the sensitivity of the option price to changes in the volatility of the price of the underlying. The specific risk requirement will be determined separately, multiplying the delta equivalent of each option by the specific risk weights established in points 6.2. and 6.3.

6.5.3.1. The position in an option will be equivalent to the market value of the underlying multiplied by the delta coefficient of the option. The gamma and vega coefficients must also be calculated. For the calculation, models approved by options markets authorized to operate by the National Securities Commission (CNV) or proprietary pricing models must be used. In the latter case, entities must make available to the Superintendency of Financial and Currency Entities both the basic elements of the calculation methodology and any other detail requested based on the volume and frequency of transactions.

6.5.3.2. Delta-weighted positions whose underlying are debt securities or interest rates will be assigned to the time bands established in point 6.2. Two parts of the operation will be reported: one when the underlying contract comes into effect and another when it matures. “Caps” or “floors” must be registered as a combination of a floating rate bond and a set of European options. The provisions on offset positions of item i) of point 6.2.3.5. will apply.

6.5.3.3. In the case of share options, each national market will be considered as a separate underlying. The delta-weighted position will be incorporated into the calculation described in point 6.3.

6.5.3.4. In the case of options on gold and foreign currencies, the net delta equivalent of these options will be incorporated into the exposure to gold or the corresponding foreign currency as provided in point 6.4.

6.5.3.5. The capital requirements to cover gamma and vega risks will be calculated separately for each option position—including hedging positions—under the following terms:
i) The gamma effect for each option:
gamma effect = ½ gamma x VU where
VU = variation in the price of the option's underlying. gamma: value of the option's gamma coefficient, expressed as the change in the option's delta coefficient against a change of 1 peso in the price of the underlying asset. ii) VU will be calculated as follows:
a) Options on interest rates whose underlying is a bond: the market value of the underlying will be multiplied by the risk weights established in point 6.2.2.4. When the underlying is an interest rate, a similar procedure will be used, based on the assumptions regarding changes in yields as set out in point 6.2.2.4. b) Options on shares, stock indices, gold, or foreign currencies: the market value of the underlying will be multiplied by 8%. iii) For calculation purposes, the following positions will be considered as the same underlying:
a) Interest rates: each time band for each type of currency, as established in point 6.2.2.4. b) Shares and stock indices: each national market. c) Foreign currency and gold: each currency pair that makes up the option—gold will be considered as a foreign currency. iv) Each option on the same underlying will have a gamma effect that can be positive or negative. The sum of the individual effects will result in a net gamma effect for each underlying, also positive or negative. Only net negative gamma effects will be included in the capital calculation. v) The total capital requirement for gamma risk will be the sum of the absolute values of the calculated net negative gamma effects as provided above. vi) For vega risk, the capital requirement is obtained by multiplying the sum of the vega coefficients of all options on the same underlying by a proportional change in volatility of ± 25%. vii) The total capital requirement for vega risk will be the sum of the absolute values of the individual capital requirements calculated for that risk.

6.6. Calculation.

6.6.1. Capital integration.
For the purposes of compliance with what is established in point 1.1., integration will be determined daily considering:

6.6.1.1. the computable equity of the last day of the previous month; and

6.6.1.2. the daily change in value that occurs in the portfolio of assets included in the calculations of the market risk requirement as a consequence of changes in their market prices, since the last quote registered at the close of the immediate previous month.
In the event of incorporations (purchases) of assets during the month, only the variation in the value of those assets since their incorporation will be taken. In the event of sales of these assets (closing of positions), the resulting loss or gain between the sale price and the last price at which the position was valued must be taken into account.

6.6.2. Daily capital deficiency.

6.6.2.1. Immediate framing.
In the event of a defect in daily integration regarding the capital requirement for market risk, except for that corresponding to the last day of the month, originating in the calculation of the requirements for interest rate, exchange rate, and share risks, the financial entity must replenish capital and/or reduce its financial asset positions until it achieves compliance with the established requirement, for which it will have a period of ten business days, counted from the first deficiency.

6.6.2.2. Persistent deficiency.
i) If the defect persists for a period greater than 10 business days, entities must present a regularization and rehabilitation plan within the 5 business days following, with the effects indicated in point 1.4.2.1. ii) When the deficiencies are determined by the Superintendency of Financial and Currency Entities and to the extent that the deficiency is subsistent according to the latest available information, the terms referred to in point 1.4.2.2. item i) for the presentation of the defense and for that Superintendency to rule on the matter will be 5 and 10 business days, respectively, while for the regularization of the non-compliance, in the manner provided in point 6.6.2.1., the entity will observe a period of 10 business days, counted from the date the integration defect becomes final. Once that term has expired without the non-compliance having been regularized, what is established in item i) will be observed.

6.7. Policies and procedures for the management of the trading portfolio.
Financial entities must, at a minimum, take the following into consideration:

6.7.1. State the trading activities that the entity includes in this portfolio.

6.7.2. To what extent exposures can be valued daily at market prices, referencing an active, liquid, and two-way market—i.e., one that exists for both supply and demand.

6.7.3. For exposures valued by model, if the entity can:

6.7.3.1. identify significant risks;

6.7.3.2. hedge significant risks and if the hedging instruments have an active and liquid two-way market;

6.7.3.3. obtain reliable estimates of the main assumptions and parameters used in the model.

6.7.4. To what extent the valuations of exposures can be consistently validated from external information.

6.7.5. To what extent legal restrictions or other operational requirements could prevent the entity from liquidating the exposure immediately.

6.7.6. The degree to which the entity can actively manage the risk of the exposure, within the framework of its trading operations.

6.7.7. If the entity can transfer the risk or exposures between the investment and trading portfolios, and the criteria for doing so.

6.8. Additional requirements to include positions in the trading portfolio.
Financial entities must have:

6.8.1. A clearly documented trading strategy regarding the instruments, positions, and portfolios that includes the expected holding horizon and is approved by Senior Management.

6.8.2. Clearly defined policies and procedures for the active management of positions, to ensure that:

6.8.2.1. they are managed by a trading team;

6.8.2.2. they are subject to limits that are monitored to check their adequacy;

6.8.2.3. they are assumed and managed by personnel with autonomy to decide, within the agreed limits and established strategy;

6.8.2.4. they are valued at market prices at least daily and, in the case of model valuation, the parameters are evaluated with daily periodicity;

6.8.2.5. they are reported to Senior Management as part of the risk management process; and

6.8.2.6. they are subject to active monitoring with respect to market information sources. In addition to evaluating the quality and availability of the data used in the valuation process, the entity must consider market liquidity, the ability to obtain hedging for positions, and the size of the positions traded relative to the total volume traded in the market.

6.8.3. Clearly defined policies and procedures to verify that positions are in accordance with the entity's trading strategy, with particular attention to traded volume and aged positions.

6.9. Treatment for less liquid positions.
Guidelines are established for the prudent valuation of positions accounted for at fair value, whether attributed to the trading or investment portfolio. These guidelines are especially important for positions for which there are no market prices or observable data to use for valuation, as well as for less liquid positions that require entities to exercise greater caution. The following provisions do not modify the valuation criteria and procedures of accounting standards, but the Superintendency of Financial and Currency Entities will evaluate their compliance for the purposes of calculating the capital requirement and risk management and to determine if it is appropriate to make adjustments in the valuation of less liquid positions to reflect more realistic market conditions when available information is insufficient or price transparency is inadequate.

6.9.1. A prudent valuation framework must include, at a minimum, the following:

6.9.1.1. Systems and controls.
Systems and controls must guarantee to the directors and/or managers of the entity and to the Superintendency of Financial and Currency Entities that estimated values are prudent and reliable. These systems, which must be integrated with the organization's other risk management systems, must include:
i) Documented policies and procedures for the valuation process. This includes a clear definition of the responsibilities of the areas participating in the valuation, sources to consult to obtain market information and opinion on its validity, guidelines for the use of data that, being unobservable, result from the entity's assumptions about the considerations of market participants for the determination of prices, frequency of independent valuations, timeliness of closing prices, procedures for valuation adjustments, and verification procedures, both “ad-hoc” and at month-end; and ii) Clear reporting lines of information for those responsible for the valuation process, independent of those who decide and generate operations (“front office”), reaching up to the entity's board of directors.

6.9.1.2. Valuation methodologies.
i) Market valuation.
Market valuation consists of valuing positions, at least daily, at prices that would allow the entity to liquidate its holdings in an orderly manner and that come from independent and easily available sources, such as prices obtained from markets, and screens and quotes provided by several independent and reputable “brokers”.

Valuation shall be performed at market value whenever possible. The most prudent value within the bid-ask spread interval shall be used, unless the entity is a significant market maker for a specific type of position and can liquidate it at an intermediate price.

For the estimation of fair value through valuation techniques, entities must maximize the use of observable data when these are relevant. However, observable data or transactions may not be relevant if they originate, for example, from forced liquidations, sales in critical situations, or inactive markets. In such cases, observable data may be considered but will not be determinative.

ii) Model-based valuation.

Model-based valuation may only be used when market valuation is not possible and provided that it can be demonstrated that this leads to a prudent valuation. Model-based valuation is that obtained from references, extrapolations, or other calculations based on a market datum. When valuing using models, even more conservative criteria must be applied. In order to determine the prudence of model-based valuations, the Superintendency of Financial and Currency Entities will take the following into consideration:

a) Senior Management must know which elements of trading or investment portfolios are valued using models and understand the significance of the uncertainty this creates in information regarding risk and business performance.

b) Market data must, as far as possible, come from the same sources as market prices. It must be periodically verified that market data are adequate for valuing each specific position.

c) Whenever they are available, and as far as possible, generally accepted valuation methodologies for each specific product must be used.

d) When the entity develops its own models, these must be based on appropriate assumptions, which must be evaluated and tested by qualified personnel who do not participate in the development process. The model must be developed or approved independently of those who decide and generate transactions ("front office"). Furthermore, the mathematical formulas, assumptions used, and software implementation must be validated independently.

e) Formal procedures for controlling modifications must be implemented, and a copy of the model must be kept in order to periodically verify valuations.

f) Risk management managers must be aware of the weaknesses of the models used and the best way to reflect them in valuation results.

g) The model must be subjected to periodic reviews to determine the reliability of its results (for example, by testing that assumptions remain valid, analyzing profit and loss in relation to risk factors, and comparing model results with the values at which holdings could actually be liquidated).

h) When necessary, adjustments must be made to the valuation, observing, where applicable, the provisions in points 6.9.1.3 and 6.9.2.

iii) Independent verification of prices.

This is a process in which the accuracy of prices or model data is periodically verified. While personnel responsible for trading may perform daily market valuation, the verification of market prices or model data must be carried out by a unit independent of the unit responsible for transactions ("dealing room"). Such verification must be carried out at least monthly, or more frequently, depending on the nature of the market or trading activity. However, it does not need to have the same frequency as daily market valuation, since independent valuation of positions aims to reveal errors or biases in the daily determination of prices.

Independent price verification requires a higher degree of precision, as in this case market prices and model data are used to determine profit and loss, whereas daily market valuation is primarily used to inform bank management during periods between the preparation of management reports. For the purposes of independent price verification, when the sources from which they originate have a higher degree of subjectivity, prudent measures should be adopted and valuation adjustments made.

6.9.1.3. Valuation adjustments.

As part of the valuation procedure, whether market-based or model-based, entities must establish procedures to consider the need to make valuation adjustments, particularly in cases where they use valuations provided by third parties.

At a minimum, entities must evaluate whether adjustments for unearned credit spreads, liquidation costs, operational risks, early termination, investment and financing costs, future administrative costs, and, where applicable, the risk associated with the use of models, should be made.

6.9.2. Adjustment of current values of less liquid positions for regulatory capital purposes.

6.9.2.1. Entities must establish procedures to determine the need to make adjustments to the current values of less liquid positions for regulatory capital purposes. This adjustment may even be greater than the adjustment required by accounting standards and must reflect the illiquidity of the position. The evaluation of the need to make adjustments must cover all positions valued at market, whether using prices or other observable data, third-party valuations, or model-based valuations.

6.9.2.2. The current value of these positions must be adjusted and the sufficiency of the adjustment must be monitored permanently. For the calculation of the adjustment, entities must compute the prices at which concentrated or matured positions could be liquidated and any other relevant factors for less liquid positions—such as the time required to cover the position or the risks within it, the average volatility of the spread between bid and ask prices, the existence of independent quotes (number and identity of market makers), the average and volatility of traded volumes (particularly during stress periods), market concentrations, the age of the positions, the extent to which models must be relied upon for valuation, and the impact of model risks.

6.9.2.3. For complex products, such as securitizations and nth-to-default credit derivatives, entities must explicitly evaluate the need to adjust the valuation to reflect two forms of model risk: the use of an incorrect valuation methodology and the use of non-observable and potentially incorrect calibration parameters.

6.9.2.4. Adjustments to the current value of less liquid positions under point 6.9.2.2. must be deducted from Common Equity Tier 1 capital, even if they exceed the adjustments under point 6.9.1.3. and those arising from accounting standards.

6.10. Responsibilities.

Financial entities that buy and/or sell options contracts, regardless of their amount, and those that on any day of a month record assets (sum of purchased and sold positions of included assets) that together exceed 25% of the calculable equity registered on the last day of the second preceding month, must define responsibilities in the management of the risk administration policy assumed by positions subject to the minimum capital requirement for market risk.

This will imply designating the persons responsible for the correct application of the established calculation methodology and the primary responsibility for adopting the necessary safeguards to maintain positions covered with the required capital, especially actions aimed at regularizing daily integration defects exceeding 3% of the requirement. They will also be responsible for supplying information in a timely manner to the Superintendency of Financial and Currency Entities in accordance with the information regime established in this matter.

Modifications to the list of designated responsible persons, the General Manager, and the member of the Board of Directors, Administrative Council, or equivalent authority to whom the function is reported, which have been duly supplied, must be communicated to said Superintendency within ten calendar days following their occurrence.

6.11. Internal Audit.

Internal audit must carry out a thorough review of the scheme adopted by the entity for measuring the market risk requirement, especially regarding the provisions in point 6.9., leaving a record of the work programs and reports prepared on this matter. Likewise, it must periodically monitor the correct application and the changes introduced in the measurement of said requirement.