COBAC Regulation R-2003/03 on the Accounting and Prudential Treatment of Securities Operations by Credit Institutions

BANKING COMMISSION OF CENTRAL AFRICA

COBAC REGULATION R-2003/03 ON THE ACCOUNTING AND PRUDENTIAL TREATMENT OF SECURITIES OPERATIONS CARRIED OUT BY CREDIT INSTITUTIONS

The Banking Commission of Central Africa,

Having regard to the Convention of October 16, 1990 establishing a Banking Commission of Central Africa;

Having regard to Articles 1 and 9 of the annex to the Convention of October 16, 1990;

Having regard to the Convention of January 17, 1992 on the Harmonization of Banking Regulations in the Central African States;

Having regard to Articles 32 and 36 of the annex to the Convention of January 17, 1992;

Having regard to Articles 31, 32 and 34 of the Convention governing the Central African Monetary Union;

Having regard to COBAC Regulation R-93/02 on the net own funds of credit institutions, as amended by COBAC Regulation 2001/01;

Having regard to COBAC Regulation R-93/05 on the coverage of fixed assets, as amended by COBAC Regulation 2001/06;

Having regard to COBAC Regulation R-93/06 on the liquidity of credit institutions;

Having regard to COBAC Regulation R-93/07 on the transformation carried out by credit institutions;

Having regard to COBAC Regulation R-93/13 on the commitments of credit institutions in favor of their shareholders or associates, directors, managers and staff, as amended by COBAC Regulation R-2001/05;

Having regard to COBAC Regulation R-98/01 on the accounting plan for credit institutions;

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Having regard to COBAC Regulation R-2001/02 on the coverage of risks of credit institutions;

Having regard to COBAC Regulation R-2001/03 on the division of risks of credit institutions;

Having regard to COBAC Regulation R-2001/07 on internal control in credit institutions;

Having regard to COBAC Regulation R-2003/01 on the organization of accounting for credit institutions;

DECIDES:

CHAPTER I: GENERAL PROVISIONS

Article 1.- For the application of this regulation, the following are considered as securities:

• transferable securities issued in one of the member states of the Economic and Monetary Community of Central Africa (CEMAC) or abroad;
• Treasury bills and other negotiable securities issued in one of the CEMAC member states, as well as instruments of the same nature issued abroad;
• and, generally, all claims represented by a negotiable security on a market.

These securities may be issued by public or private legal entities and may take the form of paper certificates, registration in the issuer's register, or that of an authorized third party.

Article 2.- For the application of this regulation, the following constitute fixed-income securities:

• fixed interest rate securities;
• variable interest rate securities when the variation stipulated at the time of issue depends on a parameter determined by reference to rates applied, on certain dates or during certain periods, on a market.

Other securities are qualified as variable-income securities.

Article 3.- The provisions of this regulation do not apply to securities representing mandatory advances and loans granted to the State according to legal provisions such as equipment bonds, exceptional solidarity loans, securitized claims on the State acquired by virtue of a legal or regulatory provision. They are recorded in the accounts at their issue value in the accounts for mandatory loans and subscription securities.

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Values regularly recorded in the accounts for mandatory loans and subscription securities before the entry into force of this regulation must be maintained therein regardless of their characteristics.

Article 4.- Any credit institution, within the meaning of the Convention of October 16, 1990, is required to account for the acquisitions, disposals, loans or borrowings of securities, under the conditions provided for by the accounting plan for credit institutions and by this regulation, regardless of the form or denomination of these operations.

Article 5.- Credit institutions must distinguish between securities held for their own account and those managed for the account of clients and correspondents.

Securities held for own account are recorded in balance sheet accounts. They include trading securities, available-for-sale securities, held-to-maturity securities, participating interests, and portfolio activity securities.

Securities managed for the account of clients and correspondents are recorded in off-balance sheet accounts and, where applicable, in physical inventory accounting according to the rules set by the bodies responsible for the settlement and custody of managed or held securities.

CHAPTER II: PROVISIONS APPLICABLE TO TRADING SECURITIES

Article 6.- Trading securities are fixed or variable income securities acquired or sold from the outset with the intention of reselling or repurchasing them in the short term and which meet the following characteristics: a) they are negotiable on a regulated market whose liquidity can be considered assured, notably by the presence of regulated market-making institutions that provide permanent bid and ask price quotes whose spreads correspond to market practices or, failing that, that carry out significant volume operations on equivalent securities in terms of sensitivity and whose market necessarily influences that of the securities concerned; b) their market prices are constantly accessible to third parties and retained by regulated institutions for justification purposes during accounting closings.

Article 7.- Regulated institutions must periodically review, at least at each accounting closing, the classification of trading securities. Either following this review, or at the latest at the end of a six-month holding period, the securities held are definitively removed from trading securities to be accounted for as available-for-sale or held-to-maturity securities.

Securities held by an institution due to its market-making activity mentioned in Article 6, paragraph a) above, are exempt from the obligation set out in the preceding paragraph. This exemption is subject to the condition that the stock of securities

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is subject to effective rotation and a significant volume of operations, taking into account market opportunities.

Article 8.- Trading securities are recorded in treasury operations accounts on the date of their acquisition and at their acquisition price including fees, including, where applicable, accrued interest.

The liability representing short-sold securities is recorded on the liabilities side of the selling institution for the sale price of the securities including fees.

At each accounting closing, securities are valued at the most recent market price of the day. The overall balance of differences resulting from price variations is posted to the income statement.

When securities are reclassified as available-for-sale or held-to-maturity securities in application of the first paragraph of Article 7 of this regulation, they are removed from trading securities and entered into available-for-sale or held-to-maturity securities at the market price on the day of transfer. The difference between the book value resulting from the last revaluation preceding the transfer and the market price on the day of transfer is posted to the income statement.

CHAPTER III: PROVISIONS APPLICABLE TO AVAILABLE-FOR-SALE SECURITIES

Article 9.- Available-for-sale securities are fixed or variable income securities acquired with the intention of holding them for a long period, in any case for a period exceeding six months, and which meet the criteria set out in paragraphs a) and b) of Article 6 above.

Excluded from available-for-sale securities are fixed-income securities that the institution intends to hold until maturity and which meet the provisions described in Article 11 below.

Available-for-sale securities also include:

• securities previously recorded as trading securities whose transfer occurred in application of Article 7 above;
• securities acquired with the intention of reselling them within a period of less than six months, but whose market does not meet the conditions required in Article 6, paragraph a) above.

Article 10.- Available-for-sale securities are recorded in treasury operations accounts on the date of their acquisition and at their acquisition price excluding fees. If they originate from trading securities, they are recorded at market price on the day of transfer. Institutions distinguish in their accounting, where applicable, in attached accounts, the accrued interest recognized at the time of acquisition of the securities.

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When the acquisition price of fixed-income securities differs from their redemption price, the difference must be amortized or recognized as income, as the case may be, over the remaining life of the securities.

At each accounting closing, latent losses resulting from the difference between the book value, possibly adjusted for amortizations and reversals of differences authorized in the preceding paragraph, and the market price of the securities are subject to provisioning, unless there is a strong probability that securities of the same nature will not be offset by gains recognized on other categories of securities. Latent gains are not recognized.

To be considered of the same nature, fixed-income securities must be denominated in the same currency and present homogeneous characteristics regarding their sensitivity to interest rate variations and the quality of the issuer, and variable-income securities must confer the same rights.

At each accounting closing, institutions use attached accounts to record interest accrued since the acquisition of fixed-income securities.

CHAPTER IV: PROVISIONS APPLICABLE TO HELD-TO-MATURITY SECURITIES

Article 11.- Held-to-maturity securities are fixed-income securities that have been acquired with the intention of holding them for a long period, in principle until maturity, and whose redemption price is fixed. They include, in particular, securities that cannot be realized immediately if necessary.

Institutions that record securities as held-to-maturity securities must have the means to effectively hold the securities for a long period, notably by obtaining globally matched resources allocated to the financing of these securities.

Article 12.- Held-to-maturity securities are recorded in fixed asset accounts on the date of their acquisition and at their acquisition price, excluding fees. If they originate from trading securities, they are recorded at the market price on the day of transfer. If they originate from available-for-sale securities, they are recorded at their acquisition price and previously constituted provisions are reversed over the remaining life of the securities concerned. Institutions distinguish in their accounting, where applicable, in attached accounts, the accrued interest recognized at the time of acquisition of the securities.

When the acquisition price of fixed-income securities differs from their redemption price, the difference must be amortized or recognized as income, as the case may be, over the remaining life of the securities.

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During semi-annual or annual closings, latent losses resulting from the difference between the book value, adjusted for amortizations and reversals of differences described above, and the market price of fixed-income securities are not subject to provisioning, unless there is a strong probability that the institution will not hold these securities until their maturity due to new circumstances and without prejudice to provisions to be constituted if there are risks of issuer default. Latent gains are not recognized.

At each accounting closing, institutions use attached accounts to record in the income statement the accrued interest adjusted for the staggering of differences described in the second paragraph of this article.

CHAPTER V: PROVISIONS APPLICABLE TO PARTICIPATING INTERESTS AND PORTFOLIO ACTIVITY SECURITIES

Article 13.- Participating interests are variable-income securities that grant rights in the capital of a company when these rights, by creating a lasting link with the company, are intended to contribute to the activity of the regulated institution. To this end, they must either represent at least 10% of the issuer's share capital, or, if not, meet one of the following conditions:

• existence of common directors or managers with the issuing company;
• holding by the issuing company of a portion of the shares issued by the regulated institution;
• belonging to the same group controlled by natural or legal persons exercising control over the whole and asserting a unity of decision.

Article 14.- Portfolio activity securities are variable-income securities acquired by an institution with a view to investing, depending on the category to which the institution belongs, all or part of its assets in a portfolio of securities to derive a satisfactory long-term return, without intervention in the management of the companies whose securities are held.

Article 15.- Participating interests and portfolio activity securities are recorded on the date of their acquisition and at their acquisition price, excluding fees, in fixed asset accounts.

At each semi-annual or annual accounting closing, participating interests and portfolio activity securities are valued at the lower of their acquisition cost and their fair value. A depreciation provision must be constituted if the fair value is lower than the acquisition cost. No accounting entry is recorded if the fair value is higher than the acquisition cost. No offsetting can be made between securities with a fair value lower than their acquisition price and those whose fair value is higher than said price.

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CHAPTER VI: PROVISIONS APPLICABLE TO DISPOSALS AND SUBSCRIPTIONS FOR SECURITIES ISSUES

Article 16.- Disposals of own-account securities are recorded in accordance with the provisions of COBAC Regulation R-2003/03 on the accounting of asset disposal operations, depending on whether they are outright disposals, firm purchases or sales, repos, or payments in kind.

Article 17.- Own-account securities that are subject to a firm sale or given as collateral are valued by the selling institution in accordance with the rules applicable to each category of securities concerned. When the disposal relates to trading securities, the counterpart of the expense or income thus recognized is recorded among the regularization accounts until the securities are repurchased or bought back.

Article 18.- Securities issued with a firm underwriting guarantee granted by a regulated institution are recorded among off-balance sheet commitments, up to the share subscribed by the institution and at the issue price.

Reclassification operations carried out by way of purchase or sale of subscription commitments before the settlement date of an issue, known as "grey market" operations, are recorded at their transaction value among off-balance sheet commitments.

As soon as they are acquired, results on firm underwriting guarantees and on reclassification of issues are accounted for, without prejudice to the possible constitution of provisions for losses and charges on the portion of securities not re-placed during accounting closings prior to the settlement date.

However, trading securities acquired as part of firm underwriting and reclassification are valued at their market price, if they are traded on a market whose liquidity can be considered assured under the conditions set out in Article 6 above.

Securities subscribed during an issue by a regulated institution and not re-placed at the closing of the issue are, depending on the institution's intention, transferred to trading securities, available-for-sale securities, or held-to-maturity securities:

• either on the date of introduction to the stock exchange,
• or within thirty days at most of the closing of the issue if they are unlisted securities,
• or, if an issuing syndicate has been formed, upon its dissolution and at most three months after the closing of the issue.

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Article 19.- Securities acquired through payment in kind must be recorded in one of the categories of securities mentioned by this regulation, depending on the intention of the transferee and the characteristics of the acquired securities.

CHAPTER VII: PROVISIONS APPLICABLE TO ALL OWN-ACCOUNT SECURITIES

Article 20.- Regulated institutions identify in their accounting information system, as soon as they are carried out, securities operations according to whether they are trading securities, available-for-sale securities, held-to-maturity securities, participating interests, or portfolio activity securities, and according to the characteristics of the securities concerned.

Article 21.- The market price referred to in Articles 8, 10 and 12 above is determined as follows:

• listed securities are valued at the most recent price,
• unlisted securities are estimated at their probable negotiation value.

Furthermore, for the preparation of regulatory and publishable statements, securities denominated in foreign currencies are converted into CFA francs at the spot rate of the currency concerned in force on the market on the closing date or observed on the nearest preceding date.

Article 22.- The accounting entries described in this regulation are made on the balance sheet of regulated institutions upon the transfer of ownership of the securities. Any guarantees collected to cover these risks are recorded off-balance sheet.

For fixed-income securities, the transfer of ownership cannot be deemed to have occurred before the date chosen to determine the amount of accrued interest due to the seller.

When the date of transfer of ownership is subsequent to the negotiation date, the securities are, in the interim, recorded off-balance sheet and are subject to valuation according to the category of securities concerned.

Article 23.- Regulated institutions provide in an annex to their published annual accounts a breakdown of the securities they hold according to whether they are listed or unlisted and according to whether they are recorded as trading securities, available-for-sale securities, held-to-maturity securities, participating interests, or portfolio activity securities.

They indicate the amount of securities that have been reclassified from one of these five categories to another and the total amount of held-to-maturity securities that have been sold before their maturity.

They also indicate the differences between the acquisition price and the redemption price relating to available-for-sale securities and held-to-maturity securities. The information described above is published insofar as it

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is significant and necessary for a proper understanding of the financial statements.

CHAPTER VIII – PRUDENTIAL TREATMENT OF SECURITIES

Article 24.- With the exception of securities that are deducted from the institution's own funds in application of Article 6 of COBAC Regulation R-93/02 on net own funds as amended by COBAC Regulation 2001/01, securities held by the credit institution are, regardless of their classification, taken into account for the determination of:

• credit risks for the calculation of the risk coverage ratio, according to the weighting rates set by COBAC Regulation R-2001/02 on the coverage of risks of credit institutions;
• risks retained for verifying compliance with risk division standards, according to the weighting rates set by COBAC Regulation R-2001/03 on the division of risks of credit institutions;
• commitments in favor of shareholders or associates, directors, managers and staff, according to the terms set by COBAC Regulation R-93/13 on the commitments of credit institutions in favor of their shareholders or associates, directors, managers and staff as amended by COBAC Regulation R-2001/05;
• the denominator of the long-term transformation coefficient, according to the terms set by COBAC Regulation R-93/07 on the transformation carried out by credit institutions.

Article 25.- With the exception of securities that are deducted from the institution's own funds in application of Article 6 of COBAC Regulation R-93/02 on net own funds as amended by COBAC Regulation 2001/01, participating interests and portfolio activity securities held by the credit institution, as well as the portion of held-to-maturity securities not covered by matched resources allocated to their financing, are included in the denominator of the fixed asset coverage ratio, according to the terms set by COBAC Regulation R-93/05 on the coverage of fixed assets as amended by COBAC Regulation R-2001/06.

Article 26.- Maturities of fixed-income securities of less than one month are assimilated to maturities of less than one month for non-rediscountable facilities granted to clients mentioned in Article 2, paragraph 5 of COBAC Regulation R-93/06 on the liquidity of credit institutions.

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CHAPTER IX – FINAL PROVISIONS

Article 27.- Credit institutions that infringe the principles set by this regulation are liable to the sanctions provided for by the banking regulations in force.

Article 28.- All previous contrary provisions are repealed as of the effective date of this regulation.

Article 29.- This regulation shall be notified to the Ministers in charge of Money and Credit as well as to all credit institutions approved in the Central African States and their Professional Associations.

Article 30.- The Secretary General of the Banking Commission of Central Africa is responsible for the execution of this regulation, which will enter into force on January 1, 2004.

Done in Yaoundé, November 14, 2003

For the Banking Commission,

The Chairman,

Jean-Félix MAMALEPOT