Implementation of Risk Management and Standard Approach Measurement for Interest Rate Risk in the Banking Book for Commercial Banks

To:
The Board of Directors of Commercial Banks,
At your location.

COPY
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER: 12/SEOJK.03/2018 CONCERNING THE IMPLEMENTATION OF RISK MANAGEMENT AND STANDARD APPROACH MEASUREMENT FOR INTEREST RATE RISK IN THE BANKING BOOK (INTEREST RATE RISK IN THE BANKING BOOK) FOR COMMERCIAL BANKS

In connection with the establishment of Financial Services Authority Regulation Number 18/POJK.03/2016 concerning the Implementation of Risk Management for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 53, Supplement to the State Gazette of the Republic of Indonesia Number 5861), hereinafter referred to as POJK Risk Management; Financial Services Authority Regulation Number 4/POJK.03/2016 concerning the Assessment of the Health Level of Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 16, Supplement to the State Gazette of the Republic of Indonesia Number 5840), hereinafter referred to as POJK TKS; Financial Services Authority Regulation Number 11/POJK.03/2016 concerning Minimum Capital Requirements for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 25, Supplement to the State Gazette of the Republic of Indonesia Number 5848) as amended by Financial Services Authority Regulation Number 34/POJK.03/2016 concerning Amendments to Financial Services Authority Regulation Number 11/POJK.03/2016 concerning Minimum Capital Requirements for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 188, Supplement to the State Gazette of the Republic of Indonesia Number 5929), hereinafter referred to as POJK KPMM; and Financial Services Authority Regulation Number 38/POJK.03/2017 concerning the Implementation of Consolidated Risk Management for Banks Controlling Subsidiary Companies (State Gazette of the Republic of Indonesia Year 2017 Number 144, Supplement to the State Gazette of the Republic of Indonesia Number 6087), hereinafter referred to as POJK Consolidated Risk Management Implementation, among others, it is regulated that Banks are required to implement Risk Management for Market Risk and assess the Risk Profile for Market Risk, which includes Interest Rate Risk in the Banking Book (Interest Rate Risk in the Banking Book). Banks need to strengthen the framework for implementing Risk Management and methods for calculating Interest Rate Risk in the Banking Book (Interest Rate Risk in the Banking Book) by using two perspectives, namely the economic value perspective and the earnings perspective. This aims to enable Banks to identify Risks more accurately and take appropriate follow-up corrective actions.

Therefore, it is necessary to regulate the implementation regarding the Implementation of Risk Management and Standard Approach Measurement for Interest Rate Risk in the Banking Book (Interest Rate Risk in The Banking Book) for Commercial Banks in this Circular Letter of the Financial Services Authority as follows:

I. GENERAL PROVISIONS

Market Risk is the Risk on balance sheet positions and administrative accounts, including derivative transactions, resulting from overall changes in market conditions, including option price change Risk.
Market Risk includes, among others, Interest Rate Risk, Exchange Rate Risk, Equity Risk, and Commodity Risk. Interest Rate Risk, Exchange Rate Risk, and Commodity Risk can arise from both Trading Book positions and Banking Book positions, while Equity Risk arises from Trading Book positions.
The implementation of Risk Management for Equity Risk and Commodity Risk is applied to Banks that perform consolidation with Subsidiary Companies.
Interest Rate Risk in the Banking Book or Interest Rate Risk in The Banking Book, hereinafter abbreviated as IRRBB, is the Risk due to market interest rate movements contrary to the Banking Book position, which has the potential to impact the Bank's capital adequacy and earnings (earnings) both currently and in the future.
The scope of Banking Book positions and Trading Book positions refers to regulations issued by the Financial Services Authority governing minimum capital requirements for commercial banks.
The Guidelines for Implementing Risk Management and Standard Approach Measurement for IRRBB for Commercial Banks serve as the standard reference for the implementation of Risk Management and measurement of IRRBB applicable to:
a. Banks included in the Commercial Bank Business Group (BUKU) 4; b. Banks included in the BUKU 3 group; and
c. Foreign banks.
Banks included in the BUKU 4 and BUKU 3 groups as referred to in item 6.a and item 6.b refer to regulations issued by the Financial Services Authority governing business activities and office networks based on the Bank's core capital.
Foreign banks as referred to in item 6.c are:
a. Branch offices of banks located outside the country; b. Commercial banks in the form of Indonesian legal entities where more than 50% (fifty percent) of their shares are owned by foreign citizens and/or foreign legal entities, either individually or jointly; and/or
c. Commercial banks owned individually or jointly by foreign citizens and/or foreign legal entities at less than or equal to 50% (fifty percent) but under the control of foreign citizens and/or foreign legal entities.
Banks that already have policies, standards, procedures, and/or Guidelines for Implementing Risk Management and Standard Approach Measurement for IRRBB for Commercial Banks but do not yet meet the standard implementation of Risk Management and risk measurement for IRRBB shall adjust and perfect them by referring to Appendix I and Appendix II, which are an integral part of this Financial Services Authority Circular Letter.
The perfection of the Guidelines for Implementing Risk Management and Standard Approach Measurement for IRRBB for Commercial Banks as referred to in number 6 shall be completed no later than 1 (one) month before the reporting deadline for the first IRRBB report as referred to in the provisions of this Financial Services Authority Circular Letter governing the Report on Risk Management Implementation for IRRBB and the IRRBB Calculation Report.
Banks may expand and deepen the Guidelines for Implementing Risk Management and Standard Approach Measurement for IRRBB for Commercial Banks according to their needs, size, and complexity.

II. GUIDELINES FOR IMPLEMENTING RISK MANAGEMENT FOR IRRBB

The Guidelines for Implementing Risk Management for IRRBB shall contain at least:
a. Implementation of Risk Management for IRRBB, besides referring to general risk management implementation guidelines as regulated in Financial Services Authority regulations governing risk management implementation for commercial banks, Banks must add aspects of risk management for IRRBB. b. Risk profile assessment, which covers assessment of inherent Risk and the quality of Risk Management implementation in the Bank's operational activities. In assessing the Risk profile, Banks also pay attention to the coverage of the Bank Health Level assessment mechanism as regulated in Financial Services Authority regulations regarding bank health levels.
The risk management implementation guidelines for IRRBB as referred to in item 1.a refer to Appendix I, which is an integral part of this Financial Services Authority Circular Letter.
The assessment of inherent Risk as part of the risk profile assessment as referred to in item 1.b uses several parameters or indicators of inherent Risk by referring to Appendix III, which is an integral part of this Financial Services Authority Circular Letter.

III. STANDARD APPROACH MEASUREMENT FOR INTEREST RATE RISK IN THE BANKING BOOK (INTEREST RATE RISK IN THE BANKING BOOK)

In performing IRRBB Risk measurement, Banks use 2 (two) methods as follows:
a. measurement based on changes in the economic value of equity (economic value of equity), hereinafter abbreviated as EVE, is a method that measures the impact of interest rate changes on the economic value of the Bank's equity; and b. measurement based on changes in net interest income, hereinafter abbreviated as NII, is a method that measures the impact of interest rate changes on the Bank's earnings (earnings).
Measurement based on EVE as referred to in item 1.a refers to Appendix II, which is an integral part of this Financial Services Authority Circular Letter.
Measurement based on NII as referred to in item 1.b refers to the Bank's internal methods regulated in the Bank's internal policy.
In performing IRRBB measurement, several main considerations and assumptions used are as follows:
a. shock scenarios and interest rate change scenarios; b. the presence of behavioral options (behaviour options) and the possibility of option execution (both explicit options and embedded options) against the Bank's financial instruments;
c. the existence of commercial margins in cash flows and discounting of cash flows;
d. the behavior of non-maturity deposits (non maturity deposit), hereinafter abbreviated as NMD; and e. treatment of equity.
The procedure for IRRBB measurement, including further explanation regarding considerations and assumptions used, refers to Appendix II, which is an integral part of this Financial Services Authority Circular Letter.

IV. CAPITAL ADEQUACY ASSESSMENT FOR IRRBB

Banks include IRRBB calculation results in the process of internal capital adequacy assessment or Internal Capital Adequacy Assessment Process (ICAAP) as referred to in Financial Services Authority regulations governing minimum capital requirements for commercial banks.
Banks perform an outlier test by comparing between:
a. the maximum ΔEVE value of the final position of the reporting quarter based on 6 (six) interest rate shock scenarios; and b. the value of 15% (fifteen percent) of the core capital (Tier 1) of the final position of the reporting quarter (hard limit).
In the event that the ΔEVE value exceeds the hard limit, the Bank may take the following actions:
a. increase capital to cover potential losses that may arise from the current IRRBB level as regulated in Article 2 paragraph (3) and paragraph (4) of POJK KPMM; b. take risk management improvement steps as follows:
1. improve the quality of the Risk Management process for IRRBB;
2. reduce IRRBB exposure, for example by hedging; or
3. set limits on internal Risk parameters used by the Bank,
  as regulated in Article 2 paragraph (1) of POJK Risk Management.
In addition to the hard limit as referred to in number 3, Banks may establish a soft limit, which serves as an internal trigger to anticipate reaching the maximum limit, in order to prevent exceeding the boundaries established by applicable regulations, especially when all internal limits established have been utilized.

V. REPORTING AND PUBLICATION

In the context of implementing Risk Management for IRRBB, Banks submit IRRBB reports and publications both individually and consolidated as follows:

Report on Risk Management Implementation for IRRBB
a. Banks submit the report on Risk Management implementation for IRRBB to the Financial Services Authority for the end-of-June and end-of-December positions as part of the self-assessment results of the Bank Health Level. b. The report on Risk Management implementation for IRRBB as referred to in letter a is submitted to the Financial Services Authority online via the Financial Services Authority reporting system.
c. In the event that online reporting to the Financial Services Authority cannot yet be performed, the report is submitted offline.
d. The format and content of the report on Risk Management implementation for IRRBB as referred to in letter a via the Financial Services Authority online reporting system or offline refer to Appendix IV, which is an integral part of this Financial Services Authority Circular Letter. e. The procedure and timeframe for submitting the report on Risk Management implementation for IRRBB as referred to in letter a via the Financial Services Authority online reporting system or offline are carried out in accordance with the procedure and timeframe for submitting self-assessment results of the Bank Health Level as regulated in Financial Services Authority regulations governing the assessment of commercial bank health levels. f. The report on Risk Management implementation for IRRBB as referred to in letter a is first conducted for the reporting position at the end of June 2019.
IRRBB Calculation Report
a. Banks submit the IRRBB calculation report:
1. quarterly for positions at the end of March, end of June, end of September, and end of December as part of the Risk Profile report for Market Risk; and
2. semi-annually for positions at the end of June and end of December as part of the self-assessment results of the Bank Health Level.
  b. The IRRBB calculation report as referred to in letter a is submitted to the Financial Services Authority online via the Financial Services Authority reporting system.
  c. In the event that online reporting to the Financial Services Authority cannot yet be performed, the report is submitted offline.
  d. The format and content of the IRRBB calculation report as referred to in letter a via the Financial Services Authority online reporting system or offline refer to Appendix IV, which is an integral part of this Financial Services Authority Circular Letter. e. The procedure and timeframe for submitting the IRRBB calculation report as part of the Risk Profile report for Market Risk as referred to in item a.1) via the Financial Services Authority online reporting system or offline are carried out in accordance with the procedure and timeframe for submitting Risk Profile reports as regulated in Financial Services Authority regulations governing risk management implementation for commercial banks. f. The procedure and timeframe for submitting the IRRBB calculation report as part of the self-assessment results of the Bank Health Level as referred to in item a.2) are carried out in accordance with the procedure and timeframe for submitting self-assessment results of the Bank Health Level as regulated in Financial Services Authority regulations governing the assessment of commercial bank health levels. g. The IRRBB calculation report as referred to in letter a is first conducted for the reporting position at the end of June 2019.
Publication of the Report on Risk Management Implementation for IRRBB and the IRRBB Calculation Report
a. Banks publish and disclose the Report on Risk Management Implementation for IRRBB and the IRRBB Calculation Report submitted through:
1. Quarterly Publication Report at the end of June as part of quantitative information on the Risk exposures faced by the Bank for the end-of-June position; and
2. Annual Publication Report as part of the disclosure of Risk Management practices.
  b. The procedure and timeframe for submitting publication reports as referred to in letter a are carried out in accordance with the procedure and timeframe for publication as regulated in Financial Services Authority regulations governing transparency and publication of Bank reports.
  c. The format and content of the IRRBB publication report refer to Appendix IV, which is an integral part of this Financial Services Authority Circular Letter.
  d. The submission of publication reports on Risk Management implementation for IRRBB and IRRBB calculation reports as referred to in letter a is first conducted for the position at the end of June 2019.

This copy is consistent with the original
Director of Law 1
Legal Department signed
Yuliana

VI. CLOSING

The provisions in this Financial Services Authority Circular Letter shall take effect on the date of determination.

Determined in Jakarta on August 21, 2018

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signature
HERU KRISTIYANA

APPENDIX I
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER: 12 /SEOJK.03/2018 CONCERNING THE IMPLEMENTATION OF RISK MANAGEMENT AND STANDARD APPROACH MEASUREMENT FOR INTEREST RATE RISK IN THE BANKING BOOK (INTEREST RATE RISK IN THE BANKING BOOK) FOR COMMERCIAL BANKS

GUIDELINES FOR IMPLEMENTING RISK MANAGEMENT FOR INTEREST RATE RISK IN THE BANKING BOOK (INTEREST RATE RISK IN THE BANKING BOOK) FOR COMMERCIAL BANKS

In implementing Risk Management for IRRBB, besides referring to general risk management implementation guidelines as regulated in Financial Services Authority regulations governing risk management implementation for commercial banks, Banks also refer to the guidelines for implementing Risk Management for IRRBB.

A. GENERAL

Objective
The objective of implementing Risk Management for IRRBB is to identify, measure, monitor, and control interest rate movements that can cause changes in the present value and timing of future cash flows affecting the economic value of the Bank's assets, liabilities, and administrative account transactions, and causing changes in net interest income.
Implementation of Risk Management
The implementation of Risk Management for IRRBB is applied both to Banks individually and to Banks consolidated with Subsidiary Companies. The implementation of Risk Management for IRRBB is adjusted to the Bank's objectives, business policies, size, and business complexity.

B. IMPLEMENTATION OF RISK MANAGEMENT FOR IRRBB

The implementation of Risk Management for IRRBB shall cover at least:

Active Supervision by the Board of Directors and Board of Commissioners
In implementing Risk Management through active supervision by the Board of Directors and Board of Commissioners for IRRBB, besides carrying out active supervision as regulated in Financial Services Authority regulations regarding risk management implementation for commercial banks, Banks must add several items in each aspect of active supervision by the Board of Directors and Board of Commissioners, as follows:

a. Authority and Responsibilities of the Board of Directors and Board of Commissioners, including:

The Board of Directors and Board of Commissioners must thoroughly understand the type, characteristics, and level of IRRBB exposure faced by the Bank;
The Board of Commissioners approves the overall business strategy and policies related to IRRBB;
The Board of Directors ensures there is clear direction from the Board of Commissioners regarding the permissible level of IRRBB in accordance with the Bank's business strategy;
The Board of Directors is responsible for ensuring that the Bank has taken steps to identify, measure, monitor, and control IRRBB consistently with the approved strategy and policies;
The Board of Directors and the delegated Risk Management Committee are responsible at least for:
a) setting appropriate limits for IRRBB and compiling procedures and approval mechanisms for certain limit exceptions and ensuring compliance with those limits; b) compiling adequate systems and standards for measuring IRRBB; c) compiling standards for measuring, assessing positions, and measuring IRRBB performance, including compiling procedures for updating interest rate shock scenarios and stress scenarios and main underlying assumptions used in performing IRRBB analysis; d) preparing comprehensive reporting and review processes for IRRBB measurement; and e) preparing effective internal control systems and management information systems;
The Board of Directors is responsible for establishing approval mechanisms, implementation, and evaluation of IRRBB management policies, procedures, and limits;
The Board of Directors obtains reports or information regarding the level and direction of IRRBB exposure from the Risk Management Work Unit (SKMR) periodically at least 2 (two) times a year;
The Board of Directors must understand the implications of the IRRBB strategy, including potential linkages to Market Risk, Liquidity Risk, Credit Risk, and Operational Risk;
The Board of Directors must have adequate technical capability to evaluate the accuracy of reports submitted to the Board of Directors; and
The Board of Commissioners periodically reviews the information submitted. This information must be compiled in sufficient detail to allow the Board of Commissioners to assess the performance of the Board of Directors in monitoring and controlling IRRBB based on policies approved by the Board of Commissioners. Evaluation can be performed more frequently in the event of significant IRRBB exposure or complex IRRBB instrument positions.

b. Human Resources (HR)
In carrying out responsibilities for implementing Risk Management for IRRBB related to HR, aspects that the Board of Directors must pay attention to include at least:

ensuring that Risk Management unit executors and IRRBB analysts are competent employees with technical knowledge and experience. Risk Management activities and IRRBB analysis are carried out in line with the bank's behavior and scope of activities;
ensuring that senior management has the ability and expertise to understand IRRBB; and
ensuring there is sufficient HR to carry out the implementation of Risk Management for IRRBB.

c. IRRBB Risk Management Organization

The Bank must have a function tasked with identifying, measuring, monitoring, and controlling IRRBB. This function must have clear responsibilities and independence from operational work units (risk-taking functions). This function reports IRRBB exposure directly to the Board of Directors or its delegate.
In order to effectively implement Risk Management for IRRBB, the Bank's Board of Directors may delegate authority considering the following matters:
a) The Board of Directors may delegate authority in compiling IRRBB policies and practices to the Asset and Liability Management Committee (ALCO), experts, or executive officials. b) In the event that delegation of authority is given to ALCO, the ALCO team must hold regular meetings, including meetings with representatives from each main work unit related to IRRBB. c) The Board of Directors must clearly identify personnel or committees designated as delegates to perform IRRBB management. In order to avoid conflicts of interest, the Board of Directors ensures there is a clear separation of responsibilities in each main element of the Risk Management process. d) Personnel or committees designated as delegates must have a clear separation of responsibilities from the unit responsible for regulating Banking Book positions. e) The organizational structure must be designed to ensure that IRRBB management delegates can fulfill their responsibilities, support

process of effective decision-making, and good governance. f) The Board of Directors supports the creation of discussions regarding IRRBB process management. g) The Bank's Risk Management and Strategic Planning Division must conduct periodic discussions to assist in evaluating IRRBB arising from the Bank's future activities.

Risk Management Policies and Procedures and Risk Limit Setting
In implementing Risk Management for IRRBB, in addition to formulating Risk Management policies and procedures and setting Risk limits as regulated by the Financial Services Authority (OJK) regarding risk management implementation for commercial banks, the Bank must add several items to the IRRBB Risk Management Policy as follows:

a. Risk Management Strategy

The Bank formulates a Risk Management Strategy for IRRBB that aligns with the Bank's overall business strategy, taking into account the level of Risk taken (risk appetite) and Risk tolerance (risk tolerance) that have been established.
The Risk Management Strategy for IRRBB must be reviewed periodically and communicated to relevant employees to ensure that IRRBB exposure is managed in a controlled manner in accordance with the Bank's internal policies and procedures.

b. Risk Appetite and Risk Tolerance

The Bank must establish a risk appetite that is approved by the Board of Directors and implemented through a comprehensive risk appetite framework, including policies and procedures to limit and control IRRBB.
The risk appetite framework must at least describe:
a) delegation of authority; b) clear authority and responsibilities at each level of position related to the implementation of Risk Management for IRRBB; c) clear criteria for instruments that can be designated as Banking Book; d) clear hedging strategy mechanisms; and e) clear definition of risk-taking opportunities.
In establishing risk tolerance, the Bank needs to consider significant exposure to gap risk, basis risk, or specific positions with embedded options and explicit options.

c. Policies and Procedures

The Bank must have comprehensive Banking Book position policies and procedures to manage IRRBB. These policies must align with business strategy, risk appetite, risk tolerance, capital adequacy, human resource capacity, and portfolio complexity.
Banking Book position policies and procedures must at least clearly include:
a) criteria for financial instruments that can be designated as Banking Book and mechanisms to ensure these criteria are applied consistently; b) the purpose of holding Banking Book positions; c) Banking Book portfolio management policies, including the authorized party to approve or change said policies and guidelines; d) IRRBB exposure measurement methods used by the Bank for both periodic risk monitoring and capital adequacy calculations, including measurements based on EVE and NII; and e) policies for handling financial instruments without maturity and contractual interest rate adjustments.
IRRBB Risk Management policies and procedures must be reviewed periodically, at least once (1) per year (1), and improvements may be made if necessary.
The implementation of the Bank's Risk Management policies and procedures must be supported by adequate capital and human resource quality. Matters to be considered include at least:
a) The Bank is responsible for evaluating and linking IRRBB levels with the capital level required to absorb potential losses from IRRBB and other Risks; b) capital adequacy assessments must be based on Risk measurement results from the Bank's internal measurement systems, considering the assumptions used and established Risk limits; c) the required capital level must include all identified and measured Risks and the risk appetite. This is documented in the internal capital adequacy assessment process or ICAAP as referred to in regulations governing minimum capital requirements for commercial banks; and d) The Bank must conduct capital adequacy assessments related to business lines.
Capital adequacy assessments based on IRRBB assessments must at least consider:
a) the results of the OJK's review of the Bank's capital adequacy; b) the methodology formulated for allocating capital considering the risk appetite; c) the determination of the amount and quality of required capital; d) capital adequacy assessments for IRRBB related to the Risk of economic value decline on assets, liabilities, and administrative account transactions held by the Bank; and e) linking Risk levels with the Bank's capital adequacy to anticipate Risks faced. For example: additional capital assessments to cover Risks regarding future earnings due to the possibility that future earnings may be lower than expected.
In calculating the impact of IRRBB exposure on capital adequacy assessments, the Bank must at least consider:
a) the size and duration of internal IRRBB exposure limits, and determining whether these limits will be exceeded in capital calculations; b) the effectiveness and expected cost of hedging transactions on open positions, aimed at obtaining potential profits from internal expectations of future interest rates; c) the sensitivity of internal IRRBB measurements to the main assumptions used in developing IRRBB measurement models; d) the impact of interest rate shock scenarios and stress scenarios on positions using different interest rates or reference indices (basis risk); e) the impact of mismatched positions in different currencies on EVE and NII measurements; f) the impact of embedded losses; and g) the underlying sources of IRRBB and monitoring situations causing the Risk to become clear.

d. Limits
Setting and monitoring IRRBB limits is one of the control tools, specifically to ensure the Bank operates within the established risk appetite corridor set by Bank management. The Bank may have different limit setting and allocation mechanisms adjusted to the complexity of transactions or products issued. Matters to be considered in setting and monitoring IRRBB limits include at least:

IRRBB limit policies formulated and established by the Board of Directors must be consistent with the Bank's approach to measuring IRRBB overall and consider the risk appetite and Bank strategy.
Overall IRRBB limits and risk appetite for IRRBB must be applied both individually and on a consolidated basis.
IRRBB limits must be linked to specific scenarios regarding interest rate changes and/or term structure, including changes caused by increases or decreases in interest rate amounts or changes in the shape and slope of the yield curve. Interest rate movements used in developing and setting IRRBB limits must represent material interest rate shock scenarios and stress scenarios, and consider historical interest rate volatility.
IRRBB limit setting considers the time required by management to mitigate IRRBB exposure.
The Bank must have IRRBB limits appropriate to the Bank's characteristics, size, complexity, and overall strategy, considering the Bank's capital capacity to absorb Risk exposure or losses, and considering the Bank's ability to measure and implement IRRBB Risk Management.
IRRBB limit setting is conducted comprehensively based on all Bank asset and liability components with IRRBB exposure.
The Bank must establish policies for IRRBB limit exceedance escalation through management approval mechanisms, including time limits for resolving exceedances and remedial actions to be taken in case of exceedance.
In addition to hard limits as referred to in Section IV.2.b of this OJK Circular, the Bank may establish soft limits, which are internal triggers to anticipate reaching maximum limits, in order to prevent exceeding limits set by applicable regulations, especially when all internal limits have been used. The aforementioned soft limits are used as early warnings for anticipatory actions by business units managing IRRBB.

Risk Identification, Measurement, Monitoring, and Control Processes and Risk Management Information Systems
In implementing Risk Management for IRRBB, in addition to carrying out risk identification, measurement, monitoring, and control processes and Risk Management information systems as regulated by OJK regulations on risk management implementation for commercial banks, the Bank must add several items to the IRRBB Risk Management Policy as follows:

a. IRRBB Identification

The Bank must have a Risk identification process tailored to IRRBB inherent in the Bank's products and activities. The Bank must ensure that the process has adequate procedures and monitoring.
The IRRBB identification process includes identification of IRRBB sources such as gap risk, basis risk, and option risk, which can affect the Bank's interest income and the economic value of the Bank's financial positions, as well as the Bank's capital available to anticipate IRRBB impacts.
Significant hedging transactions or Risk Management implementation initiatives must receive Board of Directors approval before implementation.
The Bank must ensure that Risks from new products and activities have undergone careful review and Risk Management processes in accordance with OJK regulations on risk management implementation for commercial banks before being introduced or operated, so that the Bank can understand the IRRBB characteristics present in such products and activities.
IRRBB Risk Management must be integrated with the overall Risk Management framework and linked to business plans and budget planning activities.
Portfolios constructed based on significant mark-to-market movements must be clearly identified in the Bank's management information system and in line with monitoring of other portfolios exposed to Market Risk.

b. IRRBB Measurement
In measuring IRRBB, the Bank uses 2 (two) methods, namely EVE and NII, which include wide and precise interest rate shock scenarios and stress scenarios. The Bank must have main assumptions and use accurate data in developing IRRBB measurement models that are reasonable, reliable, and well-documented. These main assumptions must be reviewed or evaluated carefully, periodically, and adjusted to the Bank's business strategy. Reviews of main assumptions are conducted at least once (1) per year (1) and may be done more frequently if there are continuous market condition changes. Models used in IRRBB measurement must be comprehensive and include monitoring processes for IRRBB Risk Management models. Furthermore, there is a validation function or unit conducted by independent internal parties against the work unit that develops IRRBB measurement models. Matters to be considered in implementing the IRRBB measurement process include at least:

The Bank must have an IRRBB measurement system or model to measure positions and sensitivities related to IRRBB under both normal and stress conditions;
main assumptions considered in measuring IRRBB exposure from the perspectives of EVE and NII include at least:
a) expectations regarding the execution of interest rate options (explicit and embedded) by the Bank and customers, based on specific interest rate shock scenarios and stress scenarios; b) treatment of balance positions and interest payment cash flows originating from NMD instruments; c) treatment of the Bank's capital in measuring IRRBB exposure from the EVE perspective; d) determination of the impact of accounting practices on IRRBB exposure measurements; and e) setting assumptions regarding actual durations or interest rate adjustment behaviors that may differ from the periods stated in instrument contracts due to behavior options. Instruments with behavior options include fixed rate loans subject to prepayment risk, fixed rate loan commitments, term deposits subject to early redemption risk, and NMD;
the Internal Measurement System (IMS) for IRRBB exposure must at least have features:
a) covering all material sources of IRRBB and assessing the impact of market changes on the coverage of the Bank's products and activities; b) capable of accommodating IRRBB impact calculations on EVE and NII based on various scenarios; and c) equipped with interest rate shock scenarios and stress scenarios;
The Bank must measure the impact of interest rate shock scenarios on economic value and consider the Bank's ability to obtain adequate earnings to maintain the continuity of the Bank's business activities;
interest rate shock scenarios considered in IRRBB measurements include at least:
a) interest rate shock scenarios established by the Bank and reflecting the Bank's Risk profile; b) interest rate stress scenarios using historical data and hypothetical assumptions that tend to be worse than interest rate shock scenarios; c) 6 (six) standard interest rate shock scenarios as contained in Appendix II, which is an integral part of this OJK Circular; and d) additional interest rate shock scenarios established by OJK;
The Bank must conduct stress testing in IRRBB calculations. In measurements using stress testing, the Bank must at least:
a) measure the Bank's potential losses under stressed market conditions. These measurement results are used when formulating and reviewing policies and limits for IRRBB; b) develop and implement an effective stress testing framework for IRRBB as part of broader Risk Management implementation and governance processes. Stress testing of IRRBB exposure is an important part of the process of communicating Risks between the Bank and supervisors through adequate disclosure; c) stress testing coverage must be adjusted to the scale, complexity of business activities, and overall Risk profile assessment; d) stress testing results are used for decision-making and strategy planning processes. Furthermore, these results must be considered in preparing the ICAAP, so the bank must prepare detailed, forward-looking stress testing that can identify market condition changes that can affect the Bank's capital and profitability; e) The Bank ensures that forward-looking stress testing scenarios include new products, latest market information, potential new Risks that may arise, and changes in the Bank's portfolio composition caused by internal or external factors; f) in conducting stress testing, the Bank uses scenarios that consider the Bank's business activities and vulnerabilities; and g) The Bank conducts reverse stress testing both qualitatively and quantitatively;
in the context of effective Risk Management implementation and control execution, the Bank must have an accurate and timely IRRBB measurement system;
the IRRBB measurement system must be able to identify and quantify the main sources of IRRBB exposure;
the form of IRRBB measurement systems is adjusted to the Risk characteristics of the Bank's business activities and the complexity of the Bank's business lines;
Risk Management systems tend to vary in capturing IRRBB components, so the Bank is expected not to rely on only 1 (one) Risk measurement. The Bank must have various methodologies to quantify IRRBB exposure based on EVE and NII measurements, both from simple calculations based on static simulations using current positions and more complex and dynamic modeling techniques reflecting potential future business activities;
in order to overcome weaknesses that may arise from the use of IRRBB measurement models, the Bank must conduct model validation performed by independent internal parties against the work unit using the model. If necessary, validation is conducted or supplemented by review results performed by external parties with technical competence and expertise in Risk measurement model development. The validation process must at least consider the following:
a) validation of IRRBB measurement methods and assessment of related risk models must be included in the formal policy formulation process, which must be reviewed and approved by the Board of Directors. This policy must explain the role of management and determine the party responsible for developing, implementing, and using the model; and b) responsibility for model and policy oversight, including the development of initial validation procedures and subsequent validations, evaluation of Risk measurement results, approval, version control, exceptions, escalation, modification, and model deactivation processes, must be explained and integrated into the Model Risk Management governance process;
The Bank must formulate an effective IRRBB measurement model validation framework, including at least 3 (three) main factors as follows:
a) evaluation of concepts or methodologies, including development evidence; b) continuous model monitoring conducted through verification processes and comparing models with existing models; and c) analysis of Risk measurement results, including back testing of main parameters developed internally such as deposit stability, prepayment, early redemption, and instrument price measurements;
in relation to initial and continuous validation activities, IRRBB Risk Management policies must include the formulation of a hierarchical or tiered process for determining model risk soundness based on quantitative and qualitative aspects, such as size, impact, past performance, and understanding of the model formation techniques used;
IRRBB model Risk Management must include a comprehensive approach, including independent review and validation processes for IRRBB model development, as well as processes for determining model inputs, assumptions, IRRBB measurement model development methods, and Risk measurement results. After obtaining approval, the Bank conducts periodic reviews and validations of IRRBB measurement models;
validation is conducted on IRRBB models developed by the Bank itself or by third parties. The validation process also includes validation of assumptions used in forming the model. The Bank must document and explain model specification choices as part of the validation process.

c. Risk Monitoring

The Bank must have IRRBB monitoring systems and procedures. Monitoring results are presented in periodic reports submitted to Bank management for Risk mitigation and necessary actions.
The Bank must monitor IRRBB limit compliance and follow-up actions in case of exceedance. Follow-up results are reported to interested parties as regulated in the Bank's internal policies.
Presented reports may vary depending on the Bank's portfolio composition. The aforementioned reports must at least include:
a) results of periodic reviews and audits of IRRBB measurement models; b) results of periodic comparisons between estimated Risk results and actual results to identify potential model weaknesses; c) overall IRRBB exposure, assets, liabilities, cash flows, and strategies driving the level and direction of IRRBB; d) consistency of implementation with established policies and procedures; e) model formation assumptions such as NMD characteristics, fixed rate loans subject to prepayment risk, and currency grouping; f) stress testing results, including sensitivity assessments regarding main assumptions and parameters used; and g) summary of review results for IRRBB policies, procedures, and measurement system adequacy, including findings from internal and external auditors and/or other external parties, such as consultants.
IRRBB monitoring results and detailed IRRBB exposure reports are presented in periodic reports that must be submitted to the Board of Directors or relevant parties.

stakeholders as regulated in the Bank's internal policies.

The IRRBB Report as referred to in item 4) must provide all information in detail to be used by the Board of Directors or executive officials and their management in assessing the Bank's sensitivity to changes in market conditions, especially for portfolios that are potentially affected by significant mark-to-market movements.
The Board of Directors or the work unit receiving the delegation must monitor IRRBB risk management policies and procedures in reviewing reports to ensure compliance.
Reviews of the IRRBB Report must be adjusted to the applicable IRRBB policies and procedures.

d. Risk Control

Management must take steps in risk control, including preventing IRRBB losses from becoming larger.
Banks with Banking Book positions in various different currencies may be exposed to IRRBB in each currency type because the yield curve of the Banking Book position will differ for each currency. Banks must evaluate and control exposure in each currency.
The responsibility for IRRBB control in the operating unit must at least include:
a) reconciliation of positions managed and recorded in the management information system, including positions with behavioral option features; and b) control over the accuracy of profit and loss and compliance with regulations, including financial accounting standards.

e. IRRBB Risk Management Information System

The Risk Management Information System for IRRBB must ensure:

the data and information collected are adequate and accurate data and information at the right time;
input data can be automated to reduce errors;
the availability of sufficient coverage of interest rate risk data across all significant IRRBB exposures;
adequate system documentation containing the main data sources used in the IRRBB measurement process;
the ability to calculate IRRBB based on EVE and NII, as well as facilitate IRRBB measurement required by the Financial Services Authority based on interest rate shock scenarios and stress scenarios; and
the system can adapt to regulatory limitations regarding the estimation of internal risk parameters.

Internal Control System

In implementing Risk Management through the implementation of an internal control system for IRRBB, in addition to implementing internal controls as referred to in the regulations of the Financial Services Authority regarding the implementation of risk management for commercial banks, in each aspect of the Bank's system, the following implementations must be added at a minimum:

a. an adequate internal control system to ensure the existence of integration in the Risk Management process for IRRBB. The implementation of such internal control systems supports the creation of effective and efficient operational activities, reliability of financial reports and compliance reports, and increased Bank compliance with regulations and laws and Bank policies;

b. policies and procedures for IRRBB that have been established must consider the existence of appropriate approval processes, the establishment of risk exposure limits, the implementation of reviews, and other mechanisms with the aim of providing adequate assurance that the objectives of Risk Management implementation have been achieved;

c. periodic evaluation and review of the internal control system and Risk Management process. The Bank ensures that Bank employees comply with the policies and procedures that have been created;

d. significant changes that can affect the effectiveness of controls (including changes in market conditions, personnel, technology, and compliance with exposure limits) and ensure the existence of escalation procedures in the event of limit breaches;

e. the function or unit performing valuation must be independent of the function or unit taking Risk and the function or unit performing model validation must be independent of the function or unit developing the IRRBB measurement model;

f. an internal review mechanism to ensure that such revisions or developments are implemented in a timely manner, in the event of revisions or developments to internal controls;

g. the review of the Risk Management modeling process is conducted by internal audit as part of the annual audit plan and annual risk assessment; and

h. review by independent parties, including:

The Bank develops mechanisms and an effective IRRBB control system, including reviews conducted by the internal audit work unit or by the Risk Management work unit;
review of the implementation of Risk Management for IRRBB conducted by the internal audit work unit to assess the reliability of the Risk Management framework for IRRBB, which includes policies, organizational structure, allocation of resources for the IRRBB Risk Management process, information systems, IRRBB reporting, and adequacy of the review conducted by the independent unit in the Risk Management work unit;

This copy is consistent with the original
Legal Director 1
Legal Department signed
Yuliana

the Bank's organizational structure must support the implementation of independent reviews by the internal audit work unit or by the Risk Management work unit. The function or unit and personnel carrying out independent reviews must be independent of the operational unit being evaluated and have reliable competence and review methods; and
weaknesses and problems identified in the review must be reported to the Board of Directors and Board of Commissioners as suggestions for improving the framework and implementation of Risk Management for IRRBB.

Determined in Jakarta on August 21, 2018
EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signed
HERU KRISTIYANA

APPENDIX II
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 12 /SEOJK.03/2018 REGARDING THE IMPLEMENTATION OF RISK MANAGEMENT AND STANDARD APPROACH RISK MEASUREMENT FOR INTEREST RATE RISK IN THE BANKING BOOK (INTEREST RATE RISK IN THE BANKING BOOK) FOR COMMERCIAL BANKS

GUIDELINES FOR MEASURING RISK USING THE STANDARD APPROACH FOR INTEREST RATE RISK IN THE BANKING BOOK (INTEREST RATE RISK IN THE BANKING BOOK) FOR COMMERCIAL BANKS

A. GENERAL

Interest rate risk is a part of Risk that normally attaches to Bank activities. Unprudently managed Interest Rate Risk in the Banking Book can cause significant threats to the Bank's capital and earnings.

Definition of IRRBB

a. Interest Rate Risk in the Banking Book, hereinafter abbreviated as IRRBB, is the Risk arising from market interest rate movements contrary to the Banking Book position, which has the potential to impact the Bank's capital and earnings both currently and in the future.

b. Interest rate movements as referred to in letter a can cause:

changes in the present value and timing of future cash flows for assets, liabilities, and administrative accounts, thereby affecting EVE; and
changes in interest income and interest expenses sensitive to interest rate changes, thereby causing changes in NII.

Sources of IRRBB

IRRBB originates from at least 3 (three) basic aspects related to the level and characteristics of the interest rate structure, as well as the impact of such levels and characteristics on changes in the yield curve. The three basic aspects referred to are gap risk, basis risk, and option risk, which can occur individually or simultaneously, requiring comprehensive monitoring.

a. Gap Risk

Gap Risk is the Risk that can cause a decrease in NII or a relative change in the economic value of the Bank's assets and liabilities caused by:

Interest rate change timing risk (repricing risk), which is the difference in: (i) remaining time to maturity, for fixed-rate instruments; and (ii) remaining time to the next rate reset date, for floating-rate instruments.

Repricing risk can be distinguished based on the structure of the financial position report (balance sheet) as follows:
a) The Bank's financial position report (balance sheet) is categorized as a "liability sensitive bank" when the Bank has liabilities with a shorter interest rate adjustment (repricing) period compared to the repricing period on assets. The Bank will experience faster interest rate adjustment on liabilities compared to asset interest rate adjustments. IRRBB increases when the interest rate paid on liabilities increases before the interest rate received from assets increases. Example: The Bank has assets with fixed interest rates funded by liabilities with floating interest rates. The Bank's NII will decrease in the event that interest income obtained from assets does not change, while the interest expense to be paid for liabilities increases. b) The Bank's financial position report (balance sheet) is categorized as an "asset sensitive bank" when the Bank has assets with a shorter interest rate adjustment (repricing) period compared to liabilities. The Bank will experience an increase in IRRBB when the interest rate received from assets decreases before the interest rate paid on liabilities decreases. Example: The Bank has assets with floating interest rates funded by liabilities with fixed interest rates. NII will decrease in the event that the interest expense paid for liabilities does not change, while the interest income obtained from assets decreases.

Interest rate change risk on each time segment of the yield curve (yield curve risk), which is the Risk arising from changes in the shape and slope of the yield curve. Changes in the shape and slope of the yield curve can occur in parallel, meaning interest rates on all time segments of instruments increase or decrease by the same amount, or non-parallel, meaning interest rates on all time segments of instruments increase or decrease by different amounts. The shape and slope of the yield curve consist of:
a) upward sloping yield curve is a yield curve that describes a condition where long-term interest rates are higher than short-term interest rates. b) downward sloping yield curve is a yield curve that describes a condition where long-term interest rates are lower than short-term interest rates.

b. Basis Risk

Basis Risk is the Risk arising from changes in the reference interest rate of a financial instrument that has (i) similar tenor but different reference interest rate levels (reference rate basis risk); (ii) different tenor but the same reference interest rate level (tenor basis risk or short-term non-parallel gap risk); or (iii) the same tenor and reference interest rate level but different currencies (currency basis risk).

Example: a 1 (one) year loan with a 1 (one) month Jakarta Interbank Offered Rate (JIBOR) reference rate funded by a 1 (one) year deposit with a 1 (one) month Bank Indonesia Certificate (SBI) interest rate can cause basis risk in the event that the value of one or both of these indices changes unsynchronized.

c. Option Risk

Option Risk is the Risk arising from option features of derivative positions or optional components attached to most assets, liabilities, and administrative account transactions that can change the level and timing of cash flows. In order to measure IRRBB, option risk is divided into 2 (two) different but interrelated categories, namely:

Automatic option risk
Automatic option risk is the Risk originating from instruments with standalone option features (stand alone derivative). Option holders will execute the option if they have a financial interest in doing so.
Example: option features traded through exchanges or over-the-counter, or option features explicitly attached to specific financial instruments (capped rate loan).
Behavioural option risk
Behavioural option risk is the Risk originating from changes in interest rates that can affect changes in customer behavior.
Example: loans with prepayment options by customers without significant penalties.

d. In addition to the 3 (three) basic aspects of IRRBB arising from changes in interest rate levels and structure, as referred to in letter c, IRRBB can originate from:

currency differences present in interest rate risk in addition to normal exchange rate Risk. This condition is included in the definition of basis risk in a broader sense; and/or
accounting treatment of risk positions, namely when interest rate hedging activities can achieve the desired economic impact but cannot meet the accounting treatment for hedging.

Credit Spread Risk in The Banking Book (CSRBB)

Credit Spread Risk in The Banking Book, abbreviated as CSRBB, is the Risk related to IRRBB that must also be calculated and monitored by the Bank, as part of the interest rate risk management framework. CSRBB is any form of spread risk on assets or liabilities of credit instruments that cannot be explained through IRRBB or through jump-to-default risk.

CSRBB is driven by changes in market perception regarding the credit quality of a collection of different credit-risky instruments. These changes in perception are caused by changes in default rate expectations or due to changes in market liquidity. Changes in the credit quality of credit-risky instruments can amplify Risks originating from yield curve risk. In order to monitor and assess CSRBB, as a first step, the Bank can begin monitoring spread risk on securities with fair value in the Banking Book.

Banking Book Valuation Methods

a. Based on POJK KPMM, the Trading Book is all financial instrument positions in the balance sheet and administrative accounts, including derivative transactions owned by the Bank with the purpose of:

trading and can be freely transferred or can be fully hedged, whether from transactions for own interest (proprietary positions), at customer request, or brokerage activities, and in the context of market making, which includes:
a) positions held for resale in the short term; b) positions held for the purpose of obtaining actual and/or potential short-term profits from price movements; or c) positions held for the purpose of maintaining arbitrage profits (locking in arbitrage profits); and
hedging other positions in the Trading Book.

b. The Banking Book is all other positions not included in the Trading Book.

Interest Rate Components Affecting IRRBB

a. Interest income and interest expenses are the sum of several interest rate components consisting of:

Risk-free rate
Risk-free rate is the theoretical interest rate generated from investment in risk-free assets.
Market duration spread
Market duration spread is the premium or additional spread from the risk-free rate as compensation for duration risk. Duration risk reflects price volatility, namely the value of an instrument with a long duration will be more vulnerable to changes in market interest rates compared to instruments with short duration.
Idiosyncratic credit spread
Idiosyncratic credit spread is a premium that reflects specific Credit Risk originating from the credit quality of individual borrowers. The premium also reflects the Risk assessment arising from sectors, geographic locations, borrower currencies, or specifications of credit instruments, such as derivative instruments or bonds.
Market liquidity spread
Market liquidity spread is a premium that reflects the market's appetite to invest or conduct transactions.
General market credit spread
General market credit spread is a Credit Risk premium as compensation for specific credit quality, for example, the additional yield that must be given to debt instruments issued by entities with an AA- rating compared to other risk-free instruments.

b. Changes occurring to the risk-free rate, market duration spread, reference rate, and funding margin are part of IRRBB. Whereas changes occurring to the market liquidity spread and market credit spread are part of CSRBB.

c. The interest rate components as referred to in letter a can be more easily identified on traded instruments (example: bonds), compared to non-traded instruments (example: loans). Loans can have 2 (two) interest rate components as follows:

funding rate or reference rate with a funding margin. The funding rate is calculated based on the internal cost to fund the loan, which is reflected in the internal funds transfer price. The reference rate is set based on external interest rates such as JIBOR or London Interbank Offered Rate (LIBOR). The Bank can add or subtract the funding margin component to the reference rate so that it can reflect the total funding rate. Funding rate and reference rate can include market liquidity spread, market duration spread, and market credit spread. The relationship between funding rate and reference rate can be unstable over time, which is an example of basis risk; and
credit margin or commercial margin reflects specific add-ons. The add-on referred to can include funding margin, for example, LIBOR plus 3% (three percent). Credit margin can also be part of the administered rate, namely the interest rate set and fully controlled by the Bank.

d. In practice, separating interest rates into several interest rate components as referred to in letter a is difficult to do and the boundaries between components are difficult to calculate, for example, changes in market perception over credit can also change the market liquidity spread. Thus, the Bank can develop internal measurement methods proportional to the size of the Bank's exposure to actively traded bonds.

B. IRRBB MEASUREMENT

IRRBB measurement is conducted both for the Bank individually and for the Bank consolidated with Subsidiary Companies.

Measurement Methods

a. In order to measure IRRBB, the Bank must use 2 (two) complementary methods, namely:

measurement based on changes in EVE is a method that measures the impact of interest rate changes on the economic value of the Bank's equity; and
measurement based on changes in NII is a method that measures the impact of interest rate changes on the Bank's earnings. These interest rate changes can occur gradually or at one time with a large nominal shock.

b. In order to manage IRRBB, there may be a trade-off between EVE value and NII. In the event that the Bank attempts to reduce Risk from EVE by matching the repricing of the Bank's assets and liabilities in the short term, the Bank may face volatility Risk over earnings.

c. The 2 (two) IRRBB measurement methods as referred to in letter a are complementary because both reflect the impact of interest rate changes on cash flow changes, have similar assumptions, and changes in economic value reflect changes in earnings expectations. In addition, in order to conduct Risk assessment and Bank capital adequacy assessment, the 2 (two) measurement methods as referred to in letter a are complementary in the following aspects:

Measurement Results
a) Measurement based on EVE calculates the change in Net Present Value (NPV) of assets, liabilities, and administrative account transactions owned by the Bank, and calculates the impact of specific interest rate shock scenarios and stress scenarios. The change in NPV is the comparison of equity value based on interest rate shock scenarios and equity value based on baseline scenarios. In calculating EVE, the Bank can exclude equity from the calculation or include equity in the EVE calculation with a very short duration (overnight). b) Measurement based on NII calculates changes in future earnings over a certain time period, which in turn will affect the Bank's capital level.
Assessment Timeframe
a) Measurement based on EVE is long-term interest rate risk management based on the remaining time to maturity.
EVE provides information about the capital needs to support IRRBB in the long term, but provides less adequate information regarding capital levels in the short term in the event of extreme temporary shocks causing large decreases in market value. b) Measurement based on NII is interest rate risk management with a short-to-medium term estimation period, assuming that the Bank is able to continue operational business (going concern perspective). NII is particularly useful for management in assessing the Bank's ability to generate stable interest income, thereby positively influencing dividend distribution stability and shareholder Risk perception.
Assumptions in Measurement
a) Measurement based on EVE uses the run-off balance sheet assumption, namely the assumption that all Banking Book instruments in the balance sheet will be fully amortized and will not be replaced with new instruments unless there is a need to fund the remaining balance sheet components. b) Measurement based on NII can use the run-off balance sheet assumption or use the following assumptions:
i. constant balance sheet size, namely the assumption that the size and composition of the balance sheet will be maintained according to the conditions at the start of the calculation with

performing like-for-like replacement of assets and liabilities that have matured; and/or
ii. dynamic view, which is the assumption that the Bank's balance sheet has taken into account business prospects for the near future and consistently assesses the impact of relevant scenarios on the Bank's future profit and loss.
The constant balance sheet assumption referred to in letter i must be used in the reporting of IRRBB calculations submitted to the Financial Services Authority (OJK) as referred to in this Financial Services Authority Circular.

Measurement based on economic value perspective
a. IRRBB measurement based on economic value reflects changes in market value on the Banking Book position, namely the calculation of the present value of expected contractual cash flows generated by assets, liabilities, and administrative account transactions recorded on the current balance sheet, without including cash flows from potential business in the near future. The present value calculation is performed by discounting cash flows to reflect current market interest rates. The discounting process can provide the following implications:

instruments with floating interest rates or short-term instruments may have a present value close to the carrying value, and changes in market interest rates do not cause changes in the economic value of such instruments; or
the present value calculation of instruments sensitive to interest rates and having uncertain contractual cash flows is performed using assumptions regarding customer behavior and timing.
b. The result of the economic value calculation depends on the treatment of equity with 2 (two) measurement approaches as follows:
EVE Approach.
The measurement of changes in NPV of assets and liabilities under interest rate stress scenarios can describe the actual level of EVE Risk because equity is the residual claim on assets after deducting liabilities. In this case, equity value is not included in the NPV calculation, and the NPV result will be compared with the initial NPV value before stress.
Earnings-adjusted economic value approach.
Equity is used to fund assets that will generate returns for the Bank; changes in the value of asset portfolios used to reduce earnings volatility are considered not to be relevant economic value Risk for the Bank. Equity is included in the calculation and is assumed to have the same interest rate as the asset portfolio used to hedge such equity. The NPV result will be compared with the initial equity value, but only measures Risk arising from non-structural positions.
c. Measurement of changes in economic value can be performed using several techniques, namely:
EVE, which is the calculation of the impact of interest rate changes on the economic value of Bank equity;
Present Value of a single basis point (PV01), which is the calculation of the present value of an instrument against an interest rate change of 1 (one) basis point; and/or
Economic Value-at-Risk (EVaR), which is the calculation of the maximum estimated loss that can occur on the Banking Book position under various interest rate scenarios over a specific time period or duration with a specific statistical confidence level.
These three techniques differ in complexity and ability to capture sensitivity to interest rate changes, which are the sources of IRRBB, namely gap risk, basis risk, and option risk. The use of several methods to calculate economic value sensitivity can produce a comprehensive understanding of the Risk inherent in the Banking Book position. In the calculation of IRRBB according to this guideline, Banks must perform calculations using at least the EVE method. d. The EVE calculation depends on the accuracy of cash flow calculations considering customer behavior and the discount interest rate used. e. With appropriate interest rate scenario design, EVE can capture all interest rate sensitivities, including basis risk, which can be calculated either in isolation or in combination with general yield curve shifts or changes in parameter assumptions. Basis risk can be measured by setting scenarios showing divergence in different base rates to which the Bank is specifically sensitive. f. The application of the EVE concept can be complex in Banking Book positions with the following characteristics:
having assets and liabilities in the held-to-maturity category, so there are instruments without observable market prices, such as loans and receivables;
there is undervaluation and overvaluation of Bank balance sheet instruments measured on a mark-to-market basis, reflecting income or expenses that will also determine future earnings reports;
margins on loans can vary, making the determination of the discount interest rate difficult;
cash flows depend on customer behavior as a result of interest rate changes, or customers may behave irrationally, or customer rationality does not match Bank expectations; and/or
there are structural positions that can generate significant changes in economic value.
Example:
a) A Bank purchases assets to maintain the yield stability of NMD instruments and/or equity. This causes an increase in EVE sensitivity even though this policy is intended to reduce Risk from the perspective of earnings volatility; b) A Bank with capital of Rp1,000,000,000.00 (one billion rupiah) can manage earnings volatility by investing the entire capital value in long-term government securities with fixed interest rates. This can generate consistent income but creates Risk for EVE if market interest rates change and the mark-to-market value of those securities falls. If the Bank's goal is to obtain economic value stability, the Bank can invest in overnight instrument markets, but the Bank's earnings may fluctuate with changes in interest rates. Thus, there is a trade-off, namely the Bank cannot reduce Risk in economic value and earnings simultaneously. g. In order to reduce the complexity of EVE calculations, Banks focus on the change in NPV of balance sheet components, based on current cash flow nominal values, or cash flows adjusted for interest rate shocks and stress scenarios. These value changes are a measure of the IRRBB level and can be compared with the present value of equity to determine changes in EVE. h. The EVaR approach has the advantage of capturing all interest rate sensitivities. The disadvantage of EVaR is that it can only be used under normal market conditions and cannot adequately calculate tail risk. EVaR calculations are performed based on historical simulation, variance-covariance approach, and Monte-Carlo simulation. Historical simulation and the variance-covariance approach are backward-looking methods prone to losing tail events with significant Risk. Monte-Carlo simulation requires advanced technological and calculation capabilities.
i. PV01 measurement can be performed using gap analysis. The gap analysis calculation process is as follows:
placing all asset and liability positions sensitive to interest rates on each established time scale, based on the next repricing date. Banks may also include equity value, NMD, loans with prepayment, or other instruments with future cash flows dependent on customer behavior;
calculating the absolute arithmetic difference between the sum of assets and liabilities at each time scale; and
setting interest rate change scenarios at each time scale.
j. The gap analysis method has the advantage of providing a visual image regarding the dispersion of interest rate Risk exposure relative to the repricing profile, reflecting exposure to parallel and non-parallel gap risk. The disadvantage of the gap analysis method is that it cannot quantify the magnitude of Risk. In addition, the assumptions used in gap analysis are that all positions within the established time scale will have maturity and perform interest rate adjustment (reprice) simultaneously, so it does not take into account the potential basis risk in each gap. As a variation of the PV01 calculation alternative, Banks may use the modified duration method, which has the advantage of measuring relative changes in market value caused by marginal movements of the yield curve in parallel. The disadvantage of this technique is that it only measures marginal shifts of the yield curve and is only useful for parallel movements.

Measurement based on earnings-based measures
a. In order to measure IRRBB based on earnings, the earnings component receiving primary attention is NII. NII calculation is performed by calculating the difference between total interest income and total interest expense, considering hedging activities through derivative transactions. b. Measurement based on earnings is part of asset liability management used for purposes including:

measuring the Bank's vulnerability to IRRBB in the short to medium term with the assumption that the Bank can continue operational business (going concern perspective). However, if the Bank has conducted activities generating fee-based income and other non-interest income, the Bank needs to focus on broader net income by considering interest income, non-interest income, and expenses.
measuring the Bank's ability to generate stable earnings in the short to medium term so that it can be used to pay dividends at a stable level and reduce beta (volatility) in the Bank's stock price and reduce the cost of capital.
c. The change in NII value is the difference between the expected NII value based on the base scenario and the expected NII value based on the alternative scenario. The base scenario describes the Bank's current business plan, including volume, price, and interest rate adjustment date projections for each business transaction (interest rates used are market expected rate or spot rate considering spread or margin projections). Alternative scenarios include increased stress scenarios, changed customer behavior assumptions, and management reactions under various interest rate scenarios.
d. Banks project future earnings based on economic scenarios reflecting corporate plans, interest rate shock scenarios, and stress scenarios. These projections also consider assumptions about customer or market behavior and internal Bank management's attitude toward economic conditions, including:
volume and type of assets and liabilities, whether new volume and type or expected replacements to be obtained during the evaluation period;
volume and type of assets and liabilities subject to redemptions or reductions during the evaluation period;
base interest rates and interest rate margins related to new assets and liabilities, as well as those related to withdrawn or liquidated assets and liabilities; and/or
the impact of fees received or paid to execute options.
e. Measurement based on earnings-based measures cannot identify Risk to capital arising from the revaluation of portfolios of instruments in the available-for-sale category.

Key Considerations and Assumptions
In order to measure IRRBB using the EVE and NII approaches as referred to in item B.1.a, Banks consider assumptions including the following:
a. Interest Rate Scenarios and Shock Scenarios; Banks determine the range of shock scenarios against current interest rates to calculate their impact on economic value and earnings, as well as economic stress scenarios consistent with those shock scenarios. Formulating relevant interest rate change scenarios is an important component of IRRBB management. Various scenarios are necessary because, for example, shocks assuming only parallel yield curve shifts cannot capture basis risk. b. Option Execution

In order to calculate IRRBB, Banks consider the execution of explicit and implicit options that can be exercised by the Bank or customers, consisting of 2 (two) different but interrelated categories, namely automatic options and behavioral options.
Automatic options are options executed based on rational expectations, namely when there is financial benefit based on standard financial modeling techniques.
Behavioral options are options executed by customers based on behavior that is not always rational and requires more complex analysis. Customers may execute behavioral options even if it does not provide financial benefit to the customer, or may not execute options even if it provides financial benefit to the customer.
Banks must determine the impact of behavioral options on the actual maturity and interest rate repricing behavior of financial instruments, which may differ from contractual maturity. Behavioral options can be predicted using models that measure, among other things, the correlation between interest rate repricing and the speed of prepayment.
Banks must have continuously updated models to calculate the influence of behavioral option positions on cash flows and to determine the hedging strategies required.
c. Financial Instruments with Behavioral Options
Financial instruments with behavioral option features include the following:
Fixed rate loans subject to prepayment risk
a) Banks must understand the prepayment risk characteristics of their portfolio and formulate prudent and rational estimates or models of expected prepayment. The formulation of such models also considers macroeconomic indicators, including stock price indices, unemployment rates, inflation, and housing price indices. b) Banks must have documentation of the assumptions underlying the estimates and the impact of prepayment penalties on embedded options. c) There are several important factors determining the Bank's estimates of the impact of each interest rate shock scenario and stress scenario on the average speed of prepayment. Banks must evaluate the expected average speed for each scenario. d) Factors that can influence customer behavior to accelerate prepayment include loan size, loan-to-value (LTV) ratio, customer characteristics, contractual interest rates, geographic location, demographics, changes in family composition, taxes, maturity, and other historical factors. e) Customers tend to accelerate prepayment when interest rates fall so they can refinance at lower interest rates, or customers tend to maintain fixed-rate loans when market interest rates rise so the Bank cannot offer loans at higher interest rates. The customer's right to accelerate prepayment may be stated in the loan agreement. Banks estimate prepayment rates if the nominal penalty amount does not reflect the actual economic costs and benefits due to legal restrictions, or if there is a policy where the Bank must provide compensation for customer complaints (customer redress policy).
Fixed rate loan commitments
a) Banks may sell option features to individual customers where customers have the choice to draw down loans at a previously determined committed rate. b) Drawdown loans for corporate customers under fixed rate loan commitments reflect characteristics of automatic interest rate options. Drawdown loans for individual customers are also influenced by various other factors. c) Factors that can influence customer behavior regarding fixed rate loan commitments include customer characteristics, geographic location, customer relationship with the Bank, remaining maturity of the commitment feature, and remaining maturity of loans to individual customers.
Term deposits subject to early redemption risk
a) Banks may issue deposits with specific contractual maturities or with step-up features that customers can use to withdraw before maturity. b) Banks must have adequate documentation of all schemes or features, including schemes where early withdrawal will be subject to penalties or other contractual features aimed at maintaining cash flow profiles. c) Factors that can influence customer behavior to accelerate early redemption include deposit size, deposit characteristics, contractual interest rates, seasonal factors, geographic location, competitive factors, remaining maturity, and other historical factors. d) In formulating models for early redemption behavior, Banks must also consider macroeconomic indicators including stock price indices, unemployment rates, inflation, and housing price indices.
Non Maturity Deposits (NMD)
a) NMD are liabilities that have no contractual maturity or interest rate adjustment, so customers can withdraw deposits at any time. NMD positions generally have lower interest rates than corporate deposit interest rates, and withdrawn NMD positions can be quickly replaced with new deposits at similar interest rates. Thus, NMD balances historically represent relatively stable and cost-effective funding sources. b) Banks consider earnings volatility Risk arising from NMD by, among other things, identifying core deposits, which are parts of NMD considered stable despite different interest rate scenarios. In determining core deposits, Banks do not consider transactional accounts with routine fluctuations, such as withdrawals followed by redeposits. c) Banks use internal measurement systems to determine the specific behavioral maturity of NMD so that they can allocate to corresponding assets (matched assets) and generate stable earnings. d) Matched assets are managed dynamically to adjust to core deposit levels and to ensure that the maturity of matched assets aligns with the Bank's expectations of customer behavior and the Bank's risk appetite. Although behavioral maturity can be set very long, matched assets carry economic value Risk because they have fixed interest rates and duration, so NPV will vary with market interest rates. The chosen maturity profile is a consideration between earnings stability for a certain period and increased economic value Risk that may become actual if a specific shock event occurs (e.g., sudden large withdrawals or Bank failure). e) Banks must conduct adequate documentation, monitoring, and periodic updates of assumptions and behaviors regarding NMD to be used in calculating IRRBB. f) Factors that can influence the execution of embedded behavioral options include the interest rate sensitivity of products to market interest rate movements, current interest rates, the range between interest rates offered by the Bank and market interest rates, competition from other Banks, geographic location, and customer characteristics. d. Existence of Commercial Margins and Discounting of Cash Flows IRRBB calculations require cash flow estimates. The EVE method calculates all cash flows from the principal amount...

and interest payments on balance sheet positions sensitive to interest rates, then discounting them using the relevant interest rate. The NII method calculates all cash flows, including cash flows from margins and principal amounts generated from business activities in the future, but does not discount these cash flows.

Discounting of cash flows in the EVE method is performed as follows:

in the event that cash flows do not include margins, the EVE calculation is the notional cash flow multiplied by the reference interest rate (base rate) at the time of the transaction, discounted by the risk-free rate at the reporting date;
in the event that cash flows include margins, the EVE calculation is the notional cash flow multiplied by the interest rate given to customers (client rate) at the time of the transaction, discounted by the risk-free rate at the reporting date plus the margin at the time of the transaction; or
in the event that cash flows include margins, the EVE calculation is the notional cash flow multiplied by the interest rate given to customers (client rate) at the time of the transaction, discounted by the risk-free rate at the reporting date. For positions with floating interest rates, the fixed margin component is considered until maturity.

e. Assumptions Regarding Bank Capital
In the context of IRRBB calculations, the treatment of Bank capital is as follows:

Equity is the net value of assets minus liabilities, thus representing assets that do not have funding obligations. Equity generally has costs in the form of dividends, and Banks generally seek ways to stabilize income generated from assets funded by equity. Such techniques include determining the net equity value that can receive behavioral treatment. Some assets, such as land and buildings, are non-interest bearing and can be considered funded from equity. Thus, the equity value available for behavioral treatment can be reduced by the value of land and buildings. Banks may also determine that a portion of equity is invested with short maturities so that it can function as a buffer when stress occurs in the Bank's business.
Capital does not have a contractual date for interest rate adjustment (repricing), so the Bank determines a strategy to manage the earnings volatility of capital using the same techniques used for NMD.

C. STANDARD FRAMEWORK FOR IRRBB MEASUREMENT

IRRBB Measurement Based on EVE
In order to measure IRRBB based on EVE, the Bank calculates the change in EVE value (∆EVEi,c) based on interest rate scenario i and currency c for each exposure in a specific currency with a material value, namely exposures in a specific currency with an amount of at least 5% (five percent) of total assets or liabilities in the Banking Book position.

IRRBB measurement based on EVE is generally divided into 5 (five) stages as follows:

a. Stage 1
The Bank categorizes Banking Book positions sensitive to interest rates (interest rate-sensitive) found in the financial position report (balance sheet) and contingent commitment report (off-balance sheet) into amenable, less amenable, and not amenable categories, with determination based on the feasibility for standardization.

b. Stage 2

The Bank projects all notional repricing cash flows in the future originating from instruments sensitive to interest rates. The determination of these cash flows is based on repricing maturities, considering the following:
a) amenable positions have cash flow determinations that can be done easily and clearly, namely based on contractual maturity. b) less amenable positions have explicit automatic options or those separated from the related asset or liability (host contract). Treatment for less amenable options refers to Stage 4. c) not amenable positions have cash flow determinations that separate the treatment of NMD and behavioral options.
All notional repricing cash flows as referred to in item 1) are allocated into the time buckets as referred to in Table 1. This is done for each interest rate shock scenario.
In each time bucket, all positive and negative values of notional repricing cash flows are netted out to produce one long or short position.

c. Stage 3
Notional repricing cash flows that have been netted out in each time bucket or the midpoint of the time bucket are multiplied by a weighted discount factor based on continuously compounded interest calculations, mathematically calculated with the following formula:

DFi,c(tk) = exp(−Ri,c(tk) ∙ tk)

Explanation:
DFi,c(tk) = discount factor based on reference rate with interest rate scenario i at the reporting date.
Ri,c(tk) = reference rate with interest rate scenario i at the reporting date. The reference rate used in the discount factor is a proxy for the risk-free rate or risk-free rate plus commercial margin and other spread components (only if the Bank also includes commercial margin and other spread components in the cash flow calculation). The proxy risk-free rate that can be used by the Bank is the reference rate issued by Bank Indonesia and/or the Indonesian Government.

The result of multiplying notional repricing cash flows and the discount factor will produce a weighted net position, which is then summed to obtain the EVE value for each currency c and based on each scenario i (excluding automatic interest rate option positions), mathematically calculated with the following formula:

EVEi,c_nao = ∑(k=1 to K) CFi,c(k) ∙ DFi,c(tk) or EVEi,c_nao = ∑(k=1 to K) CFi,c(tk) ∙ DFi,c(tk)

Explanation:
CFi,c(k) = notional repricing cash flow based on interest rate scenario i in time bucket k.
CFi,c(tk) = notional repricing cash flow based on interest rate scenario i at the midpoint of the time bucket (tk).
DFi,c(tk) = discount factor based on reference rate with interest rate scenario i at the reporting date.

d. Stage 4
All changes in EVE value (ΔEVE) for each currency c and interest rate shock scenario i are obtained by subtracting the EVE value in interest rate shock scenario i (EVEi,c_nao) from the EVE value in the current interest rate term structure (EVE0,c_nao), then adding the value of automatic interest rate options to the change in EVE value (ΔEVE).

Automatic interest rate options sold will undergo full revaluation based on 6 (six) interest rate shock scenarios for each currency.
The change in option value will be added to the EVE measurement in each interest rate shock scenario for each currency, mathematically calculated with the following formula:

∆EVEi,c = ∑(k=1 to K) CF0,c(k) ∙ DF0,c(tk) − ∑(k=1 to K) CFi,c(k) ∙ DFi,c(tk) + KAOi,c or ∆EVEi,c = ∑(k=1 to K) CF0,c(tk) ∙ DF0,c(tk) − ∑(k=1 to K) CFi,c(tk) ∙ DFi,c(tk) + KAOi,c

Explanation:
ΔEVEi,c = change in EVE value in interest rate scenario i and currency c.
CF0,c(k) = notional repricing cash flow based on the current interest rate term structure in time bucket k.
CF0,c(tk) = notional repricing cash flow based on the current interest rate term structure at the midpoint of the time bucket (tk).
DF0,c(tk) = Discount factor based on reference rate at the reporting date.
DFi,c(tk) = Discount factor based on reference rate with interest rate scenario i at the reporting date.
CFi,c(k) = notional repricing cash flow based on interest rate scenario i in time bucket k.
CFi,c(tk) = notional repricing cash flow based on interest rate scenario i at the midpoint of the time bucket (tk).
KAOi,c = Automatic interest rate options, the calculation of which refers to the methodology as referred to in item C.7.

e. Stage 5
The ΔEVE value with the standard framework is the maximum worst-case EVE loss based on 6 (six) established interest rate shocks.
EVE losses are summed for each interest rate shock scenario i, and the maximum loss across all interest rate shock scenarios is the EVE Risk value.
The summation is mathematically calculated with the following formula:

Standard EVE Risk Value = max iϵ{1,2,…,6} {max(0; ∑ ∆EVEi,c c:∆EVEi,c>0)}

The IRRBB measurement framework based on EVE is broadly presented in Figure 1.

Figure 1. IRRBB Measurement Framework Based on EVE

Grouping of Banking Book Positions
Banking Book positions are grouped based on the feasibility for standardization as follows:
a. Positions that can use the standard approach (amenable to standardisation) are positions with repricing maturities that can be determined clearly.
Example: loans with fixed interest rates and no prepayment options, deposits with no early redemption risk, and other loan products that can be amortized such as Fixed Rate Home Loans (KPR). b. Positions that are less able to use the standard approach (less amenable to standardisation) are positions that have uncertainty regarding repricing maturity, but this uncertainty can still be measured with internal methods or standard methods. A common feature of these positions is the automatic option feature. These features can be valued using a standard model with the assumption that the option will be realized only if there is a financial benefit for the holder of the said option. Example: explicit interest rate options, option rights attached to securities, embedded derivatives based on options including caps or floors features, and callable bonds.
c. Positions that cannot use the standard approach (not amenable to standardisation) are instruments that have uncertainty regarding repricing maturity. This uncertainty must be measured based on estimates of main Risk parameters that have been independently validated by the Bank. These positions consist of:

NMD;
fixed rate loans subject to prepayment risk; and
term deposits subject to early redemption risk.

Cash Flow Grouping
a. The Bank projects all notional repricing cash flows in the future originating from instruments sensitive to interest rates, as follows:

assets sensitive to interest rate changes and not being assets deducted from Common Equity Tier 1 capital as referred to in POJK KPMM. The calculation does not include fixed assets such as buildings and intangible assets, nor equity values in the Banking Book;
liabilities sensitive to interest rate changes and not including liabilities recognized as Common Equity Tier 1 capital components as referred to in POJK KPMM.
The calculation includes non-remunerated deposits and is considered as interest-bearing liabilities; and
administrative account transactions sensitive to interest rate changes.
b. The Bank includes the notional cash flows as referred to in letter a into time buckets as follows:
based on the repricing date maturity consisting of 19 (nineteen) established time buckets as referred to in Table 1; or
time buckets based on the midpoint without changing the remaining maturity of the notional repricing cash flow.
The Bank determines criteria for placing cash flows into time buckets as referred to in Table 1 based on the Bank's internal policy. The Bank is expected to have stable cash flow placement criteria so that IRRBB values in different periods can be compared accurately.

Table 1. Time Buckets and Midpoint of Time Buckets
Time Bucket
Overnight
(0.0028 T)

Overnight
s.d. ≤ 1 mo
(0.0417 T)
1 mo
s.d. ≤ 3 mo
(0.1667 T)
3 mo
s.d. ≤ 6 mo
(0.375 T)
6 mo
s.d. ≤ 9 mo
(0.625 T)
9 mo
s.d. ≤ 1 Y
(0.875 T)
1 Y
s.d. ≤ 1.5 Y
(1.25 T)
1.5 Y
s.d. ≤ 2 Y
(1.75 T)
2 Y
s.d. ≤ 3 Y
(2.5 T)
3 Y
s.d. ≤ 4 Y
(3.5 T)
4 Y
s.d. ≤ 5 Y
(4.5 T)
5 Y
s.d. ≤ 6 Y
(5.5 T)
6 Y
s.d. ≤ 7 Y
(6.5 T)
7 Y
s.d. ≤ 8 Y
(7.5 T)
8 Y
s.d. ≤ 9 Y
(8.5 T)
9 Y
s.d. ≤ 10 Y
(9.5 T)
10 Y
s.d. ≤ 15 Y
(12.5 T)
15 Y
s.d. ≤ 20 Y
(17.5 T)
20 Y
(25 T)

Explanation:
Mo = Month; Y = Year
The numbers in parentheses are the midpoint values of the time buckets.

c. Assets with the category of Non-Performing Loans are assets with Poor, Doubtful, or Loss quality. The Bank can determine the sensitivity level of said assets to interest rate changes using internal business assumptions.
d. Notional repricing cash flows as referred to in letter a are all cash flows until maturity, consisting of:

principal repayment (example: at contractual maturity);
repricing principal at the earliest time when:
a) the Bank or counterparty has the right to unilaterally change the interest rate; or b) the interest rate of a floating rate instrument changes automatically in response to changes in market reference interest rates;
interest payments on the portion of principal that has not been repaid or has not undergone interest rate adjustment. The spread component of interest payments on said principal is allocated until contractual maturity without considering whether the non-amortised principal has undergone interest rate adjustment or not.
e. Notional repricing cash flows as referred to in letter a for floating rate instruments are assumed to undergo interest rate adjustment on the first reset date. Thus, all principal amounts are placed in the time bucket where the first reset date occurs. There is no additional allocation to longer time buckets for notional repricing cash flows, except for the spread component that does not undergo interest rate adjustment.

Time Bucket Placement Process and Separation of Banking Book Instruments
Notional repricing cash flows are placed into the appropriate time bucket or midpoint of the time bucket based on the contractual maturity date for cash flows originating from fixed rate instruments or based on the next interest rate adjustment period for cash flows originating from floating rate instruments.

a. Positions amenable to standardisation
Positions amenable to standardisation consist of:

Fixed rate positions
Positions that generate fixed cash flows until contract maturity. All cash flows generated from principal and interest payments are placed into the time bucket or midpoint of the time bucket closest to the contract maturity.
Floating rate positions
Positions that generate variable cash flows until maturity. There are cash flows related to spread components that do not undergo interest rate adjustment. These cash flows consist of:
a) a series of coupon payments until the next repricing date; and b) notional principal cash flows placed in the time bucket midpoint closest to the next repricing date time bucket.

b. Positions with embedded automatic interest rate options.

In the context of the cash flow slotting process as referred to in item 3.b, the Bank must separate options in the form of embedded automatic interest rate options from their main contracts.
Example: floating rate loans or bonds with floor instruments. The floor option will be considered non-existent, so the floating rate loan or bond will fully undergo repricing on the next reset date. The full outstanding balance will be placed in the time bucket corresponding to the contractual maturity. Callable bonds issued by the Bank are assumed to mature on the latest contractual maturity date and do not take into account the call options contained in the callable bonds.
Options not taken into account as referred to in item 1) will receive the same treatment as explicit automatic interest rate options.
The Bank may include other positions in the category of positions amenable to standardisation and not take into account options attached to said positions if the Bank can prove that the consequence of separating said options does not result in a material impact.

c. Positions less amenable to standardisation
Positions less amenable to standardisation have option features that cause the maturity of notional repricing cash flows to be uncertain. The said options are separated from the original contract and consist of:

explicit automatic interest rate options; and
embedded automatic interest rate options.
Example: Floating rate Home Loans (KPR) with attached caps or floors. Notional repricing cash flows for such loans are treated like fixed rate loans until the next interest rate adjustment date without considering the caps or floors option features. This option component will be valued together with automatic interest options.

d. Positions not amenable to standardisation
Positions not amenable to standardisation consist of NMD, fixed rate loans subject to prepayment risk, term deposits subject to early redemption risk, and fixed rate loan commitments. The time bucket placement process uses internal methods developed by the Bank.

Treatment for Non Maturity Deposits (NMD)
a. NMD are liabilities that can be withdrawn by customers at any time because they do not have a contractual maturity. Based on the standard framework, the separation of NMD is performed as follows:

The Bank separates NMD based on deposit categories originating from individual customers, micro and small business customers, and corporate customer deposits. The said deposit categories meet the requirements as referred to in Financial Services Authority Regulations regarding the obligation to fulfill the liquidity coverage ratio for commercial banks;
Deposits from individual customers, micro and small business customers are placed into 2 (two) types of accounts as follows:
a) transactional accounts, namely deposit accounts used for regular transactions, for example salary accounts or non-interest bearing deposits; or b) non-transactional accounts.
Deposits from individual customers, micro and small business customers are categorized into stable deposits and less stable deposits. The Bank can use the requirements as referred to in Financial Services Authority Regulations regarding the obligation to fulfill the liquidity coverage ratio for commercial banks. The Bank is expected to perform analysis using data on volume changes over the previous 10 (ten) year period. As an initial step, the Bank can use data on stable and less stable deposits currently available in the Liquidity Coverage Ratio (LCR) calculation.
The Bank identifies core deposits and non-core deposits from each stable deposit based on the limits contained in Table 2.

Core deposits are a portion of stable NMD with a very small interest rate change level even if there are quite significant changes in market interest rates. The Bank can use the pass-through rate concept to determine the portion of stable deposits that are sensitive to interest rates. Pass-through rate is the portion or proportion of market interest rate changes that will be charged to customers in order to maintain the same level of stable deposits. This also reflects the portion of stable deposits that undergo interest rate changes (reprice) due to changes in market interest rates. The Bank must measure the pass-through rate as a response to interest rate shifts within a time period considered relevant or until all effects of market interest rate movements have been charged to customers based on the Bank's internal estimates.
5) The Bank determines the appropriate cash flow placement for each category and refers to the limits contained in Table 2, considering the following:
a) Non-core deposits, cash flows are categorized as overnight deposits and placed in the time bucket or midpoint of the time bucket that is the shortest. b) Core deposits, cash flow placement procedures are performed based on the longest average maturity for each category as established in Table 2.

Table 2. Caps on Core Deposits and Average Maturity by Category

Caps on core deposit proportion (%)
Caps on average maturity of core deposits (years)

Retail/Transactional: 90, 5
Retail/Non-transactional: 70, 4.5
Wholesale: 50, 4

Treatment for Positions with Behavioral Options other than Non-Maturity Deposits (NMD)

a. Treatment for positions with behavioral options other than NMD applies to individual customers. In the event that a corporate customer has behavioral options that can change the pattern of notional repricing cash flows, such options will be categorized as automatic interest rate options.

b. Examples of behavioral options held by corporate customers include puttable fixed coupon bonds issued by the Bank and purchased by corporate customers. Corporate customers who purchase puttable fixed coupon bonds have the right to sell the bonds back to the Bank at any time, at a price determined at the inception of the contract. Customers may exercise the option due to, among other things, changes in interest rates.

c. In order to calculate the estimated optionality value and determine cash flows for products with behavioral options, the Bank must apply a standard framework using a 2 (two) stage approach, which is the product of:

a scenario-dependent scalar reflecting changes in customer behavior in exercising the option; and
baseline parameter estimates for fixed-rate loan products with prepayment options and deposit products with early redemption options based on the term structure of interest rates applicable on the reporting date.

The baseline estimates referred to above:
a) are determined by the Bank after obtaining approval from the Financial Services Authority (OJK); or b) are set by the Financial Services Authority (OJK).

d. Treatment for Fixed Rate Loans Subject to Prepayment Risk

Uncompensated prepayment is the prepayment of all or part of a loan with economic costs not charged to the borrower.
The standard framework for determining notional repricing cash flows for fixed rate loans subject to prepayment risk must be used for loans with the following conditions:
a) economic costs for prepayment are never charged to the borrower; or b) economic costs for prepayment will be charged to the borrower when the notional amount of prepayment exceeds a determined threshold.
In order to calculate cash flows, the Bank must determine the baseline Conditional Prepayment Rate (CPR) for each portfolio p consisting of homogeneous prepayment-exposed loan products in denomination currency c, based on the term structure of applicable interest rates.
The CPR for each portfolio p consisting of homogeneous prepayment-exposed loan products in denomination currency c, and interest rate scenario i, is the product of a constant baseline value and a scenario multiplier, with the following formula:

CPR(i,c,p) = min(1, γi * CPR(0,c,p))

CPR(i,c,p) = adjusted CPR value for portfolio p consisting of homogeneous prepayment-exposed loan products in denomination currency c.
CPR(0,c,p) = constant baseline CPR value for portfolio p consisting of homogeneous prepayment-exposed loan products in denomination currency c.
γi = multiplier used for interest rate scenario i, as per Table 3.

The prepayment speed can vary depending on the interest rate shock scenario. The multiplier reflects the expectation that prepayment will generally increase when interest rates decline and decrease when interest rates rise.

Table 3. CPR by Interest Rate Shock Scenario

Prepayment on fixed rate loans must be reflected in relevant cash flows, i.e., there must be a clear schedule for loan payment periods, prepayment periods, and interest payment periods. It is assumed that there are no annual limits on prepayment. However, if the Bank has an annual limit on uncompensated prepayment, that limit will be applied. Payments can be divided into 2 (two), namely:
a) scheduled payments for prepayment; and b) uncompensated prepayment.

With the following formula:

CF(i,c,p)(k) = CF(s)(i,c,p)(k) + CPR(i,c,p) * N(i,c,p)(k-1)

CF(s)(i,c,p)(k) = scheduled principal and interest payments; CPR(i,c,p) = adjusted CPR value for portfolio p consisting of homogeneous prepayment-exposed loan products in denomination currency c.
N(i,c,p)(k-1) = outstanding notional value at time scale k-1. i = baseline cash flows based on the current yield curve and baseline CPR marked with i = 0, while interest rate shock scenarios are marked with i = 1 to 6.

e. Treatment for Term Deposits Subject to Early Redemption Risk

Deposits with fixed interest rates and fixed maturities may have early redemption risk. Deposits are treated as fixed-rate liabilities, and the notional repricing cash flow related to the deposit will be placed on the time scale based on the contractual maturity date, subject to the following conditions:
a) the customer does not have a legal right to withdraw the deposit; and b) early redemption can result in significant penalties that can be used as compensation for:
i. interest losses occurring in the period between the withdrawal date and the contractual maturity date; and
ii. economic costs of contract termination.

However, often penalties do not reflect the calculation of the aforementioned economic costs but are based on easier calculations such as a percentage of accrued interest. In such cases, there is a potential for changes in profit or loss arising from the difference between the penalty charged and the actual economic cost of early redemption.

If the requirements referred to in item 1 are not met, the customer has the option to withdraw the deposit, creating early redemption risk.
Furthermore, in the event that the Bank issues deposits that do not meet the above criteria to corporate customers, it is assumed that the customer will exercise the right to withdraw the deposit in the manner least favorable to the Bank. Such deposits are classified as automatic interest rate options.
In order to calculate cash flows from deposits, the Bank must determine the baseline Term Deposit Redemption Ratio (TDRR) for each portfolio p consisting of homogeneous deposit products in denomination currency c, based on the term structure of applicable interest rates on the reporting date or calculation date.
Deposits expected to be withdrawn earlier will be placed on the overnight time scale (k=1) or time bucket midpoint (t1).
The TDRR for time scale k applies to each portfolio p consisting of deposit products in denomination currency c, and interest rate scenario i, and is the product of the baseline and a scalar multiplier (ui) with the following formula:

TDRR(i,c,p) = min (1, ui * TDRR(0,c,p))

TDRR(0,c,p) = constant baseline TDRR value for portfolio p consisting of homogeneous deposit products in denomination currency c. ui = multiplier used for interest rate scenario i, as per Table 4.

Table 4. TDRR by Interest Rate Shock Scenario

Notional repricing cash flows expected to be withdrawn earlier based on interest rate shock scenario i with the following formula:

CF(i,c,p)(1) = TD(0,c,p) * TDRR(i,c,p)

TD(0,c,p) = outstanding deposit value based on portfolio type p.
TDRR(i,c,p) = TDRR value for portfolio p with interest rate i consisting of homogeneous deposit products in denomination currency c.

The net cash flow amount in each time scale is multiplied by the corresponding multiplier to estimate the sensitivity of different time scale positions to interest rate change scenarios.

Calculation Method for Automatic Interest Rate Options

a. In order to calculate IRRBB, the Bank performs an add-on calculation for automatic interest rate options, both explicit and embedded.

b. Automatic interest rate options that are traded and arise in Banking Book positions are caps and floors, which are generally embedded in banking products. Swaptions, such as prepayment options in non-retail products, can also be treated as automatic interest rate options. In the event that such options are held by corporate customers, the option holder will tend to exercise the option if it is in the financial interest of the option holder.

c. In the event that there are behavioral option positions held by corporate customers that can change the pattern of notional repricing cash flows, such positions are categorized as automatic interest rate options embedded in the product.

d. This applies to automatic interest rate options sold by the Bank. The Bank has the choice to calculate all automatic options purchased or only calculate automatic options used to hedge automatic interest rate options sold by the Bank, with the following calculation method:

For each automatic interest rate option o sold by the Bank in currency c, the change in value is marked with ∆FVAO(i,c,o) and calculated for each interest rate shock scenario i. The change in value is calculated based on:
a) an estimate of the option value to the option holder. This estimation requires a methodology previously approved by the Financial Services Authority, based on:
i. the yield curve in currency c and interest rate shock scenario i; and
ii. a relative increase in implied volatility of 25% (twenty-five percent); minus
b) the value of the automatic option sold to the option holder based on the yield curve in currency c and at the valuation date.
For each automatic interest rate option q purchased by the Bank, the Bank must determine the change in option value based on interest rate shock scenario i and the current term structure of interest rates, combined with a relative increase in implied volatility of 25% (twenty-five percent). The change in value is marked with ∆FVAO(i,c,q).
The Bank calculates the total Risk for automatic interest rate options based on interest rate shock scenario i and currency c with the following formula:

KAO(i,c) = Σ ∆FVAO(i,c,o) - Σ ∆FVAO(i,c,q)

nc and mc are the number of options sold and purchased in currency c.

e. In the event that the Bank chooses to only calculate automatic interest rate options purchased by the Bank and used to hedge automatic interest rate options sold by the Bank, then the Bank must add each change in market value reflected in the capital adequacy measurement as referred to in POJK KPMM into the calculation of total Risk for automatic interest rate option risk (KAO(i,c)).

D. INTEREST RATE SHOCK SCENARIOS AND STRESS SCENARIOS

Development of internal interest rate shock scenarios and stress scenarios

a. Banks that develop and use an internal measurement system (IMS) for IRRBB must be able to accommodate the calculation of the impact of various scenarios on economic value and earnings. In developing interest rate shock scenarios, the Bank must consider various factors, at least the shape and level of current interest rates, past interest rates, and the implied volatility of interest rates. The scenarios include:

internally determined interest rate shock scenarios to measure the Bank's Risk profile based on internal capital adequacy assessment (ICAAP) calculation results;
interest rate stress scenarios using historical data and hypothetical assumptions. This tends to be more difficult than shock scenarios;
standardized interest rate shock scenarios consisting of 6 (six) scenarios as referred to in item 3; or
other interest rate shock scenarios set by the Financial Services Authority for IRRBB measurement.

Process for Selecting Shock and Stress Scenarios

In order to develop interest rate shock simulation methods and stress scenarios for calculating IRRBB, the Bank coordinates with work units and expert teams within the Bank. The Bank ensures that the IRRBB stress testing program has considered various suggestions from expert teams. In addition, the Bank must pay attention to the following:

a. Having diverse scenarios in identifying sources of IRRBB such as gap risk, basis risk, and option risk. The Bank must ensure that the scenarios are significant and reasonable, and consider the applicable interest rate levels and interest rate cycles.

b. Concentration of instruments or markets because liquidation or mitigation of concentrated Bank positions will be more difficult when markets face pressure or stress.

c. Considering the results of assessments conducted on other types of Risk, including Credit Risk and Liquidity Risk, and analyzing the possibility of interaction with various types of Risk.

d. Assessing the impact of adverse changes in the spread of new asset or liability positions replacing matured asset or liability positions.

e. In the event that the Bank has significant option risk, the Bank must include scenarios for the exercise of such options. For example, a Bank with products featuring caps or floors must include scenarios that assess the pattern of change in Risk positions if these options move into the money for caps or floors. The market value of options fluctuates with changes in interest rate volatility, so the Bank must set interest rate assumptions to measure IRRBB exposure to changes in interest rate volatility.

f. Determining the term structure of interest rates to be used and the relationship between the yield curve, interest rate indices, and so on. The Bank must estimate the pattern of interest rate changes managed by management, such as the prime rate or individual customer deposit rates, compared to interest rates influenced only by the market. These assumptions must be adequately documented.

Interest Rate Shock Scenarios

a. The Bank must perform shock simulations in IRRBB calculations. IRRBB exposure measurement is based on 6 (six) interest rate shock scenarios as follows:

parallel interest rate shock up;
parallel interest rate shock down;
steepener shock with a combination of short-term interest rates declining and long-term interest rates increasing (short rates down and long rates up);
flattener shock with a combination of short-term interest rates increasing and long-term interest rates decreasing (short rates up and long rates down);
short-term interest rate shock up (short rates shock up); and
short-term interest rate shock down (short rates shock down).

b. Shock simulations in IRRBB calculations using the EVE method are based on 6 (six) shock scenarios as referred to in letter a.

c. Shock simulations in IRRBB calculations using the NII method are based on 2 (two) shock scenarios as referred to in letter a items 1) and 2).

d. The change in risk-free interest rate ∆R(i,c)(tk) for interest rate shock scenario i, currency c, and the midpoint of the time scale tk (k is a numerical index for 19 (nineteen) standard time scales as referred to in Table 1) using 6 (six) interest rate shock scenario parameters is determined as follows:

Parallel shock up
∆R(parallel,c)(tk) = + R̅(parallel,c)
Parallel shock down
∆R(parallel,c)(tk) = - R̅(parallel,c)
Short Rate Shock Up and Short Rate Shock Down
∆R(short,c)(tk) = ± R̅(short,c) ∙ Sshort(tk) = ± R̅(short,c) ∙ e^(-tk/x)

Note: x=4

Steepener Shock
∆R(steepener,c)(tk) = -0.65 ∙ |∆R(short,c)(tk)| + 0.9 ∙ |∆R(long,c)(tk)|.
Flattener Shock
∆R(flattener,c)(tk) = +0.8 ∙ |∆R(short,c)(tk)| - 0.6 ∙ |∆R(long,c)(tk)|.

Example:

Short rate shock: It is assumed that the Bank uses the standard framework with K = 19 and tk = 19 years (the midpoint in time units of the longest tenor on time scale k), and tk is the midpoint in time units on time scale k. In the standard framework, if k = 10 with tk = 3.5 years, the scalar adjustment for short shock is Sshort(tk) = (e^(-3.5/4)) = 0.417. The Bank will multiply this value with the short rate shock value to obtain the amount to be added or subtracted from the interest rate at each tenor point along the yield curve.

If the short rate shock is +100 bp, then the interest rate increase for the tenor point on the yield curve with tk = 3.5 years is 41.7 bp.

Steepener: It is assumed that the tenor point on the yield curve is the same as above, i.e., tk = 3.5 years. In the event that the absolute value of the short rate shock is 100 bp and the absolute value of the long rate shock is 100 bp (in this case for Japanese Yen), the interest rate change at the tenor point on the yield curve with tk = 3.5 years is the sum of the effect of the short rate shock plus the effect of the long rate shock in basis points:

-0.65 ∙ 100bp ∙ 0.417 + 0.9 ∙ 100bp ∙ (1 - 0.417) = +25.4bp.

Flattener: The interest rate change at the tenor point on the yield curve due to the shock as in the example above with tk = 3.5 years is: +0.8 ∙ 100bp ∙ 0.417 - 0.6 ∙ 100bp ∙ (1 - 0.417) = -1.6bp.

e. Post-shock interest rates are set to a minimum of 0% (zero percent).

f. The final calibration of standard interest rate shock values set is as follows:

Table 5. Specific Values of Interest Rate Shock Scenarios R̅(Shocktype,c)

ARS	AUD	BRL	CAD	CHF	CNY	EUR	GBP	HKD	IDR
Parallel	400	300	400	200	100	250	200	250	200	400
Short	500	450	500	300	150	300	250	300	250	500
Long	300	200	300	150	100	150	100	150	100	350

INR	JPY	KRW	MXN	RUB	SAR	SEK	SGD	TRY	USD	ZAR
Parallel	400	100	300	400	400	200	200	150	400	200	400
Short	500	100	400	500	500	300	300	200	500	300	500
Long	300	100	200	300	300	150	150	100	300	150	300

Set in Jakarta,
On August 21, 2018

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY,

Signed,
HERU KRISTIYANA

This copy is consistent with the original
Legal Director 1
Legal Department

Signed,
Yuliana

APPENDIX III
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 12 /SEOJK.03/2018 CONCERNING THE IMPLEMENTATION OF RISK MANAGEMENT AND STANDARD APPROACH MEASUREMENT FOR INTEREST RATE RISK IN THE BANKING BOOK (INTEREST RATE RISK IN THE BANKING BOOK) FOR COMMERCIAL BANKS

Matrix for Setting Inherent Risk Levels for IRRBB as part of the Matrix for Setting Inherent Risk Levels for Market Risk

Rating	Definition of Rating
Low (1)	Considering the business activities conducted by the Bank, the likelihood of losses faced by the Bank from IRRBB is classified as very low during a certain period in the future.
Characteristics of Banks included in the Low (1) rating include at least:
a. asset and liability structure is not sensitive to interest rate changes, as reflected in the very minimal impact of EVE calculations on capital; and b. the EVE calculation parameter is when ∆EVE is below the Bank's internal limit.
Low to Moderate (2)	Considering the business activities conducted by the Bank, the likelihood of losses faced by the Bank from IRRBB is classified as low during a certain period in the future.
Characteristics of Banks included in the Low to Moderate (2) rating include at least:
a. asset and liability structure is less sensitive to interest rate changes, as reflected in the minimal impact of EVE calculations on capital; and b. the EVE calculation parameter is when ∆EVE is above the Bank's internal limit but below 13% (thirteen percent) of core capital (Tier 1). Moderate (3)	Considering the business activities conducted by the Bank, the likelihood of losses faced by the Bank from IRRBB is classified as moderately high during a certain period in the future. Characteristics of Banks included in the Moderate (3) rating include at least:
a. asset and liability structure is moderately sensitive to interest rate changes, as reflected in the moderately significant impact of EVE calculations on capital; and b. the EVE calculation parameter is when ∆EVE is between 13% (thirteen percent) to 15% (fifteen percent) of core capital (Tier 1). Moderate to High (4)	Considering the business activities conducted by the Bank, the likelihood of losses faced by the Bank from IRRBB is classified as high during a certain period in the future. Characteristics of Banks included in the Moderate to High (4) rating include at least:
a. asset and liability structure is sensitive to interest rate changes, as reflected in the significant impact of EVE calculations on capital; and b. the EVE calculation parameter is when ∆EVE is between 15% (fifteen percent) to 20% (twenty percent) of core capital (Tier 1).

Matrix for Setting Inherent Risk Levels for IRRBB as part of the Matrix for Setting Inherent Risk Levels for Market Risk

Rating	Definition of Rating
Low (1)	Considering the business activities conducted by the Bank, the likelihood of losses faced by the Bank from IRRBB is classified as very low during a certain period in the future.
Characteristics of Banks included in the Low (1) rating include at least:
a. asset and liability structure is not sensitive to interest rate changes, as reflected in the very minimal impact of EVE calculations on capital; and b. the EVE calculation parameter is when ∆EVE is below the Bank's internal limit.
Low to Moderate (2)	Considering the business activities conducted by the Bank, the likelihood of losses faced by the Bank from IRRBB is classified as low during a certain period in the future.
Characteristics of Banks included in the Low to Moderate (2) rating include at least:
a. asset and liability structure is less sensitive to interest rate changes, as reflected in the minimal impact of EVE calculations on capital; and b. the EVE calculation parameter is when ∆EVE is above the Bank's internal limit but below 13% (thirteen percent) of core capital (Tier 1). Moderate (3)	Considering the business activities conducted by the Bank, the likelihood of losses faced by the Bank from IRRBB is classified as moderately high during a certain period in the future. Characteristics of Banks included in the Moderate (3) rating include at least:
a. asset and liability structure is moderately sensitive to interest rate changes, as reflected in the moderately significant impact of EVE calculations on capital; and b. the EVE calculation parameter is when ∆EVE is between 13% (thirteen percent) to 15% (fifteen percent) of core capital (Tier 1). Moderate to High (4)	Considering the business activities conducted by the Bank, the likelihood of losses faced by the Bank from IRRBB is classified as high during a certain period in the future. Characteristics of Banks included in the Moderate to High (4) rating include at least:
a. asset and liability structure is sensitive to interest rate changes, as reflected in the significant impact of EVE calculations on capital; and b. the EVE calculation parameter is when ∆EVE is between 15% (fifteen percent) to 20% (twenty percent) of core capital (Tier 1).

This copy is identical to the original
Legal Director 1
Legal Department signed
Yuliana
Matrix for Setting Inherent Risk Levels for IRRBB as part of the Matrix for Setting Inherent Risk Levels for Market Risk Rating Definition Rating High (5) Considering the business activities conducted by the Bank, the likelihood of losses faced by the Bank from IRRBB is classified as very high over a certain period in the future. Characteristics of Banks included in the High (5) rating include at least:
a. asset and liability structures sensitive to interest rate changes, as reflected in the EVE calculation having a very significant impact on capital; and b. the EVE calculation parameters are such that ∆EVE is above 20% (twenty percent) of core capital (Tier 1). Determined in Jakarta, on August 21, 2018 EXECUTIVE HEAD OF BANKING SUPERVISOR FINANCIAL SERVICES AUTHORITY, signed HERU KRISTIYANA

APPENDIX IV
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 12 /SEOJK.03/2018 CONCERNING THE IMPLEMENTATION OF RISK MANAGEMENT AND STANDARD APPROACH RISK MEASUREMENT FOR INTEREST RATE RISK IN THE BANKING BOOK (INTEREST RATE RISK IN THE BANKING BOOK) FOR COMMERCIAL BANKS

IRRBB RISK MANAGEMENT IMPLEMENTATION REPORT
(INTEREST RATE RISK IN THE BANKING BOOK)
Bank Name : PT Bank…. (individual/consolidated)* Report Position : Month/Year Qualitative Analysis

Explanation of how the Bank defines IRRBB for
risk measurement and control.
Explanation of Risk Management and Risk Mitigation
strategies for IRRBB.
IRRBB calculation periodicity of the Bank and explanation of
specific measurements used by the Bank to measure sensitivity to IRRBB.
Explanation of interest rate shock scenarios and stress
scenarios used by the Bank in IRRBB calculations using EVE and NII methods.
If there are modeling assumptions used significantly
in the Bank's IMS (Internal Capital Adequacy Assessment Process) (e.g., EVE measurement results conducted by the Bank for purposes other than disclosure, internal assessment of capital adequacy) differ from the modeling assumptions used in the standard approach IRRBB calculation report, the Bank must provide an explanation of such assumptions including their impact and reasons for using such assumptions (e.g., historical data, management considerations and analysis).
Explanation of how the Bank hedges against IRRBB
(if any) and related accounting treatment.
Comprehensive explanation of the main modeling assumptions and
parametric assumptions used in calculating ∆EVE and ∆NII, at least:
a. determining whether commercial margins and other spread components have been taken into account in cash flows and in the discount rates used in calculations with the EVE method; b. determining how the average repricing maturities of NMD are determined in quantitative disclosure (including unique product characteristics that affect repricing behavior assessment);
c. methodology used to estimate prepayment rates for
loans and/or early withdrawal rates for time deposits and other significant assumptions; d. other assumptions, including instruments with behavioral options (behaviour options) that have been excluded from calculations, which have a material impact on ∆EVE and ∆NII disclosed in

the standard approach IRRBB calculation report and explanation of how this has a material impact; and e. methodology for aggregation across currencies and interest rate correlation across currencies that is significant.
8. Other information that needs to be disclosed by the Bank regarding the Bank's interpretation of the significance and sensitivity of IRRBB measurement results that have been disclosed and/or explanation of significant variations in reported IRRBB levels compared to previous disclosures (if any).
Quantitative Analysis

Average interest rate adjustment period (repricing maturity)
applied to NMD.
Longest interest rate adjustment period (repricing maturity)
applied to NMD.

IRRBB CALCULATION REPORT
Bank Name : PT Bank…. (individual/consolidated)* Report Position : Month/Year Currency : … (Filled with a specific currency that has material exposure) In Million Rupiah ∆EVE ∆NII Period T T-1 T T-1 Parallel up Parallel down Steepener Flattener Short rate up Short rate down Maximum Negative Value (absolute) Tier 1 Capital (for ∆EVE) or Projected Income (for ∆NII) Maximum Value divided by Tier 1 Capital (for ∆EVE) or Projected Income (for ∆NII) IRRBB Calculation Report Notes:
For each interest rate shock scenario set by the Financial Services Authority, the Bank must report in the current period and previous periods regarding:

Changes to EVE value based on the standard approach
as referred to in Appendix II which is an integral
part of this Financial Services Authority Circular Letter,
using run-off balance sheet assumptions and 6 (six) shock scenarios established by the Financial Services Authority.
Changes to projected NII value over 12 (twelve) months
compared to the Bank's projected estimates under normal conditions conducted over the 12 (twelve) month period using constant balance sheet assumptions and 2 two) shock scenarios established by the Financial Services Authority.

This copy is identical to the original
Legal Director 1
Legal Department signed
Yuliana
Determined in Jakarta, on August 21, 2018
EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signed
HERU KRISTIYANA

Implementation of Risk Management and Standard Approach Measurement for Interest Rate Risk in the Banking Book for Commercial Banks

Lineage: In force