INSTRUCTION NO. 14/2016

of August 8

SUBJECT: CALCULATION AND REQUIREMENT OF REGULATORY CAPITAL FOR MARKET RISK AND COUNTERPARTY CREDIT RISK IN THE TRADING BOOK

Whereas it is necessary to regulate the technical specifics regarding the regulatory capital requirement provided for in Notice No. 04/2016 of June 22, regarding regulatory capital requirements for market risk and counterparty credit risk in the trading book;

Under the combined provisions of letters d) and f) of paragraph 1 of Article 21 and letter d) of paragraph 1 of Article 51, both of Law No. 16/10 of July 15 – Law of the Bank of Angola, and Article 88 of Law No. 12/15 of June 17 – Basic Law of Financial Institutions.

I DETERMINE:

1. Definitions

Without prejudice to the definitions established in the Basic Law of Financial Institutions, for the purposes of this Instruction, the following are understood:

1.1 External Rating Agency: Entity that performs external credit assessments, at the request of the rated entity or on its own initiative.

1.2 Banking Book: Set of financial instruments of an Institution consisting of financial instruments not held in the trading book.

1.3 Credit Default Swap: Derivative financial instrument in which the buyer is protected by the seller against the default risk of a third-party reference entity in exchange for an annual premium. If the reference entity fails to meet its commitments, the protection seller pays the buyer the value of the loss incurred by the buyer in cash or as consideration for the physical delivery of the instrument underlying the derivative.

1.4 Forward Rate Agreements (FRA): Derivative financial instrument consisting of a forward interest rate contract in which the buyer agrees to receive a value in the form of a loan in the future remunerated at the forward (contract) rate, and the seller guarantees the contracted interest rate. However, only the difference between the interest rates (forward and market) is traded, not the underlying.

1.5 Delta: Variation in the value of an option resulting from a marginal variation in the value of its underlying asset.

1.6 Risk Factor: Aspect or characteristic that influences risk. In the assessment of risks, the characteristics of products and financial markets, borrowers, and processes in place at Institutions are relevant.

1.7 Futures and Forwards: Derivative financial instruments consisting of forward purchase and sale contracts, by which two parties agree on a price relative to a future transaction of a certain financial instrument or commodity. The two instruments differ in that futures are standardized contracts traded on an organized market, while forwards are customizable contracts by the involved parties, traded in the over-the-counter (OTC) market.

1.8 Option: Derivative financial instrument consisting of a contract that grants the right, but not the obligation, to buy or sell a given quantity of a certain asset (underlying), at a certain price and on a certain date, in the case of a European option, or until a future date, in the case of an American option.

1.9 Margin-lending operations: Operations in which the Institution grants credit through the loan of normally fungible assets, within the scope of purchase, sale, transfer, or trading of securities, not including other loans because they are secured by securities.

1.10 Long settlement operations: Operations in which a counterparty commits to deliver a security, a commodity, or a certain amount of currency in exchange for cash, other financial instruments, or commodities, or vice-versa, on a settlement or delivery date contractually defined as higher than the lowest market practice for this type of operation, occurring more than 5 (five) business days after the date on which the Institution performs the operation.

1.11 Gross position: Summation of long positions with short positions in a certain type of instrument.

1.12 Net foreign exchange position: Position between active or long exposure and passive or short exposure, in foreign currency or indexed to exchange rate variation.

1.13 Short position: Contractual position assumed by an investor who will benefit from a price drop and suffer a loss from a price rise.

1.14 Net position: Excess of the long (short) position over the short (long) in the same equity security, obligation, currency, commodity, convertible instruments, or identical financial instruments.

1.15 Long position: Contractual position assumed by an investor who will benefit from a price rise and suffer a loss from a price drop.

1.16 Relationship of control or group: Control relationship as defined in paragraph 22 of Article 2 of Law No. 12/15 of June 17 – Basic Law of Financial Institutions.

1.17 Specific risk: Risk of a price variation in the instrument due to factors associated with the issuer.

1.18 General risk: Risk of a price variation in the instrument due to a global movement in the market.

1.19 Swap: Derivative financial instrument consisting of a contract in which two counterparties agree to exchange financial flows between them, at a future date based on specific rules defined in the said contract.

1.20 Coupon rate: Interest rate paid by a debt instrument as a percentage of its nominal value.

1.21 Convertible bond: Security with a defined maturity in which there is a possibility for the issuing company to deliver to the investor, on a certain date, a certain quantity of shares or bonds.

1.22 Total Return Swap: Derivative under which all cash flow payments of interest arising from the underlying asset are remitted to another entity in exchange for a fixed payment or a variable rate payment, and any increase or reduction in the fair value of the underlying asset is absorbed by this entity.

1.23 Notional value: Face value declared on which future payments in some derivative financial instruments are based.

1.24 Warrant: Option issued by the issuing company of the underlying security.

1.25 Covered Warrant: Warrant that may have a greater variety of underlying instruments but can only be issued by Financial Institutions and grants the right, but not the obligation, not only to buy but also to sell the determined underlying instrument.

2. Regulatory Capital Requirement

2.1 Financial Institutions must calculate the regulatory capital requirement provided for in paragraph 1 of Article 4 of Notice No. 04/2016 of June 22, regarding regulatory capital requirements for market risk and counterparty credit risk in the trading book, in accordance with the annexes to this Instruction.

2.2 The result of the calculation referred to in the previous paragraph must be presented through the maps and filling notes provided for in specific regulations, regarding the provision of information on the capital requirement for market risk.

2.3 Without prejudice to the previous paragraph, the result of the calculation of the capital requirement for incomplete transactions and for positions in the trading book subject to counterparty credit risk, according to the provisions in Annexes VII and VIII of this Instruction, must be presented in specific regulations on credit risk.

2.4 Securitization operations and other credit derivatives must be previously communicated to the Bank of Angola observing the minimum requirements defined in specific regulations.

3. Sanctions

Non-compliance with the imperative norms established in this Instruction constitutes an offense punishable under the Basic Law of Financial Institutions.

4. Transitional Provisions

Institutions must comply with the provisions of this Instruction in accordance with the transitional provisions of Notice No. 02/2016 of June 15, regarding regulatory capital.

5. Doubts and Omissions

Doubts and omissions that arise in the interpretation and application of this Instruction are resolved by the Bank of Angola.

6. Entry into Force

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

PUBLISH

Luanda, August 8, 2016

THE GOVERNOR
VALTER FILIPE DUARTE DA SILVA

---

ANNEX I
Calculation of Net Positions

1. The net position of an Institution in each of the different instruments is the difference between its long positions and its short positions in equity securities, debt instruments, or convertible bonds, in the same currency or commodity and in identical contracts relating to futures, options, warrants, and covered warrants.

2. All net positions in foreign currency, regardless of their sign, must be converted into national currency, at the reference exchange rate of the Bank of Angola on the date of information provision, before their aggregation.

3. The calculation of the net position between a convertible bond and a hedging position in its underlying instrument is not permitted.

4. Interest rate futures contracts, forward-rate agreements (FRA), and forward commitments to purchase or sell debt instruments must be treated as combinations of long and short positions. In this case, "long position" is considered the position in which the Institution has fixed the interest rate it will receive in the future, and "short position" is the position in which it has fixed the interest rate it will pay in the future, according to the following:

   a) Long position in interest rate futures contracts - must be treated as the combination between:
   i. a loan taken out, maturing on the delivery date of the futures contract; and
   ii. a holding of an asset with a maturity date equal to that of the instrument or notional position underlying the futures contract in question;

   b) Sold FRA – must be treated as the combination between:
   i. a long position with a maturity date equal to the settlement date, plus the contractual period; and
   ii. a short position with a maturity date equal to the settlement date;

   c) Forward commitment to purchase debt instruments – must be treated as the combination between:
   i. a loan taken out, maturing on the delivery date, and:
   ii. a long position (spot) in the debt instrument itself;

   d) positions contrary to those described above must be treated symmetrically to those referred to in the previous letters.

5. Options on interest rates, debt instruments, equity securities, stock indices, futures on financial instruments, swaps, currencies, and commodities must be considered as if they were positions with a value equal to that of the underlying instrument of the option, multiplied by the respective delta.

6. For the purposes of the previous number, the delta to be used must be that of the exchange where the options are tradable. In the case where the said delta is not available or for over-the-counter (OTC) options, the delta used must be calculated by the Institution, which must submit the model used for approval by the Bank of Angola.

7. Positions in futures on financial instruments not relating to interest rates and forward commitments to purchase or sell the same must be considered, by the notional amount, as positions in the underlying instruments or commodities.

8. For the purposes of paragraphs 5 and 7 of this annex, Institutions may determine the net position between these positions and any hedging positions in securities or commodities identical to the underlying ones or in derivative instruments.

9. Warrants must be treated in the same manner as described for options.

10. An interest rate swap, under which an Institution receives variable rate interest and pays fixed rate interest, must be considered as the combination between:
    a) a long position in a variable rate instrument whose maturity period is equivalent to the period until the next interest rate reset; and b) a short position in a fixed rate instrument with the same maturity period as the swap.

11. For the purposes of calculating the capital requirement for hedging general risk, Institutions may offset positions in interest rate derivative instruments that cumulatively meet the following conditions:
    a) the positions have the same value and are denominated in the same currency; b) variable rate positions have the same reference rate and fixed rate positions have a difference between rates not exceeding 0.15% (fifteen hundredths of a percent); c) the difference between the interest rate reset dates for variable rate instruments or between the maturity dates for fixed rate positions, based on the shorter of the residual maturity periods, is less than:
    i. 1 (one) day, for instruments to be offset whose residual maturity is less than 1 (one) month;
    ii. 7 (seven) days, for instruments to be offset whose residual maturity is between 1 (one) month and 1 (one) year; and
    iii. 30 (thirty) days, for instruments to be offset whose residual maturity is greater than 1 (one) year.

12. For the determination of the position, for the purposes of calculating the capital requirement, when an Institution is the seller of a credit derivative, it must use the notional value of the derivative.

13. In the situations referred to in the previous number, positions are determined as follows:
    a) a total return swap originates:
    i. with respect to general risk, a long position in the underlying and a short position in debt securities of the Bank of Angola (Central Bank Securities) denominated in national currency with a maturity equivalent to the period until the next interest rate reset, to which a risk weighting coefficient of 0% (zero percent) is attributed;
    ii. With respect to specific risk, the underlying originates a long position;
    b) A credit default swap only gives rise to specific risk, and the Institution must record a synthetic long position in the underlying, but with the maturity of the credit default swap. If premium or interest payments are due, these cash flows must be recorded as notional positions in debt securities of the Bank of Angola (Central Bank Securities) denominated in national currency.

14. When an Institution is the buyer of a credit derivative, it must calculate its position symmetrically to that described for when it is the seller of the derivative.

15. If the Institution transfers securities or commodities (or rights guaranteed relating to the ownership thereof) that are part of the trading book, in a sale with a repurchase agreement or in a securities lending transaction, it must include the respective securities or commodities in the calculation of its net position for the purposes of this annex.

16. If the Institution receives securities or commodities (or rights guaranteed relating to the ownership thereof) that are part of the trading book, in a sale with a repurchase agreement or in a securities lending transaction, it must not include the respective securities or commodities in the calculation of its net position for the purposes of this annex.

---

ANNEX II
Debt Instruments

Institutions must classify their net positions in debt instruments based on the currency in which these positions are denominated and calculate the capital requirement for specific risk and general risk by currency, according to the following points.

Specific Risk:

1. Net positions in the trading book are attributed to the categories in Table 1, taking into account the respective issuer/debtor, residual maturity, and external credit risk assessment, according to specific regulations on external rating agencies. The maturity period is considered, in the case of fixed interest rate instruments, the residual term, and in the case of variable interest rate instruments, the period until the next interest rate reset. The Bank of Angola may determine that instruments included in the last and penultimate lines of Table 1 are subject to a higher specific risk requirement and/or not recognize the offsetting effect between these instruments and any other debt securities, for the purposes of calculating the capital requirement for hedging general risk.

2. The values referred to in the previous number are multiplied by the weighting coefficients indicated in the same table.

3. The capital requirement is that resulting from the sum of weighted net positions, regardless of whether they are long or short.

4. In the case where the Institution's portfolio includes its own debt instruments, these must not be included in the calculation of the capital requirement for specific risk.

Table 1

Categories	Credit Quality Grade	Capital Requirement for Specific Risk
1 – Debt securities issued or guaranteed by the central administration of Angola, i.e., the government and the Bank of Angola	N/A	0%
2 - Debt securities issued or guaranteed by central administrations, issued by central banks, international organizations, multilateral development banks, regional administrations, or local authorities	Eligible for grade 1	0%
3 - Debt securities issued or guaranteed by central administrations, issued by central banks, international organizations, multilateral development banks, regional administrations, or local authorities	Eligible for grades 2 or 3	0.25% (residual maturity equal to or less than 6 months)<br>1.00% (residual maturity greater than six months and up to 24 months)<br>1.60% (residual maturity greater than 24 months)
4 - Debt securities issued or guaranteed by Institutions eligible for grades 1 or 2
5 - Debt securities issued or guaranteed by Institutions eligible for grade 3 (with maturity not exceeding 3 months)
6 - Debt securities issued or guaranteed by companies eligible for grades 1, 2, or 3
7 - Debt securities issued or guaranteed by central administrations, issued by central banks, international organizations, multilateral development banks, regional administrations, local authorities, and by entities eligible for grades 4 or 5		8.00%
8 - Debt securities issued or guaranteed by Institutions eligible for grade 3 (with maturity equal to or greater than 3 months)
9 - Debt securities issued or guaranteed by companies eligible for grade 4
10 - Positions at risk for which no credit assessment established by an external rating agency is available.
11 - Debt securities issued or guaranteed by central administrations, issued by central banks, international organizations, multilateral development banks, regional administrations, local authorities, and by Institutions eligible for grade 6		12.00%
12 - Debt securities issued or guaranteed by companies eligible for grades 5 or 6

General Risk:

For the purposes of calculating the capital requirement for general risk, the following procedure must be followed:

1. Net positions are attributed to the appropriate maturity intervals of the second or third column of Table 2 and classified into zones also according to the same Table. The maturity period is considered, in the case of fixed interest rate instruments, the residual term, and in the case of variable interest rate instruments, the period until the next interest rate reset.

2. The sum of weighted long positions and the sum of weighted short positions in each maturity interval are calculated.

3. The amount of weighted long positions that is offset by weighted short positions, for each maturity interval, constitutes the weighted offset position of that interval, and the residual position, long or short, constitutes the weighted non-offset position of that same interval.

4. The total of weighted offset positions in all intervals is calculated.

5. To determine the weighted non-offset long position and the weighted non-offset short position in each zone of Table 2, the Institution must calculate their respective totals in all intervals included in each zone. The part of the weighted non-offset long/short position in a zone that is offset by the weighted non-offset short/long position of that same zone constitutes the weighted offset position of the zone. The part of the weighted non-offset long/short position in a zone constitutes the weighted non-offset position of that zone.

6. The part of the weighted non-offset long/short position in zone one that is offset by the weighted non-offset short/long position of zone two constitutes the weighted offset position between zones one and two.

7. The same calculations must be performed regarding the remaining part of the weighted non-offset position of zone two and the weighted non-offset position of zone three, in order to calculate the weighted offset position between zones two and three.

8. The remaining part of the weighted non-offset position of zone one is offset with the remaining part of zone three, after this zone has been offset with zone two, in order to obtain the weighted offset position between zones one and three.

9. Subsequently, the residual positions existing after the aforementioned three separate offset calculations are added, constituting the weighted non-offset residual position.

10. The capital requirement is calculated as the sum of the products resulting from the application of the following percentages to the values calculated above:
    a) 10% of the sum of weighted offset positions in all maturity intervals; b) 40% of the weighted offset position of zone one; c) 30% of the weighted offset position of zone two; d) 30% of the weighted offset position of zone three; e) 40% of the weighted offset positions between zones one and two and between zones two and three; f) 40% of the weighted non-offset residual position.

(Note: The provided text ends abruptly at point 10e. The translation reflects the available content faithfully.)