Instruction No. 18/2021 on the Calculation and Regulatory Capital Requirement for Credit Valuation Adjustment Risk

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INSTRUCTION NO. 18/2021 of October 27
SUBJECT: FINANCIAL SYSTEM

• Calculation and Regulatory Capital Requirement for Credit Valuation Adjustment Risk
  Whereas it is necessary to regulate the adjustment to the average market valuation of the portfolio of transactions carried out with a counterparty, as provided for in Notice No. 08/21 of July 5 on Prudential Requirements; Under the combined provisions of paragraphs d) and f) of paragraph 1 of Article 31, and paragraph c) of paragraph 1 of Article 54, both of Law No. 16/10 of July 15, the Law of the National Bank of Angola, and Article 166 of Law No. 14/21 of May 19, the General Regime for Financial Institutions Law. DETERMINES:

1. Object
   This Instruction establishes the Capital Requirements for Credit Valuation Adjustment Risk, as provided in Notice No. 08/21 of July 5 on Prudential Requirements.

2. Scope
   This Instruction applies to Banking Financial Institutions under the supervision of the National Bank of Angola, hereinafter abbreviated as Institutions, provided for in Law No. 14/21 of May 19, the General Regime for Financial Institutions Law.

CONTINUATION OF INSTRUCTION NO. 18/2021 Page 2 of 8
3. Definitions
Without prejudice to the definitions established in Law No. 14/21 of May 19, the General Regime for Financial Institutions Law, for the purposes of this Instruction, it is understood that:
a) OTC Derivatives: all distributions, purchases and sales of shares carried out outside the stock exchange. b) Risk Position: an asset or an off-balance sheet obligation.

4. Capital Requirements for Credit Valuation Adjustment
   4.1. For the purpose of reducing weighted risk position values for credit risk, Institutions must calculate the Capital Requirements for Credit Valuation Adjustment Risk (CVA) for all OTC derivative instruments related to both banking and non-banking portfolios, with the exception of recognized credit derivatives.
   4.2. Institutions must calculate the CVA Risk Capital Requirements for their portfolio, with respect to each counterparty, considering eligible CVA hedges, as per subsection 4.4 of this Instruction, through the following formula:
   ! = 2.33 ∙ √ℎ ∙ )+0,5
   ! ∙ /! ∙ (1! ∙ 234!
   "#$% − 1! &#'()$6!)8

• +0,75 ∙ /!
• ∙ (1! ∙ 234!
  "#$% − 1! &#'()*$6!)8

! in which:
a) ℎ = one-year risk horizon (in units of one year); ℎ = 1; b) w_i = risk weight applicable to counterparty i. Counterparty i is assigned one of the six weights w_i based on an external credit rating provided by an eligible external rating agency, defined in specific regulation on eligible external rating agencies, according to subsection 4.7 of this Instruction.

CONTINUATION OF INSTRUCTION NO. 18/2021 Page 3 of 8 c) For the purpose of the preceding paragraph, for counterparties that do not have a credit rating from an eligible external rating agency, the Institution assigns w_i = 1.0%; d) EAD_i = total value of the counterparty credit risk position, with respect to counterparty i (summing all its netting sets), including the effect of collateral, according to the capital requirement calculation method for counterparty credit risk for that counterparty, defined in specific regulation. The risk position is discounted by applying the following factor:
1 − +&',')∙+!
0,05 ∙ 0! e) N_i = notional amount of purchased single-name credit default swap hedges, summed in the case of more than one position, with respect to counterparty i and used as CVA risk coverage. This notional value is discounted by applying the following factor:
1 − +&',')∙+!
"#$%&'(&)
0,05 ∙ 0!,#-./"0/$ f) M_i = effective maturity of transactions with counterparty i in years, where M_i is the higher of 1 year and the weighted average residual maturity, using the notional value for weighting purposes; g) M_i,hedge = maturity of the hedging instrument with a notional N_i (the values M_i,hedge + N_i must be summed in the case of several positions).

4.3. The following transactions are excluded from Capital Requirements for CVA Risk:
a) Risk positions held with a central counterparty that fully guarantees all participants on a daily basis, provided these positions are clearly established with that counterparty and have not been rejected by it; and,

CONTINUATION OF INSTRUCTION NO. 18/2021 Page 4 of 8 b) Intra-group risk positions, provided both counterparties are fully included in the same consolidation perimeter and are subject to centralized risk assessment, measurement, and control procedures.

4.4. For the purpose of mitigating CVA Risk, eligible hedging elements are considered to be single-name credit default swaps or other equivalent hedging instruments, directly related to the counterparty, if used with the purpose of reducing CVA Risk.
4.5. Institutions must not reflect other types of counterparty risk hedges in the calculation of capital requirements for CVA Risk.
4.6. Eligible hedges included in the calculation of Capital Requirements for CVA Risk are not included in the calculation of capital requirements for specific risk, defined in Instruction No. 16/21 of October 27 on Regulatory Capital Requirements for Market Risk.
4.7. Without prejudice to the preceding subsection, eligible hedges included in the calculation of capital requirements for CVA Risk must not be treated as a reduction in credit risk, and should only be used for the purpose of counterparty credit risk from the same portfolio of transactions.
4.8. For the purpose of assigning a weight based on an external credit rating from an external rating agency, Institutions must consider the following table:
Table 01
Credit Quality Grade | Weight w_i
1 | 0.7 %
2 | 0.8 %
3 | 1.0 %
4 | 2.0 %
5 | 3.0 %
6 | 10.0 %

CONTINUATION OF INSTRUCTION NO. 18/2021 Page 5 of 8
5. Information Reporting
5.1. Institutions must report to the National Bank of Angola information on capital requirements for CVA Risk, through the form provided in Annex I of this Instruction and forming an integral part thereof.
5.2. For the purpose of the preceding subsection, the values to be filled in must comply with the filling notes in Annex II of this Instruction and forming an integral part thereof.
5.3. For the purpose of the preceding subsection, in the case of a financial group, the parent company must report information according to the consolidation perimeter provided for in Article 5 of Notice No. 08/21 of July 5 on Prudential Requirements.
5.4. For the purpose of subsection 5.1, Institutions must report quarterly the information required in Article 34 of Notice No. 08/21 of July 5 on Prudential Requirements, on an individual and consolidated basis.
5.5. Institutions must ensure that the data reported in the table attached to this Instruction are properly documented.

6. Transitional Provisions
   Institutions must comply with the provisions of this Instruction from December 31, 2021.

7. Sanctions
   Non-compliance with the mandatory norms established in this Instruction constitutes an offense punishable under Law No. 14/21 of May 19, the General Regime for Financial Institutions Law.

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

CONTINUATION OF INSTRUCTION NO. 18/2021 Page 6 of 8
9. Entry into Force
This Instruction enters into force on the date of its publication.
PUBLISHED.
Luanda, October 27, 2021.
THE GOVERNOR
JOSÉ DE LIMA MASSANO

CONTINUATION OF INSTRUCTION NO. 18/2021 Page 7 of 8
ANNEX I
Form “Capital Requirement for Coverage of Credit Valuation Adjustment Risk”

CONTINUATION OF INSTRUCTION NO. 18/2021 Page 8 of 8
ANNEX II
Filling Notes for the Form “Capital Requirement for Coverage of Credit Valuation Adjustment Risk”

1. The elements necessary for reporting quantitative information to the National Bank of Angola, within the scope of determining Capital Requirements for CVA Risk, are described as follows:
   a) The portion of the total counterparty credit risk position exclusively arising from OTC derivatives, as defined in section 4 of this Instruction; b) The Capital Requirements for CVA Risk calculated through section 4 of this Instruction. c) The number of counterparties included in the Capital Requirement Calculation for CVA Risk. d) The total notional amounts of single-name credit default swaps or other equivalent hedging instruments directly related to the counterparty, used as coverage for CVA Risk. ---