Norm on Liquidity Risk Management

1 Resolution No. CD-SIBOIF-926-3-ENE26-2016 Dated January 26, 2016

NORM ON LIQUIDITY RISK MANAGEMENT

The Board of Directors of the Superintendent of Banks and Other Financial Institutions,

CONSIDERING

I

That Article 38, numeral 1), of Law No. 561, General Law of Banks, Non-Bank Financial Institutions and Financial Groups, published in La Gaceta, Official Journal No. 232, of November 30, 2005, regarding the obligations of the board of directors, states that the latter has among its responsibilities ensuring the liquidity and solvency of the institution, with said article establishing the authority of the Board of Directors to issue regulations on this matter.

II

That Article 40, numeral 6) of the aforementioned Law No. 561, establishes, in its relevant parts, that the provisions regulating the corporate governance of financial institutions must include, among other aspects, policies on comprehensive processes that include the management of the various risks to which the institution may be exposed.

III

That through Resolution No. CD-SIBOIF-781-1-MAY14-2013, published in La Gaceta, Official Journal No. 147, of August 7, 2013, this Board of Directors approved the Norm on Comprehensive Risk Management, which establishes the minimum guidelines that financial institutions must observe to comprehensively manage the risks to which they may be exposed, which must be consistent with the nature, complexity, volume, and risk profile of their operations.

IV

That the regulatory framework related to comprehensive risk management must be complemented with specific norms that establish guidelines for each type of significant risk.

V

That among the risks to which financial institutions may be exposed in the development of their activities is liquidity risk, which can arise from the possibility of losses due to failure to meet contractual or contingent commitments in time and form, or in both.

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VI

That in order to promote the improvement of liquidity risk management in financial institutions, it is necessary to establish minimum liquidity requirements for their adequate management by said institutions.

VII

That according to the considerations set forth above and based on the powers established in Article 3, numeral 13), and Article 10, numerals 1) and 2) of Law No. 316, Law of the Superintendent of Banks and Other Financial Institutions and its reforms, published in La Gaceta, Official Journal No. 196, of October 14, 1999.

In exercise of its powers,

RESOLVES

CD-SIBOIF-926-3-ENE26-2016

To issue the following:

NORM ON LIQUIDITY RISK MANAGEMENT

CHAPTER I OBJECT, SCOPE, AND CONCEPTS

Article 1. Object.- The purpose of this norm is to establish the minimum guidelines that financial institutions must comply with to manage liquidity risk, consistent with the nature, complexity, volume, and risk profile of their operations.

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Article 2. Scope.- The provisions of this norm are applicable to banks, financial companies, and the branches of foreign banks and financial companies established in the country, which henceforth will be known as financial institutions, or simply institutions.

Article 3. Concepts.- For the purposes of applying the provisions contained in this norm, the concepts indicated in this article, both in uppercase and lowercase, singular or plural, shall have the following meanings:

a) Liquid Assets: Are the assets defined in the Methodological Notes of Annex 1 of this norm, which is an integral part of it. Generally, they are characterized by having little or no loss of value, low credit and market risk, low correlation with risky assets, traded on a stock exchange or regulated market, low market concentration, and preferred in quality and not explicitly or implicitly committed as collateral or committed credits, free of liens. Securities that have not been traded on a stock exchange or regulated market in the last six months are excluded from this category.

b) Central Bank or BCN: Central Bank of Nicaragua.

c) Liquidity Gap: Difference between the maturities of assets and the maturities of liabilities and contingencies.

d) FOGADE: Deposit Guarantee Fund of Financial Institutions.

e) Liquidity risk management: Process consisting of the identification, measurement, monitoring, and control of liquidity risk. This process aims to ensure that the institution has sufficient resources to face a set of unexpected events, such as the loss or decrease of funding sources.

f) Financial institution: Banks and financial companies that, according to the General Law of Banks, can capture deposits from the public. Includes branches of foreign banks and financial companies located in the country.

g) General Law of Banks: Law 561, General Law of Banks, Non-Bank Financial Institutions and Financial Groups, published in La Gaceta, Official Journal, number 232, of November 30, 2005.

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h) Liquidity: Capacity that a financial institution has to finance increases in its level of liquid assets and meet its obligations, complying with them within the established timeframe and without incurring significant losses for this concept.

i) Liquidity risk: Possibility that the institution cannot meet in time and form, or in both, contractual or contingent commitments.

j) Exceptional situations: Those in which the cash flows or cash of the institution may deviate substantially from what was expected, due to unforeseen changes in general market conditions or in its particular situation.

k) Superintendent: Superintendent of Banks and Other Financial Institutions.

l) Superintendent: Superintendent of Banks and Other Financial Institutions.

m) Risk Unit: Comprehensive Risk Management Unit referred to in the regulations governing the matter of comprehensive risk management.

CHAPTER II CORPORATE GOVERNANCE ASPECTS

Article 4. Responsibilities.- Financial institutions are responsible for adopting the following:

a) Implement adequate comprehensive liquidity risk management according to the nature, complexity, volume, and risk profile of their operations;

b) Establish an appropriate organizational structure that allows for adequate liquidity risk management, with the proper delimitation of responsibilities and segregation of functions of the areas involved in the management of this risk, as well as the levels of dependency, in accordance with the nature, complexity, volume, and risk profile of their operations, which must follow the guidelines established in the regulations governing the matter of comprehensive risk management, with the principles of good risk management practices adopted by the financial institution, established in the resolution of the Superintendent through which the risk management classification system of banks and financial companies with a risk-based supervision approach is established; and in accordance with the specific requirements provided in these provisions.

CHAPTER III

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IDENTIFICATION, MEASUREMENT, AND EVALUATION OF LIQUIDITY RISK

Article 5. Scenario Simulation.- Without prejudice to the internal scenario simulation models for measuring liquidity risk that the financial institution may have, the Risk Unit must periodically perform scenario simulations where it projects the behavior of cash flows under different assumptions, considering factors related to both the institution itself and the market. In this regard, institutions must perform simulations, at a minimum, of scenarios of normal behavior of the institution's cash flows, institutional liquidity crisis, and systemic liquidity crisis, for which purpose they must submit the information contained in Annexes 1, 2C, and 3D, referred to in Article 13 of this norm, which are an integral part of it.

Article 6. Liquidity Ratios.- Without prejudice to the internal liquidity indicators and tools that financial institutions have to manage liquidity risk, they must calculate the Liquidity Coverage Ratio (LCR) monthly, based on the data from the methodological notes of Annex 1 of this norm.

Liquid Asset Funds

• Inflows in the next 30 days LCR = Outflows in the next 30 days

Article 7. Liquid assets for the calculation of the LCR.- Financial institutions, for the calculation of the liquidity coverage ratio, must follow the guidelines established in the methodological notes contained in Annex 1 of this norm.

Article 8. Monitoring Tools.- Financial institutions, in addition to the liquidity ratio indicated in Article 6 of this norm, must use as effective monitoring tools, liquidity indicators by residual contractual maturity, by funding concentration, and by available assets, defined in the methodological notes of Annex 2 of this norm, which is an integral part of it.

When the use of these monitoring tools detects possible liquidity difficulties observed through a negative trend in the indicator, a deterioration of the liquidity position, or the absolute number of the indicator identifies a current or potential liquidity problem, institutions must apply the necessary corrective measures and report them to the Superintendent.

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Article 9. Liability Concentration.- The Risk Unit must identify the most important fund providers of the institution, as well as estimate the impact on the institution's liquidity of the withdrawal of funding by said providers. Likewise, it must identify the main factors affecting its ability to capture funds, monitoring them closely to ensure the validity of estimates regarding its ability to obtain financing. Furthermore, the Asset and Liability Management Committee must establish indicators, with their respective internal limits, to control liability concentration. Finally, the institution must establish a plan to maintain relationships with its main creditors and depositors, with the objective of diversifying its liabilities.

CHAPTER IV LIQUIDITY RISK CONTINGENCY PLAN

Article 10. Liquidity contingency plan.- The Risk Unit and business areas are responsible for designing and implementing a contingency plan that establishes the strategy to administer a liquidity crisis. This plan must help ensure that the management and key personnel of the institution are ready to respond to the crisis, and must consider, at a minimum, the following aspects:

a) Alert Signals: The activation of the contingency plan must be determined by evaluating a set of previously defined quantitative and qualitative indicators and alert signals. For the indicators, different risk levels must be determined, in such a way that they help identify a possible liquidity crisis. The indicators and alert signals must be continuously monitored by the Risk Unit and reported promptly to the members of the Asset and Liability Management Committee and to the personnel of the areas involved in the management of market and liquidity risks.

b) Crisis Management Team: The contingency plan must consider a crisis management team, which must be composed of at least the heads of the Risk Unit and the business area. This team must evaluate the liquidity problem being faced, decide on the actions to be taken and implement them, monitor changes in scenarios, and take corrective actions when necessary. The responsibilities and authority of each team member must be established in detail. Additionally, it must include the names, detailed contact information, and location of the team members. For this purpose, the team must consider, at least, the following crisis management coordination criteria:

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1. Ensure that it receives the necessary information flows for decision-making.
2. Clearly assign responsibility for all non-automatic actions aimed at altering the behavior of different assets and liabilities.
3. Have defined a priority of counterparties for the purpose of renewal or cancellation of lines.
4. Maintain a fluid relationship with wholesale and main retail clients.
5. Ensure the maintenance of a fluid relationship with the main shareholders, with all counterparties, with the main clients, and with the Superintendent and the Central Bank.
6. Define relationships with the media.

c) Identification of Funding Sources: The contingency plan must differentiate the funding strategy during a systemic crisis or a specific crisis of the institution. Likewise, the plan must identify and quantify each of the funding sources that could be accessed in each stress scenario, as well as during temporary liquidity problems that the institution might face, including funding sources from the Central Bank. These sources consist mainly of assets with which liquidity could be obtained quickly and lines of financing.

For this purpose, the team must consider at least the following criteria for obtaining funds during the crisis:

1. Have diversified pathways for accessing emergency funds planned, based on the severity of the crisis and, where applicable, the period of prior notice or instrumentation necessary.
2. Define priorities for the sale or pledge of different securities in portfolios, taking into account the time necessary for their effective settlement.
3. Have planned the limitation or denial of credits to certain groups of clients.

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4. Anticipate restrictions on the acquisition of fixed assets.
5. Have established clear criteria for the control or blocking of available lines.
6. Regarding liabilities, have planned the immediate promotion of specific products and the necessary procedures to extend their duration and to activate placements among new investors.
7. Consider existing commitments to provide liquidity to the secondary market for certain securities.

The contingency plan must be operationally viable, and the available amount of each of the identified sources must be specified. In the case of credit lines, the available line amount and the balance used for each of the counterparties must be indicated, and additionally, the cost of financing must be estimated. In case the exact amount of the credit line granted by a certain counterparty is not known with certainty, an estimate of it must be used. Furthermore, the institution must maintain a continuous presence in the chosen funding markets and close relationships with fund providers, in order to promote an effective diversification of funding sources. Likewise, it must periodically evaluate its ability to obtain funds with certainty from each source.

d) Asset and Liability Management Strategies: The contingency plan must consider asset management strategies to respond to the liquidity crisis, such as the sale of investment instruments or their use in repurchase agreements or repo operations. Likewise, financing strategies must be established, such as the use of credit lines, including those of the Central Bank. Additionally, the existing correlations between the funding source strategy and market conditions must be taken into account, since reliable funding sources under normal conditions might cease to be so under stress conditions.

e) Administrative Policies and Procedures.- The contingency plan must contain administrative policies and procedures that must be used during a liquidity crisis, in which the following must be considered, at least:

1. The responsibilities of management;
2. The responsibilities of the crisis management team;

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3. Designate the persons who will have the responsibility of making external contacts with regulators, analysts, investors, external auditors, press, important clients, etc.;
4. Coordination procedures between members of the crisis management team and other officials involved in the execution of the contingency plan; and
5. Generation of management reports that will be sent to the officials involved promptly, allowing their members to understand the severity of the crisis and implement appropriate actions.

The contingency plan must be signed by the heads of the Risk Unit and the business area, and approved by the Asset and Liability Management Committee. Updates to said plan must be sent to the Superintendent at the latest within fifteen calendar days following the closing date of June and December of each year, specifying the new changes and the updated amounts of each of the identified liquidity sources.

If the institution belongs to a financial group, the Risk Unit must simulate liquidity stress scenarios at least annually and prepare a contingency plan at the consolidated level, considering any limits that might exist for the transfer or support of liquidity between entities that make up the financial group.

CHAPTER V REGULATORY LIMIT

Article 11. Regulatory limit.- Financial institutions must comply with maintaining an LCR ≥ 100%. This limit will not apply to institutions that have the deposit capture indicator (demand, savings, and time deposits relative to total liabilities) less than 15%, unless their assets represent more than 1% of the total assets of the financial system.

Once the liquidity cushion is constituted, it may be used partially or totally and automatically when the contingency plan is activated; or when systemic risk materializes, it must be reconstituted once the situation that gave rise to the activation of the plan normalizes. The institution must immediately notify the Superintendent that its LCR has decreased below 100%, or is foreseeable that it will decrease below that percentage.

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Although financial institutions must comply with maintaining an LCR = or > 100% on a consolidated basis, the calculation of the same must be presented to the Superintendent both in national currency and in foreign currency for the purpose of monitoring the structure of their balance sheets.

Article 12. Exceptional Situations.- Financial institutions must promptly inform the Superintendent of any exceptional situation that arises or is foreseen to arise in the scope of liquidity management and administration, as well as the measures it proposes to implement to correct or face said situation, the expectations regarding the duration of the situation, and the effects on the financial system.

Article 13. Submission of Reports.- Financial institutions must submit to the Superintendent the following annexes, in accordance with their methodological notes:

a) Annex 1 “Liquidity Coverage Ratio” in national currency and foreign currency, with monthly frequency”: It must be submitted within fifteen calendar days following the closing date of the month, with its respective supports for volatility calculations (stable and less stable deposits without maturity date, and balances of unused credit card lines).

b) Annexes 2-A, 2-B, and 2-C “Liquidity Table by Residual Maturity”: They must be submitted within fifteen calendar days following the closing date of the month.

c) Annex 3-D “Stress Scenario Simulation and Contingency Plan”: It must be presented within fifteen calendar days following the closing date of June and December.

d) Annex 3-E “Funding Concentration Indicators”: It must be submitted within fifteen calendar days following the closing date of the month.

e) Annexes 3-F and 3-G “Detail of Marketable Available Assets that can be used to obtain financing in the secondary market and in the Central Bank”: It must be submitted within fifteen calendar days following the closing date of the month.

f) Corrective Measures, at the latest on the next business day after the deficit originated.

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CHAPTER VI FINAL PROVISIONS

Article 14. Authority to Modify Annexes and their Methodological Notes.- The Superintendent is authorized to modify the annexes of this norm with their respective methodological notes in order to make the adjustments and calibrations necessary for the application of the provisions of this norm.

Article 15. Transitional Provisions.- The following transitional provisions are established:

a) Financial institutions will have until June 30, 2016, to implement the provisions on liquidity risk management established therein (scenario simulation, monitoring tools, contingency plan).

During the period referred to in the previous paragraph, financial institutions will continue to calculate the liquidity position and maturity matching in accordance with what is established in the Norm on Liquidity Risk Management and Maturity Matching contained in Resolution No. CD-SIBOIF-521-1-FEB6-2008, of February 6, 2008, published in La Gaceta, Official Journal Number 53 of March 14, 2008.

Upon conclusion of said period, the aforementioned norm will be repealed along with its reforms.

b) From the entry into force of this norm, financial institutions must adjust their systems to comply with the LCR according to the following gradualness:

July 1, 2016: 60% July 1, 2017: 70% July 1, 2018: 80% July 1, 2019: 90% July 1, 2020: 100%

The report referred to in Article 13, letter a), of this norm, must be submitted for the first time at the latest on August 15, 2016, and the subsequent ones, in accordance with what is established in said letter.

Article 16. Validity.- This norm will enter into force upon its notification, without prejudice to its subsequent publication in La Gaceta, Official Journal.

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ANNEX No. 1 Annex No. 1, modified by Resolution SIB-OIF- XXVI-602-2018, of November 30, 2018 Annex No. 1, modified by Resolution SIB-OIF- XXV-131-2017, of March 16, 2017

LIQUIDITY COVERAGE RATIO (1) As of XX/XX/2018 Expressed in thousands of cordobas

Total LIQUID ASSETS (2) NC FC Factor NC FC Level 1 Assets - - - - - Cash 100%