POJK on Minimum Capital Provision Requirements for Islamic Commercial Banks

FINANCIAL SERVICES AUTHORITY
REPUBLIC OF INDONESIA

COPY

FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 21/POJK.03/2014

ON

MINIMUM CAPITAL PROVISION REQUIREMENTS FOR ISLAMIC COMMERCIAL BANKS

BY THE GRACE OF THE ALMIGHTY GOD

THE COMMISSIONERS OF THE FINANCIAL SERVICES AUTHORITY,

Considering:
a. that in order to create a healthy Islamic banking system capable of developing and competing nationally and internationally, banks need to enhance their ability to absorb risks, including those caused by crisis conditions and/or excessive growth in banking financing; b. that in line with applicable international standards, capital adequacy calculations, which function as buffers to absorb losses arising from various risks, need to be adjusted to risk profiles covering credit risk, market risk, operational risk, and other significant risks;
c. that in line with the development of bank business complexity and risks, as well as the application of risk-based supervision, banks must assess their risk profiles and capital adequacy levels to anticipate potential losses from risk exposures while continuing to meet minimum capital provision obligations as required by applicable regulations;
d. that in order to enhance banks' ability to absorb risks, it is necessary to improve the quality and quantity of bank capital in accordance with international standards;

e. that capital quality improvement is carried out through adjustments to bank capital component and instrument requirements, as well as adjustments to capital ratios; f. that in order to enhance capital quantity, banks need to form additional capital above the minimum capital provision requirements based on risk profiles, functioning as buffers in the event of financial and economic crises that could disrupt financial system stability; g. that the Bank Indonesia Regulation Number 7/13/PBI/2005 on Minimum Capital Provision Requirements for Commercial Banks Based on Sharia Principles, as amended by Bank Indonesia Regulation Number 8/7/PBI/2006, does not yet accommodate the development of capital regulations in accordance with international standards; h. that based on the considerations referred to in letters a, b, c, d, e, f, and g, it is necessary to establish a Financial Services Authority Regulation on Minimum Capital Provision Requirements for Islamic Commercial Banks;

Recalling:

1. Law Number 21 of 2008 on Islamic Banking (State Gazette of the Republic of Indonesia Year 2008 Number 94, Supplement to the State Gazette of the Republic of Indonesia Number 4867);
2. Law Number 21 of 2011 on the Financial Services Authority (State Gazette of the Republic of Indonesia Year 2011 Number 111, Supplement to the State Gazette of the Republic of Indonesia Number 5253);

DECIDING:

To Establish: FINANCIAL SERVICES AUTHORITY REGULATION ON MINIMUM CAPITAL PROVISION REQUIREMENTS FOR ISLAMIC COMMERCIAL BANKS.

CHAPTER I
GENERAL PROVISIONS
Article 1

In this Financial Services Authority Regulation:

1. Islamic Commercial Bank, hereinafter referred to as Bank, is a Sharia Bank that provides payment circulation services as referred to in the Law on Islamic Banking.
2. Board of Directors is the Board of Directors as referred to in the Law on Limited Liability Companies.
3. Board of Commissioners is the Board of Commissioners as referred to in the Law on Limited Liability Companies.
4. Subsidiary Company is a company owned and/or controlled by the Bank, directly or indirectly, both domestically and abroad, that meets the criteria as referred to in applicable regulations regarding the application of consolidated risk management for banks controlling subsidiary companies.
5. Control is control as referred to in applicable regulations regarding transparency and publication of bank financial reports.
6. Internal Capital Adequacy Assessment Process, hereinafter abbreviated as ICAAP, is the process conducted by the Bank to determine capital adequacy in accordance with the Bank's risk profile and to establish strategies to maintain capital levels.
7. Supervisory Review and Evaluation Process, hereinafter abbreviated as SREP, is the review process conducted by the Financial Services Authority over the Bank's ICAAP results.
8. Capital Conservation Buffer is additional capital that functions as a buffer in the event of losses during a crisis period.
9. Countercyclical Buffer is additional capital that functions as a buffer to anticipate losses if there is excessive growth in credit and/or banking financing, which has the potential to disrupt financial system stability.
10. Capital Surcharge for Domestic Systemically Important Bank (D-SIB) is additional capital that functions to reduce negative impacts on financial system and economic stability in the event of bank failure with systemic impact, by enhancing the Bank's ability to absorb losses.
11. Credit Risk is the risk resulting from the failure of customers or other parties to fulfill obligations to the Bank in accordance with the agreed contract.
12. Market Risk is the risk on balance sheet and administrative account positions due to changes in market prices, including risks such as changes in the value of traded or leased assets.
13. Operational Risk is the risk of loss caused by internal processes, failure of internal processes, human error, system failure, and/or external events affecting Bank operations.
14. 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:
    a. trading and freely transferable or fully hedgable, whether from customer transactions or brokerage activities, and in the context of market making, including:

1. positions held for resale in the short term;
2. positions held for the purpose of obtaining actual and/or potential short-term profits from price movements; or
3. positions held for the purpose of locking in arbitrage profits;
   b. hedging other positions in the Trading Book.

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

Article 2

(1) Banks are required to provide minimum capital in accordance with their risk profiles.
(2) The minimum capital provision referred to in paragraph (1) is calculated using the Minimum Capital Provision Ratio (KPMM).
(3) The minimum capital provision referred to in paragraph (1) is set at a minimum as follows:
a. 8% (eight percent) of Risk-Weighted Assets (RWA) for Banks with risk profile level 1 (one); b. 9% (nine percent) to less than 10% (ten percent) of RWA for Banks with risk profile level 2 (two);
c. 10% (ten percent) to less than 11% (eleven percent) of RWA for Banks with risk profile level 3 (three); or
d. 11% (eleven percent) to 14% (fourteen percent) of RWA for Banks with risk profile level 4 (four) or level 5 (five).
(4) The Financial Services Authority has the authority to set minimum capital higher than the minimum capital referred to in paragraph (3), in cases where the Financial Services Authority assesses that the Bank faces potential losses requiring higher capital. (5) The calculation of minimum capital provision according to risk profiles referred to in paragraph (3) for the first time uses the risk profile rating as of December 2014. (6) The minimum capital provision obligation according to risk profiles referred to in paragraph (1) is established as follows:
a. Minimum capital provision for positions from March to August is based on the risk profile rating as of December of the previous year; b. Minimum capital provision for positions from September to February of the following year is based on the risk profile rating as of June. (7) In the event of a change in risk profile rating between risk profile assessment periods as referred to in paragraph (6), the minimum capital provision is based on the latest risk profile rating.

Article 3

(1) In addition to KPMM according to risk profiles as referred to in Article 2, Banks are required to form additional capital as buffers according to criteria.
(2) Additional capital as referred to in paragraph (1) may consist of:
a. Capital Conservation Buffer; b. Countercyclical Buffer; and/or
c. Capital Surcharge for D-SIB.
(3) The amount of additional capital as referred to in paragraph (2) is regulated as follows:
a. Capital Conservation Buffer is set at 2.5% (two point five percent) of RWA; b. Countercyclical Buffer is set in the range of 0% (zero percent) to 2.5% (two point five percent) of RWA;
c. Capital Surcharge for D-SIB is set in the range of 1% (one percent) to 2.5% (two point five percent) of RWA.
(4) The Financial Services Authority determines the percentage of Capital Surcharge for D-SIB as referred to in paragraph (3) letter c.
(5) The Financial Services Authority may set a higher percentage of Capital Surcharge for D-SIB than the range as referred to in paragraph (3) letter c.
(6) Additional capital as referred to in paragraph (3) must be met with Core Capital components.
(7) The fulfillment of additional capital as referred to in paragraph (6) is calculated after Core Capital components are allocated to fulfill:
a. minimum Core Capital; b. minimum Tier 1 Capital; and
c. minimum capital according to risk profiles as referred to in Article 2 paragraph (3).

Article 4

(1) Banks classified as Islamic Commercial Business Unit (BUKU) 3 and BUKU 4 are required to form Capital Conservation Buffer as referred to in Article 3 paragraph (3) letter a. (2) All Banks are required to form Countercyclical Buffer as referred to in Article 3 paragraph (3) letter b. (3) Banks designated as systemically impactful are required to form Capital Surcharge for D-SIB as referred to in Article 3 paragraph (3) letter c.

Article 5

(1) The Bank's obligation to form additional capital in the form of Capital Conservation Buffer as referred to in Article 3 paragraph (3) letter a applies progressively starting from January 1, 2016. (2) The formation of Capital Conservation Buffer as referred to in paragraph (1) must be fulfilled progressively as follows:
a. 0.625% (zero point six two five percent) of RWA starting from January 1, 2016; b. 1.25% (one point two five percent) of RWA starting from January 1, 2017;
c. 1.875% (one point eight seven five percent) of RWA starting from January 1, 2018; and
d. 2.5% (two point five percent) of RWA starting from January 1, 2019.
(3) The Bank's obligation to form additional capital in the form of Countercyclical Buffer as referred to in Article 3 paragraph (3) letter b takes effect on January 1, 2016. (4) The Financial Services Authority may implement Countercyclical Buffer earlier than the time referred to in paragraph (3). (5) The Bank's obligation to form Capital Surcharge for D-SIB as referred to in Article 3 paragraph (3) letter c for Banks designated as systemically impactful takes effect on January 1, 2016.

Article 6

In the event that a Bank owns and/or exercises Control over a Subsidiary Company, the KPMM as referred to in Article 2 and the obligation to form additional capital as buffers as referred to in Article 3 apply to the Bank both individually and consolidated with the Subsidiary Company.

Article 7

(1) Banks are prohibited from distributing profits if such distribution results in the Bank's capital conditions failing to meet the provisions as referred to in Article 2, both individually and consolidated with Subsidiary Companies. (2) Banks are subject to profit distribution restrictions if such distribution results in the Bank's capital conditions failing to meet the provisions as referred to in Article 3, both individually and consolidated with Subsidiary Companies. (3) Profit distribution restrictions as referred to in paragraph (2) are determined by the Financial Services Authority.

CHAPTER II
CAPITAL
First Section
Capital
Article 8

(1) Capital consists of:
a. Tier 1 Capital, including:

1. Common Equity Tier 1 Capital;
2. Additional Tier 1 Capital; and
   b. Tier 2 Capital.
   (2) Capital as referred to in paragraph (1) must take into account factors that reduce capital.
   (3) In consolidated capital calculations, Subsidiary Company capital components that can be counted as Common Equity Tier 1, Additional Tier 1, and Tier 2 must meet the following requirements:
   a. meet the applicable requirements for each capital component as applied to Banks individually; and b. specifically for Additional Tier 1 and Tier 2, if issued by a Subsidiary Company that is not a Bank, in addition to meeting the requirements in letter a, must have features to be converted into common shares or a write-down mechanism if the Bank consolidated is potentially disrupted in its business continuity (point of non viability) clearly stated in the issuance documentation.

Second Section
Tier 1 Capital
Article 9

(1) Tier 1 Capital as referred to in Article 8 paragraph (1) letter a consists of:

1. Common Equity Tier 1 Capital, including:
   a. paid-in capital; b. disclosed reserves; and
2. Additional Tier 1 Capital.
   (2) Banks are required to provide Tier 1 Capital of at least 6% (six percent) of RWA, both individually and consolidated with Subsidiary Companies.
   (3) Banks are required to provide Common Equity Tier 1 Capital of at least 4.5% (four point five percent) of RWA, both individually and consolidated with Subsidiary Companies.

Article 10

Paid-in capital instruments as referred to in Article 9 paragraph (1) letter a number 1 must meet the following requirements:
a. issued and fully paid; b. permanent in nature;
c. available to absorb losses occurring before or during liquidation;
d. return on investment cannot be guaranteed and cannot be accumulated across periods; e. not protected or guaranteed by the Bank or Subsidiary Company; f. has dividend or return payment characteristics:

1. derived from retained earnings and/or current year profits;
2. does not have a fixed value and is not related to the value paid for the capital instrument;
3. does not have preferential features; and
   g. funding sources do not come from the issuing Bank, directly or indirectly.

Article 11

The repurchase of treasury stock recognized as paid-in capital components may only be conducted by meeting the following requirements:
a. after a period of 5 (five) years since issuance; b. for specific purposes;
c. conducted in accordance with applicable laws and regulations;
d. has obtained approval from the Financial Services Authority; and e. does not cause capital to fall below minimum requirements as referred to in Article 2, Article 3, and Article 6.

Article 12

(1) Disclosed reserves as referred to in Article 9 paragraph (1) letter a number 2 take into account the following:
a. adding factors are:

1. share premium;
2. donated capital;
3. general reserves;
4. prior years' profits;
5. current year profits;
6. translation differences;
7. capital contribution funds that meet the requirements:
   a) fully paid for capital increase purposes but not yet supported by complete requirements to be classified as paid-in capital, such as the implementation of the General Meeting of Shareholders (GMS) or approval of the articles of association by the competent authority; b) placed in a special account (escrow account) that does not provide returns; c) cannot be withdrawn by shareholders/candidate shareholders and is available to absorb losses; and d) use of funds must be approved by the Financial Services Authority;
8. warrants issued as incentives to Bank shareholders, recognized at 50% (fifty percent) of fair value, meeting the requirements:
   a) the underlying instrument is common shares; b) cannot be converted into forms other than shares; and c) the value considered is the fair value of the warrants on the date of issuance;
9. stock options issued through employee/management stock option compensation programs, recognized at 50% (fifty percent), meeting the requirements:
   a) the underlying instrument is common shares; b) cannot be converted into forms other than shares; and c) the value considered is the fair value of the stock options on the date of compensation grant;
10. other comprehensive income in the form of potential gains from increases in the fair value of financial assets classified as available for sale;
11. surplus balances from fixed asset revaluations.
    b. subtracting factors are:
12. discount;
13. prior years' losses;
14. current year losses;
15. translation differences;
16. other comprehensive income in the form of potential losses from decreases in the fair value of financial assets classified as available for sale;
17. differences between the calculation of Asset Impairment Provisions (PPA) for productive assets and the formation of Impairment Loss Reserves (CKPN) for productive assets;
18. differences between adjustments to valuation results from financial instruments in the Trading Book and adjustments based on applicable financial accounting standards;
19. Provisions for Non-Productive Asset Impairment.
    (2) In the calculation of disclosed reserves as referred to in paragraph (1), prior years' profits and/or current year profits as referred to in paragraph (1) letter a numbers 4 and 5 must be excluded from the effects of:
    a. increases or decreases in fair value over securitization transactions (gain on sale); and/or b. profits from asset sales in securitization transactions (gain on sale).

Article 13

(1) Additional Tier 1 Capital instruments as referred to in Article 9 paragraph (1) letter b must meet the following requirements:
a. issued and fully paid; b. no maturity date and no requirements requiring repayment by the Bank in the future;
c. no step-up features;
d. has features to be converted into common shares or a write-down mechanism if the Bank is potentially disrupted in its business continuity (point of non viability) clearly stated in the issuance documentation/agreement; e. subordinate in nature during liquidation, clearly stated in the issuance documentation/agreement; f. return/margin/fee cannot be guaranteed and cannot be accumulated across periods; g. not protected or guaranteed by the Bank or Subsidiary Company; h. no dividend or return/margin/fee payment features sensitive to credit risk;
i. if accompanied by a call option feature, must meet the requirements:

1. can only be executed no sooner than 5 (five) years after the capital instrument is issued; and
2. issuance documentation must state that the option can only be executed with the approval of the Financial Services Authority;
   j. cannot be purchased by the issuing Bank and/or Subsidiary Company; k. funding sources do not come from the issuing Bank, directly or indirectly;
   l. no features that hinder the process of adding capital in the future; and
   m. has obtained approval from the Financial Services Authority to be counted as a capital component.
   (2) The execution of call options as referred to in paragraph (1) letter i may only be conducted by the Bank if:
   a. approval from the Financial Services Authority has been obtained; and b. it does not cause capital to fall below minimum requirements as referred to in Article 2, Article 3, and Article 6, or is replaced with capital instruments of equal or better quality.

Article 14

(1) In consolidated KPMM ratio calculations, minority interests are counted as Common Equity Tier 1, except for parts of minority interests that do not meet Common Equity Tier 1 component requirements. (2) Minority interests as referred to in paragraph (1) can be counted in consolidated Common Equity Tier 1 if the Bank's ownership in the Subsidiary Company is more than 50% (fifty percent) and meets the following requirements:
a. the Subsidiary Company is a Bank; b. there are connections/affiliations between non-controlling shareholders of the Subsidiary Company and the Bank; and
c. there are commitments from non-controlling shareholders of the Subsidiary Company to support the Bank group's capital, stated in a letter of statement or GMS decision of the Subsidiary Company.

Article 15

(1) Common Equity Tier 1 Capital as referred to in Article 8 paragraph (1) letter a number 1 is calculated with subtracting factors including:
a. deferred tax calculations; b. goodwill;
c. other intangible assets;
d. all Bank participations, including:

1. Bank's participation in Subsidiary Companies, except temporary capital participation in the context of financing restructuring;
2. participation in companies or legal entities where Bank ownership is more than 20% (twenty percent) to 50% (fifty percent) but the Bank does not have Control; and
3. participation in insurance companies;
   e. capital shortfalls from meeting minimum solvency (Risk Based Capital) levels in insurance companies owned and controlled by the Bank; f. securitization exposures; and g. other Common Equity Tier 1 capital subtracting factors. (2) Capital subtracting factors as referred to in paragraph (1) letters d and e are no longer counted in RWA for Credit Risk.

Third Section
Tier 2 Capital
Article 16

Tier 2 Capital as referred to in Article 8 paragraph (1) letter b may only be counted at a maximum of 100% (one hundred percent) of Tier 1 Capital as referred to in Article 8 paragraph (1) letter a.

Article 17

(1) Supplementary capital instruments as referred to in Article 8 paragraph (1) letter b must meet the following requirements:
a. issued and fully paid; b. have a maturity of 5 (five) years or more and can only be redeemed with the approval of the Financial Services Authority;
c. have a feature to be converted into ordinary shares or a write-down mechanism if the Bank is likely to experience disruption to its business viability (point of non-viability), which is clearly stated in the issuance documentation/agreement;
d. be subordinated as stated in the issuance documentation/agreement; e. principal and/or return/margin/ujrah payments are deferred and accumulated between periods (cumulative) if such payments would cause the Minimum Capital Adequacy Ratio (KPMM) individually or consolidated to not meet the provisions as referred to in Article 2, Article 3, and Article 6; f. not protected or guaranteed by the Bank or Subsidiary; g. do not have a dividend or return payment feature sensitive to credit risk; h. do not have a step-up feature;
i. if accompanied by a call option feature, must meet the following requirements:

1. can only be executed no earlier than 5 (five) years after the supplementary capital instrument is issued; and
2. the issuance documentation must state that the option can only be executed with the approval of the Financial Services Authority;
   j. do not have requirements for acceleration of return/margin/ujrah or principal payments as stated in the issuance documentation; k. cannot be purchased by the issuing Bank and/or Subsidiary;
   l. funding sources do not come from the issuing Bank directly or indirectly;
   m. have obtained approval from the Financial Services Authority to be counted as a capital component.
   (2) Execution of the call option as referred to in paragraph (1) letter i can only be done by the Bank as long as:
   a. approval from the Financial Services Authority has been obtained; and b. it does not cause capital to fall below minimum requirements as referred to in Article 2, Article 3, and Article 6 or is replaced with a capital instrument that has:
3. same or better quality; and
4. in the same amount or different amount as long as it does not exceed the supplementary capital limits as referred to in Article 16.
   (3) The amount that can be counted as supplementary capital is the supplementary capital amount minus amortization calculated using the straight-line method.
   (4) Amortization as referred to in paragraph (3) is done for the remaining 5 (five) years of the instrument's maturity.
   (5) In the event there is a call option, the time until the Bank can execute the call option is the remaining maturity of the instrument.

Article 18

(1) Supplementary capital includes:
a. capital instruments in the form of shares or other forms that meet the requirements as referred to in Article 17; b. premium or discount arising from the issuance of capital instruments classified as supplementary capital;
c. general reserves of Islamic Profit-Sharing Accounts (PPA) on productive assets with an amount not exceeding 1.25% (one point two five percent) of Risk-Weighted Assets (ATMR) for Credit Risk; and
d. specific reserves.

(2) The excess of general PPA reserves as referred to in paragraph (1) letter c can be counted as a factor reducing the calculation of ATMR for Credit Risk.

Article 19

A portion of supplementary capital that has formed a redemption reserve (sinking fund) is not counted as a supplementary capital component if the Bank:
a. has established to set aside and manage the redemption reserve (sinking fund) specifically; and b. has carried out publication of the formation of the redemption reserve (sinking fund).

Article 20

(1) Factors that reduce capital as referred to in Article 8 paragraph (2) include:
a. repurchase of capital instruments that have been recognized as a Bank's capital component; and b. placement of funds in debt instruments or investments in other Banks that are recognized as a capital component by another Bank or the issuing Bank. (2) All capital reduction factors as referred to in paragraph (1) letter b are not counted in ATMR for Credit Risk.

Article 21

In the calculation of KPMM on a consolidated basis as referred to in Article 8 paragraph (3), the Bank must submit supporting data for additional core capital and supplementary capital components showing that all requirements of the Subsidiaries counted have met all requirements as capital components.

CHAPTER III
RISK-WEIGHTED ASSETS (ATMR)
First Part
Types
Article 22

ATMR used in the calculation of minimum capital as referred to in Article 2 paragraph (3) and the calculation of additional capital formation as a buffer as referred to in Article 3 paragraph (3) consists of:
a. ATMR for Credit Risk; b. ATMR for Operational Risk; and
c. ATMR for Market Risk.

Article 23

(1) Banks are required to consider ATMR for Credit Risk and ATMR for Operational Risk.
(2) In addition to fulfilling the obligations as referred to in paragraph (1), Banks that meet certain criteria are required to consider ATMR for Market Risk.

Article 24

Certain criteria as referred to in Article 23 paragraph (2) are:
a. Banks with total assets of Rp10,000,000,000,000.00 (ten trillion rupiah) or more; and/or b. Banks that conduct business activities in foreign currency with a position of financial instruments in the form of securities and/or derivative transactions in the Trading Book of Rp20,000,000,000,000.00 (twenty billion rupiah) or more; and/or b. Banks that consolidated with Subsidiaries meet one of the following criteria:

1. Banks that conduct business activities in foreign currency that consolidated with Subsidiaries have a position of financial instruments in the form of securities including financial instruments exposed to equity risk and/or derivative transactions in the Trading Book and/or
   financial instruments exposed to commodity risk in the Trading Book of Rp20,000,000,000,000.00 (twenty billion rupiah) or more; or
2. Banks that do not conduct business activities in foreign currency but consolidated with Subsidiaries have a position of financial instruments in the form of securities including financial instruments exposed to equity risk and/or derivative transactions in the Trading Book and/or financial instruments exposed to commodity risk in the Trading Book and Banking Book of Rp25,000,000,000,000.00 (twenty-five billion rupiah) or more.
   c. Banks that have office networks and/or Subsidiaries in other countries.

Article 25

Financial assets that at initial recognition are designated as financial assets measured at fair value through profit or loss and classified in the trading group are excluded from the scope of the Trading Book.

Article 26

Securities in the Trading Book only include securities classified in the trading group.

Article 27

Banks that after a merger, consolidation, or acquisition and meet certain criteria as referred to in Article 24, at least in 3 (three) monthly reporting periods in the first 6 (six) months after the merger, consolidation, or acquisition is declared effective, are required to consider Market Risk in the KPMM ratio calculation starting from the 7th (seven) month after the merger, consolidation, or acquisition is declared effective.

Article 28

Banks that have met certain criteria as referred to in Article 24 and Banks as referred to in Article 28 are required to continue to consider Market Risk in KPMM even if the Bank no longer meets certain criteria.

Second Part
Credit Risk
Article 29

(1) In the calculation of ATMR for Credit Risk, Banks use:
a. Standardized Approach; and/or b. Internal Rating Based Approach.
(2) Banks using the Internal Rating Based Approach as referred to in paragraph (1) letter b must obtain prior approval from the Financial Services Authority.

Third Part
Operational Risk
Article 30

(1) In the calculation of ATMR for Operational Risk, Banks use:
a. Basic Indicator Approach; b. Standardized Approach; and/or
c. Advanced Measurement Approach.
(2) Banks using the approaches as referred to in paragraph (1) letter b and letter c must obtain prior approval from the Financial Services Authority.

Fourth Part
Market Risk
Article 31

(1) Market Risk that must be considered by Banks individually and consolidated with Subsidiaries is:
a. benchmark interest rate risk; and/or b. exchange rate risk.
(2) Banks consolidated, are required to consider equity risk and/or commodity risk in addition to Market Risk as referred to in paragraph (1) if they meet the following criteria:

a. have Subsidiaries exposed to equity risk and/or commodity risk; and b. consolidated with Subsidiaries meet the criteria as referred to in Article 24 letter b.

Article 32

(1) Banks are required to perform daily valuation of Trading Book positions accurately.
(2) In performing valuation as referred to in paragraph (1), Banks are required to have valuation policies and procedures, including having adequate and integrated information management and control systems for the valuation process with the risk management system. (3) Valuation policies and procedures as referred to in paragraph (2) are based on the principle of prudence.

Article 33

(1) The valuation process must be performed based on fair value.
(2) For actively traded financial instruments, the valuation process as referred to in paragraph (1) is performed using transaction prices that occur (close out prices) or market price quotations from independent sources. (3) Valuation of financial instruments as referred to in paragraph (2) uses:
a. bid price for assets held or liabilities to be issued; and/or b. ask price for assets to be acquired or liabilities held.
(4) In the event that market prices as referred to in paragraph (2) are not available, Banks may determine fair value using a model or valuation technique based on the principle of prudence.

Article 34

(1) Banks are required to verify the valuation process and results.
(2) Verification of the valuation process and results is performed at least on the fairness of market prices and information used as input in models or valuation techniques.

(3) Verification as referred to in paragraph (1) is performed at least 1 (one) time in 1 (one) month by parties not involved in the execution of valuation.
(4) Banks are required to adjust valuation results based on verification results as referred to in paragraph (1).

Article 35

Banks are required to immediately adjust valuation results that do not reflect fair value in the event:
a. significant changes in economic conditions occur; b. the price of financial instruments used as a reference is a forced price, forced liquidation, or sale due to financial difficulties;
c. financial instruments are approaching maturity; and/or
d. the price used as a reference is unfair due to other conditions.

Article 36

(1) In addition to adjustments as referred to in Article 35, Banks are required to make adjustments to the valuation of financial instrument positions in the Trading Book that are illiquid by considering certain factors. (2) In the event adjustments as referred to in paragraph (1) are made, Banks are required to consider the impact of adjustments as a factor reducing core capital in the calculation of the KPMM ratio.

Article 37

(1) In the calculation of ATMR for Market Risk, Banks use approaches:
a. Standard Method; and/or b. Internal Model.
(2) Banks that meet certain criteria as referred to in Article 24 are required to first use the Standard Method in considering Market Risk.
(3) Banks using the Internal Model approach as referred to in paragraph (1) letter b must obtain prior approval from the Financial Services Authority.

CHAPTER IV
Internal Capital Adequacy Assessment Process (ICAAP) and Supervisory Review and Evaluation Process (SREP)

First Part
Scope of Internal Capital Adequacy Assessment Process (ICAAP)
Article 38

(1) In fulfilling KPMM according to risk profile as referred to in Article 2 both individually and consolidated with Subsidiaries, Banks are required to have an ICAAP adjusted to the size, characteristics, and complexity of the Bank's business. (2) ICAAP covers at least:
a. active supervision by the Board of Directors and Board of Commissioners; b. capital adequacy assessment;
c. monitoring and reporting; and
d. internal control.
(3) Banks are required to document ICAAP.

Second Part
Supervisory Review and Evaluation Process (SREP)
Article 39

(1) The Financial Services Authority conducts SREP.
(2) Based on SREP results, the Financial Services Authority may request the Bank to improve ICAAP.

Article 40

(1) In the event there is a difference in capital calculation results according to risk profile between the Bank's self-assessment results and SREP results, the capital calculation that applies is the SREP results. (2) In the event the Financial Services Authority assesses that the capital owned by the Bank does not meet minimum capital according to risk profile consolidated with Subsidiaries, the Financial Services Authority may request the Bank to:
a. increase capital to meet KPMM according to risk profile; b. improve the quality of the risk management process; and/or
c. reduce risk exposure.

Article 41

In the event the Financial Services Authority assesses that there is a tendency for the Bank's capital to decrease that has the potential to cause the Bank's capital to be below KPMM according to risk profile, the Financial Services Authority may request the Bank to do among other things:
a. restriction on certain business activities; b. restriction on opening office networks; and/or
c. restriction on capital distribution.

CHAPTER V
REPORTING
Article 42

(1) Banks are required to submit reports on KPMM calculations both individually and consolidated.
(2) Banks that meet certain criteria as referred to in Article 24 are required to submit KPMM calculation reports by considering Market Risk.
(3) The preparation and submission of reports as referred to in paragraph (1) and paragraph (2) must refer to regulations regarding periodic reports of Islamic Commercial Banks in effect. (4) In the event regulations for the preparation and submission of reports as referred to in paragraph (1) and paragraph (2) are not yet regulated in the periodic reports of Islamic Commercial Banks, Banks are required to report KPMM calculations monthly according to the format established by the Financial Services Authority. (5) Reports as referred to in paragraph (4) must be submitted to the Financial Services Authority no later than the 21st (twenty-first) day of the following month after the reporting month. (6) Banks that are late in submitting KPMM calculation reports as referred to in paragraph (5) must still submit the reports.

Article 43

(1) Banks are required to submit reports on the assessment of minimum capital adequacy according to risk profile to the Financial Services Authority.
(2) Reports as referred to in paragraph (1) are submitted together with the submission of the results of the Bank's self-assessment of Health Level.
(3) The deadline for submission of reports as referred to in paragraph (2) refers to regulations regarding the assessment of the health level of Islamic Commercial Banks.

Article 44

(1) A Bank is declared late in submitting reports as referred to in Article 43 paragraph (1) if the report is received by the Financial Services Authority at the latest 5 (five) days after the submission deadline. (2) A Bank is declared not to have submitted reports as referred to in Article 43 paragraph (1) if the report has not been received by the Financial Services Authority after the deadline as referred to in paragraph (1). (3) Banks declared not to have submitted reports are still required to submit reports as referred to in Article 43 paragraph (1).

CHAPTER VI
OTHERS
Article 45

Banks are prohibited from trading financial assets in the available-for-sale group, conducted in a pattern resembling trading of financial assets in the trading group:
a. in significant amounts; and/or b. at high frequency.

CHAPTER VII
SANCTIONS
Article 46

Banks that violate provisions as regulated in Article 2 paragraph (1), Article 3 paragraph (1), Article 4 paragraph (2), Article 5 paragraph (2), Article 7 paragraph (2), Article 8 paragraph (2) and paragraph (3), Article 9 paragraph (2) and paragraph (3), Article 10, Article 11, Article 12 paragraph (1), Article 13 paragraph (1), paragraph (2) and paragraph (4), Article 30 paragraph (1), Article 38 paragraph (1) and paragraph (3), Article 43 paragraph (1), and Article 44 paragraph (3), are subject to administrative sanctions, including:
a. written reprimand; b. prohibition on expanding business activities;
c. suspension of certain business activities;
d. prohibition on opening office networks; e. downgrade of the Bank's health level; and/or f. listing of Bank officials and/or shareholders in the list of persons prohibited from becoming shareholders and officials of Banks.

Article 47

Banks that do not submit KPMM calculation reports as referred to in Article 42 paragraph (5) are subject to sanctions in the form of an obligation to pay Rp1,000,000.00 (one million rupiah) per working day of delay with a maximum amount of Rp30,000,000.00 (thirty million rupiah).

Article 48

(1) In addition to sanctions as referred to in Article 46, Banks declared:
a. late in submitting reports referred to in Article 44 paragraph (1), are subject to sanctions in the form of an obligation to pay Rp1,000,000.00 (one million rupiah) per day of delay; b. not submitting reports as referred to in Article 44 paragraph (2), are subject to sanctions in the form of an obligation to pay Rp50,000,000.00 (fifty million rupiah).

(2) In the event Banks are subject to sanctions in the form of an obligation to pay because declared not to have submitted reports as referred to in paragraph (1) letter b, sanctions in the form of an obligation to pay for late submission of reports are not applied.

Article 49

In addition to being subject to administrative sanctions as referred to in Article 46, Banks that do not meet KPMM according to risk profile as referred to in Article 2 both individually and consolidated with Subsidiaries are required to take corrective steps or actions by referring to regulations regarding supervisory follow-up and bank status determination.

Article 50

(1) Banks that violate provisions as referred to in Article 45 are subject to sanctions in the form of not being allowed to classify subsequent financial asset purchases in the available-for-sale group, for 6 (six) months calculated from the date of issuance of the supervisory letter by the Financial Services Authority. (2) Banks that violate the sanction of not being allowed for the second time, are subject to sanctions in the form of not being allowed to classify subsequent financial asset purchases in the available-for-sale group for 1 (one) year calculated from the date of issuance of the supervisory letter by the Financial Services Authority. (3) Banks that violate the sanction of not being allowed for more than two times, are subject to sanctions in the form of not being allowed to classify subsequent financial asset purchases in the available-for-sale group for 2 (two) years calculated from the date of issuance of the supervisory letter by the Financial Services Authority.

CHAPTER VIII
TRANSITIONAL PROVISIONS
Article 51

(1) Capital components and requirements as referred to in Article 3, Article 4, and Article 5 of Bank Indonesia Regulation Number 7/13/PBI/2005 on Minimum Capital Requirements for Commercial Banks Based on Sharia Principles as amended by Bank Indonesia Regulation Number 8/7/PBI/2006 remain in effect until December 31, 2015. (2) Capital components and requirements as referred to in Article 8 to Article 21, except Article 9 paragraph (2) and paragraph (3) of this Financial Services Authority Regulation, begin to apply on January 1, 2016.

Article 52

(1) Capital instruments, as regulated in Bank Indonesia Regulation Number 7/13/PBI/2005 on Minimum Capital Requirements for Commercial Banks Based on Sharia Principles as amended by Bank Indonesia Regulation Number 8/7/PBI/2006, which do not have a maturity date and were issued before January 1, 2015 but do not meet the capital component criteria according to these regulations, can be recognized as capital components until December 31, 2018. (2) Capital instruments as regulated in Bank Indonesia Regulation Number 7/13/PBI/2005 on Minimum Capital Requirements for Commercial Banks Based on Sharia Principles as amended by Bank Indonesia Regulation Number 8/7/PBI/2006, which have a maturity date and were issued before January 1, 2015 but do not meet the capital component criteria according to these regulations, can be recognized as capital components until maturity.

CHAPTER IX
FINAL PROVISIONS
Article 53

Further provisions of this Financial Services Authority Regulation are regulated by a Circular Letter of the Financial Services Authority.

Article 54

(1) At the time this Financial Services Authority Regulation comes into effect, Bank Indonesia Regulation Number 7/13/PBI/2005 on Minimum Capital Requirements for Commercial Banks Based on Sharia Principles (State Gazette of the Republic of Indonesia Year 2005 Number 47, Additional State Gazette of the Republic of Indonesia Number 4501) as amended by Bank Indonesia Regulation Number 8/7/PBI/2006 (State Gazette of the Republic of Indonesia Year 2006 Number 17, Additional State Gazette of the Republic of Indonesia Number 4606) except Article 3, Article 4, and Article 5, are repealed and declared invalid. (2) Provisions as referred to in Article 3, Article 4, and Article 5, Bank Indonesia Regulation Number 7/13/PBI/2005 on Minimum Capital Requirements for Commercial Banks Based on Sharia Principles (State Gazette of the Republic of Indonesia Year 2005 Number 47, Additional State Gazette of the Republic of Indonesia Number 4501) as amended by Bank Indonesia Regulation Number 8/7/PBI/2006 (State Gazette of the Republic of Indonesia Year 2006 Number 17, Additional State Gazette of the Republic of Indonesia Number 4606) are repealed and declared invalid on January 1, 2016.

Article 55

This Financial Services Authority Regulation comes into effect on January 1, 2015.

To ensure that everyone knows it, order the promulgation of this Financial Services Authority Regulation by placing it in the State Gazette of the Republic of Indonesia.

Determined in Jakarta
On the date of November 18, 2014
CHAIRMAN OF THE BOARD OF COMMISSIONERS
FINANCIAL SERVICES AUTHORITY,

Signed,

MULIAMAN D. HADAD

Promulgated in Jakarta
On the date of November 19, 2014
MINISTER OF LAW AND HUMAN RIGHTS
REPUBLIC OF INDONESIA,

Signed,

YASONNA H. LAOLY

Copy consistent with the original
Director of Legal Affairs I
Ministry of Law,

[Signature]
Tini Kustini

STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2014 NUMBER 352