Regulation No. 2012-03: Miscellany of Targeted Revisions to Current Supervisory Provisions

THE GENERAL DIRECTOR
OF THE CENTRAL BANK OF THE REPUBLIC OF SAN MARINO HAVING REGARD TO Law No. 165 of 17 November 2005, and in particular Article 39, which grants the Central Bank of the Republic of San Marino the power to issue measures containing binding and general provisions; HAVING REGARD TO the Statute of the Central Bank of the Republic of San Marino approved by Law No. 96 of 29 June 2005, and in particular Article 30, paragraph 3 of the said Statute, pursuant to which acts of the Central Bank in matters of supervision, deliberated by the Supervisory Coordination, are issued by the General Director; CONSIDERING the opportunity, on the one hand, to consolidate at the regulatory level the guidelines and pronouncements already expressed by the Supervisory Coordination, and on the other hand, to make "targeted" updates, taking into account requests from the "system"; CONSIDERING the recent consolidation processes among financial intermediaries and the consequent need, pending the introduction of comprehensive consolidated supervisory regulation, to apply certain corrective measures to the methods of calculating supervisory capital and related prudential thresholds at the group level, as well as to simplify the use of forms of intra-group centralization of certain corporate functions; CONSIDERING that the modifications introduced by this Regulation have no substantial impact, also for the purposes of Article 38, paragraph 5, on the supervised entities that are its recipients; HAVING REGARD TO the resolutions of the Supervisory Coordination and the Board of Directors by which the text of Regulation No. 2012-03, named "Miscellany of Targeted Revisions to Current Supervisory Provisions", was approved; ISSUES the attached Regulation No. 2012-03 which enters into force on the date of today. San Marino, 7 December 2012 Signed: THE GENERAL DIRECTOR Mario Giannini

MISCELLANY
OF TARGETED REVISIONS
TO CURRENT SUPERVISORY PROVISIONS year 2012 / number 03

Regulation No. 2012-03: Miscellany of Targeted Revisions to Current Supervisory Provisions
Article 1 – Professional requirements for administrators and general manager
1. Articles IV.II.3 and VII.II.4 of Reg.2007-07 are replaced as follows:
"Article IV.II.3 - Board of Directors
1. The members of the Board of Directors of a bank must have acquired a total experience of not less than three years in one of the following activities:
a) administration, direction or control activities at companies, not falling within the definition of DEFAULT COMPANIES; b) professional activities, or university teaching in subjects related to the credit, financial, insurance or otherwise functional sectors to the bank's activity; c) administrative or managerial functions at public bodies or public administrations related to the credit, financial, securities or insurance sectors or at public bodies or public administrations not related to the aforementioned sectors provided they involve the management of economic-financial resources.
2. For the purposes of letter a), bankruptcy procedures, extraordinary proceedings or equivalent foreign procedures are relevant only if initiated during the period in which the subject held, for at least one year, positions of administration, direction or control in the company or in the year following the termination of the same positions.
3. The Chairman of the Board of Directors must be chosen from those referred to in the previous paragraph 1 whose total experience is at least five years.
4. For the Managing Director, the professional requirements are those set out in the following article.
Article IV.II.4 – Head of the Executive Structure
1. The HEAD OF THE EXECUTIVE STRUCTURE must possess specific competence and experience, acquired with at least five years of professional activity in the SENIOR STAFF OF ORGANIZATIONAL UNITS of banks or other FINANCIAL COMPANIES, not falling within the definition of DEFAULT COMPANIES, save as provided by Article IV.II.3 paragraph 2.".
2. Articles IV.II.3 and VII.II.4 of Reg.2011-03 are replaced as follows:
"Article IV.II.3 - Board of Directors
1. The members of the Board of Directors of a FINANCIAL COMPANY must have acquired a total experience of not less than three years in one of the following activities:
a) administration, direction or control activities at companies, not falling within the definition of DEFAULT COMPANIES;

Regulation No. 2012-03: Miscellany of Targeted Revisions to Current Supervisory Provisions b) professional activities, or university teaching in subjects related to the credit, financial, fiduciary, securities or insurance sectors or otherwise functional to the FINANCIAL COMPANY's activity; c) administrative or managerial functions at public bodies or public administrations related to the credit, financial, securities or insurance sectors or at public bodies or public administrations not related to the aforementioned sectors provided they involve the management of economic-financial resources.
2. For the purposes of letter a), bankruptcy procedures, extraordinary proceedings or equivalent foreign procedures are relevant only if initiated during the period in which the subject held, for at least one year, positions of administration, direction or control in the company or in the year following the termination of the same positions.
3. The Chairman of the Board of Directors must be chosen from those referred to in the previous paragraph 1 whose total experience is at least five years.
4. For the Managing Director, the professional requirements are those set out in the following article.
Article IV.II.4 – Head of the Executive Structure
1. The HEAD OF THE EXECUTIVE STRUCTURE must possess specific competence and experience, acquired with at least five years of professional activity in the SENIOR STAFF OF ORGANIZATIONAL UNITS of FINANCIAL COMPANIES, not falling within the definition of DEFAULT COMPANIES, save as provided by Article IV.II.3 paragraph 2.".
3. Note n.2 placed at the bottom of Annex B of Regulation No.2007-07 and Regulation No.2011-03 is replaced as follows:
"Indicate one or more of the following:

• I have acquired experience of duration not less than [three/five] years in administration, direction or control activities at companies, not falling within the definition of default companies;
• I have acquired experience of duration not less than [three/five] years in professional activities or university teaching in subjects related to the sector or otherwise functional to the activity of the said financial company;
• I have acquired specific competence and experience with at least five years of professional activity in the senior staff of organizational units of financial companies, not falling within the definition of default companies.".
  Article 2 – Intra-group outsourcing
  1. Article VII.IX.16 of Reg.2007-07 is replaced as follows:
  "Article VII.IX.16 - Limits on outsourcing

Regulation No. 2012-03: Miscellany of Targeted Revisions to Current Supervisory Provisions
1. Banks cannot outsource the exercise of material activities and corporate functions related to SAVINGS COLLECTION, credit granting and other activities reserved under LISF.
2. Outsourcing in the areas of treasury, general accounting, personnel management, INTERNAL AUDIT and COMPLIANCE CONTROLS is permitted only if all the following conditions are met:
a) the OUTSOURCER is the PARENT COMPANY or a COMPONENT of the same group, subject to supervision by the CENTRAL BANK or by a foreign Supervisory Authority, in the presence of cooperation agreements pursuant to Article 103 of LISF; b) the outsourcing is communicated to the CENTRAL BANK by the PARENT COMPANY with at least 30 days' notice prior to the actual start of the relationship, providing complete indication of the human resources and tools that it itself, or the COMPONENT designated by it for the centralization of the function at group level, intends to use; c) during the period referred to in the previous letter b), unless the time limit is interrupted for a request for further information and documents by the CENTRAL BANK, the latter does not express a negative opinion to the PARENT COMPANY regarding the submitted outsourcing, due to the unsuitability of the OUTSOURCER's organizational structure to centralize activities or functions at group level; d) the further conditions set out in the following Article VII.IX.18 exist at group level.
3. Solely with reference to the areas of INTERNAL AUDIT and COMPLIANCE CONTROLS, the OUTSOURCER may not coincide with the PARENT COMPANY or a COMPONENT of the same group, pursuant to the previous letter a); in such cases, however, outsourcing is subject to the authorization of the CENTRAL BANK.
4. The authorization of the CENTRAL BANK is granted if, in addition to the concurrence of the conditions set out in Article VII.IX.18 and compliance with the procedure set out in the following Article VII.IX.17, the OUTSOURCER possesses the necessary professionalism, independence and organizational adequacy and provides sufficient guarantees of operational continuity.".
2. Article VII.IX.16 of Reg.2011-03 is replaced as follows:
"Article VII.IX.16 - Limits on outsourcing
1. FINANCIAL COMPANIES cannot outsource the exercise of material activities and corporate functions related to credit granting and other activities reserved under LISF.
2. Outsourcing in the areas of general accounting, personnel management, INTERNAL AUDIT and COMPLIANCE CONTROLS is permitted only if all the following conditions are met:
a) the OUTSOURCER is the PARENT COMPANY or a COMPONENT of the same group, subject to supervision by the CENTRAL BANK or by a foreign Supervisory Authority, in the presence of cooperation agreements pursuant to Article 103 of LISF; b) the outsourcing is communicated to the CENTRAL BANK by the PARENT COMPANY with at least 30 days' notice prior to the actual start of the relationship, providing complete indication of the human resources and tools that it itself, or the COMPONENT designated by it for the centralization of the function at group level, intends to use;

Regulation No. 2012-03: Miscellany of Targeted Revisions to Current Supervisory Provisions c) during the period referred to in the previous letter b), unless the time limit is interrupted for a request for further information and documents by the CENTRAL BANK, the latter does not express a negative opinion to the PARENT COMPANY regarding the submitted outsourcing, due to the unsuitability of the OUTSOURCER's organizational structure to centralize activities or functions at group level; d) the further conditions set out in the following Article VII.IX.18 exist at group level.
3. In the areas identified in the previous paragraph 2, the OUTSOURCER may not coincide with the PARENT COMPANY or a COMPONENT of the same group solely with prior authorization from the CENTRAL BANK.
4. The authorization of the CENTRAL BANK is granted if, in addition to the concurrence of the conditions set out in Article VII.IX.18 and compliance with the procedure set out in the following Article VII.IX.17, the OUTSOURCER possesses the necessary professionalism, independence and organizational adequacy and provides sufficient guarantees of operational continuity.".
Article 3 – Application of prudential supervision rules at group level
1. The following Article is introduced into Title II, Part VII, of Reg.2007-07 and Reg.2011-03:
"Art. VII.II.13 – Adjusted supervisory capital
1. Pending the regulation referred to in Article IX.III.1, compliance with the limits on risk concentration and relationships with related parties and subjects connected to them, set out in Titles IV and V of this Part, is assessed by the CENTRAL BANK with reference to the "adjusted supervisory capital" equal to the sum of the supervisory capital of the controlling FINANCIAL COMPANY and the controlled FINANCIAL COMPANIES, insofar as they are authorized to carry out banking or financing activities.
2. For the purposes of the previous Article VII.II.4 paragraph 4, the controlled FINANCIAL COMPANY does not deduct from its supervisory capital the DIRECT and INDIRECT EXPOSURES that have already been deducted, for the same purposes, from the supervisory capital of the controlling FINANCIAL COMPANY.".
2. The following Article is introduced into Title IV, Part VII, of Reg.2007-07:
"Art. VII.IV.6 – Limitations on large risks in the case of groups
1. If the bank assumes INDIRECT EXPOSURES, compliance with the limits on risk concentration set out in Article VII.IV.2 is verified at group level, relating the sum of risk positions (including those granted by controlled FINANCIAL COMPANIES) to the adjusted supervisory capital referred to in Art. VII.II.13.
2. In the cases referred to in the previous paragraph, the individual COMPONENTS, banks or FINANCIAL COMPANIES, are subject only to an individual limit equal to 40% provided that, at group level, the limits indicated above are respected. The individual limit is calculated by relating the risk positions (relating only to direct exposures, for cash and signature) to the individual supervisory capital.".
3. The following Article is introduced into Title IV, Part VII, of Reg.2011-03:
"Art. VII.IV.6 – Limitations on large risks in the case of groups
1. If the FINANCIAL COMPANY assumes INDIRECT EXPOSURES, compliance with the limits on risk concentration set out in Article VII.IV.2 is verified at group level, relating the sum of risk positions (including those assumed through controlled FINANCIAL COMPANIES) to the adjusted supervisory capital referred to in Article VII.II.13.
2. In the cases referred to in the previous paragraph, the individual COMPONENTS, banks or FINANCIAL COMPANIES, are subject only to an individual limit equal to 40% provided that, at group level, the limits indicated above are respected. The individual limit is calculated by relating the risk positions (relating only to direct exposures, for cash and signature) to the individual supervisory capital.
3. As limits on concentration referred to in the previous paragraph 1, those increased pursuant to Article VII.XIII.4 may be applied only if all COMPONENTS authorized for the granting of financing fall within the category of LIMITED OPERATIONAL FINANCIAL COMPANIES.".
4. The following Article is introduced into Title V, Part VII, of Reg.2007-07:
"Art. VII.V.5 – Limitations on risk positions towards related parties in the case of groups
1. If the bank assumes INDIRECT EXPOSURES, compliance with the limits on risk positions towards RELATED PARTIES and SUBJECTS CONNECTED TO THEM set out in Article VII.V.4 is verified at group level, relating the sum of risk positions (including those granted by controlled FINANCIAL COMPANIES) to the adjusted supervisory capital referred to in Article VII.II.13.
2. In the cases referred to in the previous paragraph, the limits set out in Article VII.V.4 will be applied to the individual supervisory capital of the individual COMPONENTS, banks or FINANCIAL COMPANIES solely for direct exposures, for cash and signature.".
5. The following Article is introduced into Title V, Part VII, of Reg.2011-03:
"Art. VII.V.5 – Limitations on risk positions in the case of groups
1. If the FINANCIAL COMPANY assumes INDIRECT EXPOSURES, compliance with the limits on risk positions towards RELATED PARTIES and SUBJECTS CONNECTED TO THEM set out in Article VII.V.4 is verified at group level, relating the sum of risk positions (including those granted by controlled FINANCIAL COMPANIES) to the adjusted supervisory capital referred to in Art. VII.II.13.
2. In the cases referred to in the previous paragraph, the limits set out in Article VII.V.4 will be applied to the individual supervisory capital of the individual COMPONENTS, banks or FINANCIAL COMPANIES solely for direct exposures (for cash and signature).
3. Pursuant to Article VII.XIII.5 paragraph 2, the previous paragraphs do not apply to LIMITED OPERATIONAL FINANCIAL COMPANIES and to groups in which all COMPONENTS authorized for the granting of financing fall within the category of LIMITED OPERATIONAL FINANCIAL COMPANIES.".
Article 4 – Amendments to Regulation No.2008-02
1. The following paragraphs are added to Art.III.II.3 of Reg.2008-02:
"7. As an alternative to what is provided by the previous paragraphs, PARTICIPATIONS in controlled companies pursuant to art. 2 of LISF may be valued based on the value of the fraction, corresponding to the share of PARTICIPATION, of the net equity of the participating company, adjusted annually as provided in the subsequent paragraph 11.
8. The new criterion for valuing controlled companies may be adopted by resolution of the Board of Directors, with the favorable opinion of the Board of Statutory Auditors, which indicates the underlying reasons and the effects on the capital of the controlling bank. The resolution, together with the opinion of the Board of Statutory Auditors, must be transmitted to the Central Bank within 10 days from adoption.
9. If at the time of the first application of the method the value of the PARTICIPATION determined pursuant to paragraph 1 is higher than the corresponding fraction of the net equity of the participating company, the difference, to the extent attributable to depreciable assets or goodwill, is amortized according to the provisions of this Regulation. If the value of the PARTICIPATION is lower than the corresponding fraction of the participating company's capital, the difference is accounted for, to the extent not attributable to elements of the participating company's assets or liabilities, in a non-distributable reserve or, when it is due to the prediction of an unfavorable evolution of the participating company's future economic results, in funds for risks and charges. The note indicates the amount of the difference and the underlying reasons for the adoption of the net equity valuation criterion.
10. The difference referred to in paragraph 9 is calculated with reference to the values existing at the time of the first application of the method. This difference may also be determined according to the values existing at the date of acquisition of the PARTICIPATION or, if the acquisition was carried out in several stages, on the date when the shares or quotas became a PARTICIPATION. For the calculation of the difference, the asset and liability elements and off-balance sheet operations of the participating company that have been valued according to criteria not uniform to those followed by the participating company may be revalued. If no new valuations are carried out, this circumstance is mentioned in the notes.
11. To the value of the PARTICIPATION resulting from the last approved balance sheet is added or subtracted, if not already accounted for, the increase or decrease in the value of the net equity of the participating company corresponding to the share of PARTICIPATION and the dividends corresponding to it are deducted. If the variation is an increase and exceeds the dividends received or receivable, the excess is recorded in a non-distributable reserve without affecting the income statement.
12. For the application of the method, profits and losses resulting from trading operations carried out between the bank preparing the balance sheet and the controlled companies are eliminated, concerning, in the case of assets other than securities, currencies and other financial instruments, values included in the capital. These eliminations may be omitted, mentioning this in the notes, if of immaterial amount or when the operation has been concluded at normal market conditions and the elimination could involve disproportionate costs.".
2. As a result of the introduction of the category of restructured credits, carried out with Regulations No. 2012-01 and 2012-02, and the possibility of valuing participations in controlled companies at net equity, the Annex tables to the annual financial statements of banks nos. 2.2, 2.3, 2.4, 3.3, 3.4, 3.5, 14.8 and 25.5 of Annex B of Regulation No. 2008-02 are replaced by the corresponding tables reported in the annex to this Regulation.
3. For the purposes of Article I.I.2, paragraph 3, of Reg.2008-02, the definitions marked in the first paragraph by numbers 2, 3, 10, 11, 12, 13, 21, 28, 30 are repealed, as they are already available in Reg.2007-07 and subsequent amendments and integrations.
4. As a result of what is provided in the two previous paragraphs, the phrase reported at the bottom of the instructions for compiling tables no. 2.2 and no. 3.3 is deleted: "For the notion of BAD LOANS, NON-PERFORMING LOANS, OVERDUE AND/OR OVERDRAWN, Article I.I.2 of this regulation is observed.".
5. As a result of Delegated Decree No. 51 of 16 March 2010, repealing Decree No. 83 of 8 June 2005, the third paragraph of Article V.I.2 of Reg. 2008-02 is replaced as follows:
"3. The valuation of assets held in trust is carried out based on the criteria defined by Art. 2 of Delegated Decree No. 51 of 16 March 2010. The value of said assets is indicated synthetically in table no. 19.2 of the Notes.".

Regulation No. 2012-03: Miscellany of Targeted Revisions to Current Supervisory Provisions
6. As a result of Delegated Decree No. 51 of 16 March 2010, the instructions for compiling table 19.2 are replaced by the following:
"All assets held in trust are recorded in this table through the use of the various sub-items. For valuation criteria, reference is made to Decree 16 March 2010, n. 51 (cf. articles II.II.1, paragraph 12 and art. VI.I.2 of this Regulation.".
7. With regard to what is provided in the previous paragraph, the Annex table to the annual financial statements of banks no.19.2 of Annex B is replaced by the corresponding table reported in the annex to this Regulation.
Article 5 – Training courses for professional trustees

1. The first paragraph of Article IV.I.1 of Reg.2010-01 is replaced as follows:
   "1. Pursuant to Article 2 paragraph 7 letter f) of the TRUSTEE DECREE, the CENTRAL BANK, directly or using its BCSM FOUNDATION or other third parties appointed for this purpose, periodically organizes training courses on trust matters, open to anyone interested in the subject, regardless of the immediate or future purpose of obtaining the authorization referred to in this Regulation, which presupposes the constant fulfillment of"