Resolution of the Board of the National Bank of the Kyrgyz Republic No. 2020-P-12\39-2-(NPA) of July 8, 2020 on Amendments to the Resolution on the Instruction on the Procedure for Compliance with Limits of Open Currency Position by Banks Operating in Accordance with Islamic Principles of Banking and Finance

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Date of creation: 2020-07-13

Resolution of the Board of the National Bank of the Kyrgyz Republic

of July 8, 2020

No. 2020-P-12\39-2-(NPA)

On Amendments

to the Resolution of the Board of the National Bank of the Kyrgyz Republic

"On the Instruction on the Procedure for Compliance with Limits of Open Currency Position by Banks Operating in Accordance with Islamic Principles of Banking and Finance" dated October 14, 2009 No. 41/4

In accordance with Articles 20 and 68 of the Law of the Kyrgyz Republic

"On the National Bank of the Kyrgyz Republic, Banks and Banking Activity", the Board of the National Bank of the Kyrgyz Republic resolves:

1. To make amendments to

the Resolution of the Board of the National Bank of the Kyrgyz Republic "On the Instruction on the Procedure for Compliance with Limits of Open Currency Position by Banks Operating in Accordance with Islamic Principles of Banking and Finance" dated October 14, 2009 No. 41/4 (attached).

2. This Resolution shall enter into force upon the expiration of fifteen days from the date of its official publication.

3. To the Legal Department:

• to publish this Resolution on the official website of the National Bank of the Kyrgyz Republic;

• after official publication, to send this Resolution to the Ministry of Justice of the Kyrgyz Republic for inclusion in the State Register of Regulatory Legal Acts of the Kyrgyz Republic.

4. To the Department of Supervision and Licensing Methodology to bring this Resolution to the attention of JSC "Commercial Bank KYRGYZSTAN", CJSC "EcoIslamicBank", JSC "BAKAY BANK", JSC "Ayl Bank", JSC "RSK Bank", OOL "Union of Banks of Kyrgyzstan", corresponding structural subdivisions, regional departments, and the representative office of the National Bank of the Kyrgyz Republic in the Batken region.

5. To entrust the control over the execution of this Resolution to the member of the Board of the National Bank of the Kyrgyz Republic overseeing the supervisory block.

Chairman T. Abdygulov

Appendix

to the Resolution of the Board

of the National Bank

of the Kyrgyz Republic

of July 8, 2020

No. 2020-P-12\39-2-(NPA)

Amendments

to the Resolution of the Board of the National Bank of the Kyrgyz Republic

"On the Instruction on the Procedure for Compliance with Limits of Open Currency Position by Banks Operating in Accordance with Islamic Principles of Banking and Finance" dated October 14, 2009 No. 41/4

1. To make the following amendments to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On the Instruction on the Procedure for Compliance with Limits of Open Currency Position by Banks Operating in Accordance with Islamic Principles of Banking and Finance" dated October 14, 2009 No. 41/4:

in the title, preamble, and paragraph 1 of the Resolution, after the words "open currency position", add the words "and open position in precious metals";

in the Instruction "On the Procedure for Compliance with Limits of Open Currency Position by Banks Operating in Accordance with Islamic Principles of Banking and Finance", approved by the aforementioned Resolution:

in the title, after the words "open currency position", add the words "and open position in precious metals";

• rephrase paragraph 1.2 as follows:

"1.2. The purpose of this Instruction is to determine the procedure for calculating the open position and controlling compliance with the limits of the open currency position and open position in precious metals (hereinafter referred to as the open position) by Islamic banks and banks having an "Islamic window" (hereinafter referred to as banks), which have a license from the National Bank of the Kyrgyz Republic (hereinafter referred to as the National Bank) to conduct operations in foreign currency and the right to conduct banking operations with precious metals.

To achieve the purpose and fulfill the tasks of the National Bank, the Board of the National Bank may, by a separate resolution, change the values of the open position limits established in this Instruction for a limited period."

• in paragraph 1.3, after the words "currency risks", add the words "and risks related to transactions with precious metals";

• rephrase paragraph 1.4 as follows:

"1.4. For the purposes of this Instruction, the following definitions apply:

Currency risk is the risk of the bank incurring losses due to changes in the value of the bank's claims (assets)/liabilities denominated in foreign currency, in the event of an unfavorable change in the exchange rate at the moment when the bank has an open currency position in that currency. A currency position arises from the conduct of currency transactions and is an indicator of the degree of the bank's exposure to currency risk.

Currency transactions are deals related to the exchange, purchase/sale (conversion) of foreign currency, as well as other transactions in the course of which the volume of claims (assets) or liabilities denominated in foreign currency changes.

Net position is the difference between the bank's claims (assets) and liabilities, both on-balance sheet and off-balance sheet, in a separate foreign currency and for each type of precious metal separately (gold, silver), excluding numismatic (collectible) coins.

Open position is the mismatch between the bank's claims (assets) in a foreign currency/type of precious metal and the bank's liabilities in the same foreign currency/in the same type of precious metal; in the case of equality, the position is considered closed.

For each foreign currency and for each type of precious metal, the open position is calculated separately.

The bank's open position may be long (in the case where the bank's claims (assets) in the corresponding currency/corresponding type of precious metal exceed its liabilities in the same currency/same type of precious metal), or short (when liabilities exceed claims (assets)). A long position is recorded with a "+" sign, a short one with a "-" sign.

Aggregate position is the sum of all net positions of the bank for all foreign currencies or types of precious metals, calculated using the "short hand" method, defined in paragraph 2.5 of this Instruction.

Open position limits are restrictions established by the National Bank, expressed as a percentage ratio of open positions (for each foreign currency/for each type of precious metal and aggregate) to the bank's net total capital. Open position limits are calculated in percentages, rounded to two decimal places after the decimal point.

The bank's net total capital is calculated in accordance with the requirements of the regulatory legal acts of the National Bank.

For the purposes of this Instruction, when calculating open position limits, the value of the bank's net total capital as of the 1st day of each month is used.

Date of transaction conclusion is the date when the parties reach an agreement on the main terms of the transaction (types of currencies, exchange rate, amounts of funds, settlement date, type, mass of precious metal, etc.).

Settlement date is the date on which funds are credited to the accounts of the transaction participants."

• rephrase the title of Section II as follows:

"II. Procedure for Calculating Open Positions";

• supplement paragraph 2.1 with fourth and fifth paragraphs as follows:

"- net positions for each type of precious metal;

• aggregate position in precious metals."

• rephrase paragraphs 2.2 and 2.3 as follows:

"2.2. Net positions are calculated separately for each foreign currency and type of precious metal as the sum of the following indicators:

• net spot position in foreign currency/type of precious metal for transactions conducted by the bank in accordance with Islamic principles of banking and finance. This value is calculated as the difference between on-balance sheet assets and on-balance sheet liabilities, including unfinished spot contracts with a settlement date up to 2 (two) days. The calculation is performed based on the net book value of assets and liabilities;

• irrevocable guarantees, letters of credit, and similar financial instruments issued or confirmed by the bank, denominated in foreign currency/type of precious metal, excluding guarantees, letters of credit, and similar financial instruments secured in the same currency/same type of precious metal. For the purposes of this Instruction, financial instruments imply bill guarantees (aval), traveler's checks, and other obligations of the bank accepted in international practice. Credit lines are not considered financial instruments.

In this regard, the aforementioned guarantees, letters of credit, and similar financial instruments are included in the calculation of the net position from the moment the beneficiary (beneficiary) submits a claim for payment of the monetary amount under the obligation or the bank receives documented information indicating a high probability of a claim for payment under the aforementioned obligations. For example, a letter from the beneficiary regarding non-performance (delay in performance) of the principal's obligations is grounds for including the guarantee in the calculation of the net position;

• other on-balance sheet and off-balance sheet assets/liabilities in foreign currency/type of precious metal, placed/attracted in accordance with Islamic principles of banking and finance and carrying currency risk and risks related to transactions with precious metals.

2.3. Currency transactions and transactions with precious metals are included in the calculation of the net position on the date of transaction conclusion (including transactions containing a future settlement date that is not the date of transaction conclusion), except for transactions based on mudaraba and sharia/musharaka contracts.

Transactions in foreign currency based on mudaraba and sharia/musharaka contracts are included in the calculation of the net position on the date of receipt/provision by the bank of the amount in foreign currency. Profit or loss resulting from these transactions is included in the calculation of the net position at the moment of their actual occurrence."

• supplement paragraph 2.4 with a second paragraph as follows:

"When calculating net positions in precious metals:

• precious metals in non-cash form in quantitative terms are calculated based on the evening fixing established by the London Bullion Market Association, on the day preceding the day of accounting, calculated via the cross-rate of the official exchange rate of the US dollar to the Kyrgyz som, established by the National Bank on the reporting date;

• precious metals in physical form in quantitative terms are calculated based on the accounting rate established in the bank's accounting policy."

• rephrase paragraph 2.5 as follows:

"2.5. The aggregate position is calculated using the "short hand" method, i.e., the calculation is carried out by summing separately all long net positions and separately all short net positions for each currency/each type of precious metal. Then the resulting values are compared with each other (in absolute value), and the largest of the two values is used in the calculation of the aggregate position limit."

• rephrase the title of Section III as follows:

"III. Open Position Limits";

• supplement Section III with sub-paragraph 3.1.3 as follows:

"3.1.3. For the regulation of buy-sell transactions with precious metals, the National Bank establishes for banks a limit for the aggregate open position in precious metals:

a) as of the end of the business day, the size of the open long/short position for each type of precious metal must not exceed 15% of the bank's net total capital;

b) as of the end of the business day, the size of the aggregate position in precious metals in total must not exceed 20% of the bank's net total capital."

• in paragraphs 3.2 and 3.3, replace the words "currency positions" with the word "positions";

• rephrase paragraph 3.4 as follows:

"3.4. The magnitude of open positions during the business day is controlled by the bank independently, based on its own assessment of the permissible level of currency risk and risks related to transactions with precious metals. In this regard, the bank must maintain risk levels during the day in accordance with the internal risk management policy approved by the Board of Directors."

• in paragraph 3.5, replace the words "currency positions" with the word "positions";

• rephrase paragraph 3.6 as follows:

"3.6. In the event that the bank's net total capital is negative or equal to zero, the bank must bring net positions for each currency/each type of precious metal to a zero value (closed position) within the timeframes established by the National Bank."

• supplement the Instruction with paragraph 3.7 as follows:

"3.7. Precious metals held by the bank in safekeeping and as collateral are not liabilities of the bank and are not included in the calculation of the open position in precious metals."

• in paragraph 4.1:

exclude the word "currency";

after the words "according to Appendices 1 and 2", add the numbers "3, 4";

• rephrase paragraph 4.2 as follows:

"4.2. The bank, taking into account the data of all branches, subsidiary banks, and exchange offices, must submit the following reports on open positions:

• daily report on open currency positions (OCP) for transactions conducted in accordance with Islamic financing principles (Appendix 1);

• consolidated daily report on open currency positions (OCP) (Appendix 2);

• daily report on open positions in precious metals (OPM) for transactions conducted in accordance with Islamic financing principles (Appendix 3);

• consolidated daily report on open positions in precious metals (OPM) (Appendix 4)."

• rephrase the title of Section V as follows:

"V. Measures of Impact for Banks Violating Established Open Position Limits";

• rephrase paragraph 5.1 as follows:

"5.1. In the event of a bank violating the established open position limits, the National Bank applies measures of impact in the form of a fine of 5% of the violation amount, but not more than 10% of the regulatory minimum charter capital of the bank."

• in paragraph 5.2:

exclude the word "sanctions";

after the words "apply other", add the words "measures of impact";

after the word "regulatory", add the word "legal";

replace the words "fine sanctions" with the word "fine";

• rephrase paragraph 5.3 as follows:

"5.3. Any attempts by a bank to avoid reflecting the real position in reporting in any way will be considered by the National Bank as:

• attempts to mislead the National Bank;

• unhealthy and unsafe banking practice;

• manipulation of the net position with the purpose of distorting its real magnitude, i.e., conducting dubious transactions, the origin and commission of which do not lend themselves to clear identification and/or if these transactions affect the bank's financial reporting and its economic indicators;

• submission by the bank of unreliable financial and regulatory reporting. Such transactions are not taken into account when calculating open position limits."

• rephrase the first sentence of paragraph 5.5 as follows:

"Measures of impact in the form of a fine are generally not applied to a bank if the open position limit was violated under conditions of force majeure circumstances."

• in paragraphs 5.6 and 5.7:

exclude the word "monetary";

replace the words "currency position" with the word "position";

• supplement the Instruction with paragraph 6.3 as follows:

"6.3. The organization of internal control for transactions with precious metals is carried out in accordance with the norms established in the Regulation "On Transactions of Commercial Banks with Precious Metals Conducted in Accordance with Islamic Principles of Banking and Finance.";

• supplement the Instruction with Appendices 3 and 4 as follows:

" Appendix 3

DAILY REPORT

on open positions in precious metals (OPM) for transactions conducted in accordance with Islamic financing principles as of ___. _.20 g.

NTC as of "01" ______ year: ______ thousand som

Type of precious metal

Accounting rate

Magnitude of OPM (thousand som)

Including:

Magnitude of OPM (% to NTC)

Deviation from limit norm (%)

Balances for unfinished spot deals

balance

off-balance

sale

purchase

Gold

Silver

Total OPM:

Appendix 4

CONSOLIDATED DAILY REPORT

on open positions in precious metals (OPM)

as of ___. _.20 g.

NTC as of "01" ______ year: ______ thousand som

Type of precious metal

Accounting rate

Magnitude of OPM (thousand som)

Including:

Magnitude of OPM (% to NTC)

Deviation from limit norm (%)

Balances for unfinished spot deals

balance

off-balance

sale

purchase

gold

silver

Total OPM:

".

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