SEOJK No. 35/SEOJK.03/2015 on Risk-Weighted Asset Calculation for Market Risk Using the Standard Method for Islamic Commercial Banks

To:
The Board of Directors of Islamic Commercial Banks

COPY

CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 35 /SEOJK.03/2015

CONCERNING

RISK-WEIGHTED ASSET CALCULATION FOR MARKET RISK USING THE STANDARD METHOD FOR ISLAMIC COMMERCIAL BANKS

In light of the implementation of the Financial Services Authority Regulation Number 21/POJK.03/2014 concerning Minimum Capital Requirement for Islamic Commercial Banks (State Gazette of the Republic of Indonesia Year 2014 Number 352, Supplement to the State Gazette of the Republic of Indonesia Number 5630), hereinafter referred to as POJK KPMM BUS, it is necessary to further regulate the implementation of the Risk-Weighted Asset (RWA) calculation for Market Risk using the Standard Method for Islamic Commercial Banks in a Financial Services Authority Circular Letter, as follows:

I. GENERAL

1. Market Risk is the risk on the balance sheet and administrative accounts due to changes in market prices, including risks such as changes in the value of tradable or leaseable assets.

2. In accordance with POJK KPMM BUS, in calculating the Minimum Capital Requirement (KPMM) both individually and consolidated with Subsidiary Companies, Banks meeting certain criteria are required to calculate RWA for Market Risk.

3. Market Risk in the KPMM calculation includes benchmark interest rate risk, exchange rate risk, equity risk, and/or commodity risk.

4. Banks, both individually and consolidated with Subsidiary Companies, are required to calculate benchmark interest rate risk and/or exchange rate risk.

5. Banks, consolidated with Subsidiary Companies, in addition to calculating the risks referred to in item 4, are also required to calculate:
   a. equity risk, if the Bank has a Subsidiary Company exposed to equity risk; and/or b. commodity risk, if the Bank has a Subsidiary Company exposed to commodity risk.

6. In calculating RWA for Market Risk, Banks may use 2 (two) types of approaches, namely:
   a. Standard Method; and/or b. Internal Model.
   For initial implementation, Banks meeting certain criteria must first use the Standard Method in calculating Market Risk.

II. RWA CALCULATION FOR MARKET RISK USING THE STANDARD METHOD

A. BENCHMARK INTEREST RATE RISK CALCULATION

1. General Provisions
   a. The calculation of benchmark interest rate risk is conducted against financial instruments in the Trading Book exposed to benchmark interest rate risk, including Shariah securities or Sukuk. b. The capital charge calculation for benchmark interest rate risk includes:

   1. specific risk of each financial instrument in the long position;
   2. general risk of the entire portfolio in the long position.
      c. The market value of Shariah securities or Sukuk used in the specific and general risk calculations is the dirty price, which is the market value of Shariah securities or Sukuk (clean price) plus the present value of the benefits to be received (recorded on an accrual basis). The present value of the benefits to be received may be omitted if, based on the coupon payment period, the present value does not result in a material difference from the value of the benefits to be received.

2. Specific Risk Calculation
   a. The capital charge calculation for specific risk is designed to protect Banks from the risk of losses due to price changes of each financial instrument held due to factors related to the issuer of the financial instrument. b. Specific risk charges are divided into weighting categories referring to Table 1 below.

Table 1. Issuer and Risk Weight (Specific Risk)

Issuer	Risk Weight (%)

1. Indonesian Government | 0.00
2. Foreign Government
   a. rating AAA to AA- | 0.00 b. rating A+ to BBB- with:
   i. remaining maturity less than or equal to 6 (six) months | 0.25
   ii. remaining maturity more than 6 (six) months up to 24 (twenty-four) months | 1.00
   iii. remaining maturity more than 24 (twenty-four) months | 1.60
   c. rating BB+ to B- | 8.00
   d. rating less than B- | 12.00 e. unrated | 8.00
3. Qualifying
   a. remaining maturity less than or equal to 6 (six) months | 0.25 b. remaining maturity more than 6 (six) months up to 24 (twenty-four) months | 1.00
   c. remaining maturity more than 24 (twenty-four) months | 1.60
4. Others
   a. corporations with:
   i. short-term rating A-1 | 1.60
   ii. short-term rating A-2 | 4.00
   iii. short-term rating A-3 | 8.00
   iv. short-term rating less than A-3 | 12.00
   v. rating AAA to AA- | 1.60
   vi. rating A+ to A- | 4.00
   vii. rating BBB+ to BB- | 8.00
   viii. rating less than BB- | 12.00
   ix. unrated | 12.00
   b. banks classified as:
   i. Short-term Claims
   1) short-term rating less than A-3 | 12.00
   2) rating BB+ to B- | 4.00
   3) rating less than B- | 12.00
   4) unrated | 4.00
   ii. Long-term Claims
   1) short-term rating less than A-3 | 12.00
   2) rating BB+ to B- | 8.00
   3) rating less than B- | 12.00
   4) unrated | 8.00
   c. public sector entities, multilateral development banks, and international institutions
   i. rating BB+ to B- | 8.00
   ii. rating less than B- | 12.00
   iii. unrated | 8.00

1) Indonesian Government
The category of Indonesian Government financial instruments includes all instruments issued, guaranteed, or backed by securities issued by:
a) The Central Government of the Republic of Indonesia; b) Bank Indonesia; c) Other government bodies and institutions whose entire operational funding comes from the State Budget (APBN) of the Republic of Indonesia.

2) Foreign Government
The category of foreign government financial instruments includes all instruments issued, guaranteed, or backed by securities issued by the central government or central bank of another country.

3) Qualifying
a) The category of qualifying financial instruments includes:
(1) Shariah securities issued, guaranteed, or backed by securities issued by:
(a) regional governments as regulated in legislation concerning regional government; (b) banks; (c) State-Owned Enterprises (BUMN) as regulated in legislation concerning BUMN, which are not classified as banks; (d) multilateral development banks, namely the World Bank Group consisting of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), Asian Development Bank (ADB), African Development Bank (AfDB), European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IADB), European Investment Bank (EIB), European Investment Fund (EIF), Nordic Investment Bank (NIB), Caribbean Development Bank (CDB), Islamic Development Bank (IDB), and Council of Europe Development Bank (CEDB); (e) international institutions, namely the Bank for International Settlements, International Monetary Fund (IMF), and European Central Bank, which have an investment grade rating from 1 (one) rating agency recognized by the Financial Services Authority. Banks referred to in letter (b) include banks operating in Indonesia and banks operating outside Indonesia, including the Indonesia Exports Financing Agency as referred to in the law concerning the Indonesia Exports Financing Agency. (2) Shariah securities issued by parties other than those referred to in item (1), which have an investment grade rating from at least 2 (two) rating agencies recognized by the Financial Services Authority. b) Domestic ratings are used for Shariah securities or Sukuk in Rupiah. International ratings are used for Shariah securities or Sukuk in foreign currency.

4) Others
The category of others includes all Shariah securities or Sukuk issued, guaranteed, or backed by securities issued by corporations, banks, public sector entities, multilateral development banks, and international institutions that are not included in the Indonesian Government, foreign government, and qualifying categories.

Corporations, banks, public sector entities, multilateral development banks, and international institutions refer to parties included in Claims to Corporations, Claims to Banks, Claims to Public Sector Entities, and Claims to Multilateral Development Banks and International Institutions as referred to in Financial Services Authority regulations concerning risk-weighted asset calculation for credit risk using the standard approach.

3. General Risk Calculation
   a. The capital charge calculation for General Risk is intended to protect Banks from the risk of losses due to changes in market benchmark interest rates. b. General Risk is applied to positions in Shariah securities or Sukuk and recorded in the Trading Book.
   c. The calculation methods that can be used for general risk calculation are the Maturity Method or the Duration Method. Banks may choose between these 2 (two) methods as long as they are applied consistently and accurately. For Banks using the Duration Method, Bank management must ensure that the Bank has the capacity to apply the method based on prudential principles.
   d. Banks must notify in writing to the Directorate of Islamic Banking Supervision, Regional Office, or local Financial Services Authority Office if the Bank intends to use the Duration Method in the general risk calculation. e. The written notification referred to in letter d must be accompanied by documents and information including:
   1. policies and procedures for implementing the Duration Method;
   2. instruments calculated using the Duration Method;
   3. systems supporting the implementation of calculation procedures;
   4. processes and procedures for controlling the calculation method;
   5. internal validation by an independent party regarding the Market Risk calculation method used.
      f. The Financial Services Authority may conduct examinations of the Duration Method used by Banks to ensure the correctness of documents and information as referred to in letter e. g. Maturity Method
   6. The long position of all Shariah securities or Sukuk positions is mapped into a maturity ladder consisting of 13 (thirteen) time bands. The maturity ladder refers to a table compiled based on grouping the remaining maturity or time to next coupon payment of a Shariah security or Sukuk.
   7. Instruments with fixed coupons are allocated according to remaining maturity, while instruments with variable coupons are allocated according to the time to the next repricing date.
   8. General Risk charges are divided into weighting categories referring to Table 2 below.

Table 2. Time Bands and Risk Weight (General Risk - Maturity Method)

Time Band	Risk Weight (%)
< 1 month	0.00

1 – 3 months | 0.20
3 – 6 months | 0.40
6 – 12 months | 0.70
1 – 2 years | 1.25
2 – 3 years | 1.75
3 – 4 years | 2.25
4 – 5 years | 2.75
5 – 7 years | 3.25
7 – 10 years | 3.75
10 – 15 years | 4.50
15 – 20 years | 5.25
20 years | 6.00

4. Treatment of Repo Transactions
   a. Shariah securities delivered to the counterparty as collateral in Repo transactions recorded in the Trading Book in accordance with applicable accounting standards are recorded as a long position in the specific and general risk calculations. b. Specific Risk Calculation The Specific Risk calculation for Shariah securities or Sukuk is determined from:
   1. issuer category; and
   2. rating and/or remaining maturity.
      c. General Risk Calculation
      The General Risk calculation is based on the remaining maturity for Shariah securities or Sukuk with fixed coupons, or the time to the next coupon adjustment for Shariah securities or Sukuk with variable coupons.

B. EXCHANGE RATE RISK CALCULATION

1. Exchange rate risk calculation is conducted against foreign currency positions in the Trading Book and Banking Book exposed to exchange rate risk, including gold, referring to the Net Foreign Exchange Position calculation as regulated in applicable regulations concerning net foreign exchange position. Positions in gold are calculated the same as foreign currency, considering that gold price movements are almost identical to foreign exchange rate movements and Banks treat gold transactions the same as foreign exchange transactions.

2. The capital charge calculation for exchange rate risk from foreign currency positions is charged at 8% (eight percent) of the total Net Foreign Exchange Position at the end of the day.

3. In the exchange rate risk calculation, Banks may exclude Structural Positions from the Net Foreign Exchange Position calculation as long as all requirements as regulated in applicable regulations concerning net foreign exchange position are met.
   a. If the Bank chooses to exclude such Structural Positions, the exclusion must be done consistently and obtain approval from the Financial Services Authority. b. To obtain approval from the Financial Services Authority, the Bank is required to submit supporting documents related to the status of the Structural Position and proof of transaction accounting. Example:
   Structural Positions in the form of fixed assets abroad need to be supported by documents such as proof of ownership, proof of payment, and accounting documents.
   c. The Financial Services Authority may request additional documents from the Bank to ensure the feasibility of a Structural Position to be excluded from the Net Foreign Exchange Position calculation.

C. EQUITY RISK CALCULATION

1. Equity Risk calculation for Banks consolidated with Subsidiary Companies is conducted against financial instrument positions in the Trading Book exposed to equity risk, including common stocks with or without voting rights, Shariah securities or Sukuk that can be converted into shares (convertible securities), or other financial instruments having characteristics similar to shares but not including shareholdings in Subsidiary Companies and temporary shareholdings in the context of financing rescue treated as a capital reduction factor in the Bank's capital calculation, as well as non-convertible preference shares.

2. The capital charge calculation for equity risk in the Trading Book includes:
   a. Specific risk of equity positions, which is the sum of the long position values of each financial instrument exposed to equity risk issued by each issuer in each financial market. If financial instruments exposed to equity risk are traded in more than one financial market, such financial instruments are treated as positions in the financial market where the instrument is primarily listed. b. General risk of equity positions, which is the sum of the long position values of each financial instrument exposed to equity risk in each financial market.

3. Specific Risk Calculation
   a. The capital charge calculation for specific risk is designed to protect Banks from the risk of losses due to price changes of each financial instrument exposed to equity risk due to factors related to the issuer. Risks related to the counterparty in such transactions are calculated separately in the counterparty credit risk calculation due to counterparty failure. b. The capital charge calculation for specific risk is 8% (eight percent) of the equity position.

4. General Risk Calculation
   a. The charge calculation for general risk is intended to protect Banks from the risk of losses due to changes in market factors. b. The capital charge calculation for general risk is 8% (eight percent) of the equity position.

Example:
Company | Number of Shares | Position | Market Price/Share | Market Value --- | --- | --- | --- | --- A | 10,000 | Long | Rp100 | Rp1,000,000 B | 20,000 | Long | Rp200 | Rp4,000,000

Total long position = Rp1,000,000.00 + Rp4,000,000.00 = Rp5,000,000.00 Specific Risk = Rp5,000,000.00 x 8% = Rp400,000.00 General Risk = Rp5,000,000.00 x 8% = Rp400,000.00 Equity Risk = Rp400,000.00 + Rp400,000.00 = Rp800,000.00

From the calculation above, the capital charge for equity risk is Rp800,000.00 (eight hundred thousand Rupiah).

D. COMMODITY RISK CALCULATION

1. Commodity risk calculation for Banks consolidated with Subsidiary Companies is conducted against financial instrument positions in the Trading Book and Banking Book exposed to commodity risk. Commodities include tradable physical products such as agricultural products, minerals (including oil), and precious metals, but excluding gold.

2. Commodity Risks to be calculated include:
   a. Directional risk, which is the risk arising from changes in spot prices of net open commodity positions, particularly for commodity positions from spot or physical trading transactions. b. Basis risk, which is the risk arising from price movements that are not perfectly correlated between similar but not identical commodities, which can be caused by commodity quality, among other factors.

3. In the commodity risk calculation, Banks must convert gross positions (i.e., the sum of long and short positions) for each commodity (measured in barrels, kilograms, or other units of measurement used for commodities) into currency units based on the current market price of each commodity.

4. In the commodity risk calculation, Banks may perform offsetting between long and short positions if they are identical, namely:
   a. the same underlying commodity; or b. different underlying commodities but belonging to the same group.

5. The calculation methods that can be used for commodity risk calculation are the Simplified Approach or the Maturity Ladder Approach. Banks may choose between these 2 (two) methods as long as they are applied accurately and consistently.

6. Simplified Approach
   The capital charge for commodity risk is the sum of the calculations:
   a. 15% (fifteen percent) of the net position, either long or short, of each commodity position to anticipate directional risk; and b. 3% (three percent) of the gross position (sum of the absolute values of long and short positions) of each commodity position to anticipate basis risk.

7. Maturity Ladder Approach
   a. Positions in each type of commodity must be reported based on time bands in a separate maturity ladder referring to Table 3 below.

Table 3. Time Bands and Spread Rate (Commodity Risk)

Time Band	Spread Rate
< 1 month	1.5%

1 – 3 months | 1.5%
3 – 6 months | 1.5%
6 – 12 months | 1.5%
1 – 2 years | 1.5%
2 – 3 years | 1.5%
3 years | 1.5%

b. The capital charge for commodity risk is the sum of the calculations:

1. 1.5% (one point five percent) (spread rate) of the sum of matched long and short positions in each time band;
2. 0.6% (zero point six percent) of the residual (unmatched position) from each time band multiplied by the number of bands between the previous time band and the next time band; and
3. 15% (fifteen percent) of the remaining unmatched position.

Example:
a. A Subsidiary Company agrees to a salam and parallel salam contract for sugar commodities with the following maturity and price:

Contract | Maturity | Price (in Rp. 000)
--- | --- | --- salam | 4 months | 800 parallel salam | 5 months | 1,000 salam | 2.5 years | 600 parallel salam | 7 years | 600

Time Band | Position (Rp 000) | Capital Charge Calculation --- | --- | --- < 1 month | |

1 – 3 months | |
3 – 6 months | Long 800 | [800 (Long) + 800 (Short) (matched position)] x 1.5%
| Short 1,000 | 200 (Short) (residual position) to be considered in the next 3 time bands, i.e., time bands > 2-3 years |
| --- | --- |
| | 200 X 3 x 0.6% = 3.6 |
6 – 12 months | |
1 – 2 years | |
2 – 3 years | Long 600 | [200 (Long) + 200 (Short) (matched position)] x 1.5%
| | 400 (Long) (residual position) to be considered in the next 1 time band, i.e., time band > 3 years |
| --- | --- |
| | 400 X 1 x 0.6% = 2.4 |
3 years | Short 600 | [400 (Long) + 400 (Short) (matched position) x 1.5%
| | 200 (residual position) x 15% |
| --- | --- |
| | Total Capital Charge = 78 |

III. REPORTING

1. In accordance with Article 42 of POJK KPMM BUS, Banks are required to submit KPMM calculation reports both individually and consolidated, namely:
   a. RWA calculation report for Market Risk for Banks individually submitted every month for the end-of-month position; and b. RWA calculation report for Market Risk for Banks consolidated submitted every quarter for the end-of-month positions in March, June, September, and December, for Banks having subsidiary companies; referring to the format and filling guidelines in Appendix I and Appendix II of this Financial Services Authority Circular Letter.

2. The RWA calculation report for Market Risk as referred to in item 1 is submitted to the Financial Services Authority online through the Periodic Report of Islamic Commercial Banks. The submission procedure and imposition of sanctions refer to regulations governing periodic reports of Islamic commercial banks.

3. Until online reporting as referred to in item 2 can be implemented, Banks are required to submit reports offline no later than:
   a. the 21st (twenty-first) day of the following month after the reporting month for the RWA calculation report for Market Risk for Banks individually as referred to in item 1.a; b. the 21st (twenty-first) day of the following month after the end of each quarter for the RWA calculation report for Market Risk for Banks consolidated, as referred to in item 1.b;

4. If the report submission date referred to in item 3 falls on a Saturday, Sunday, or public holiday, the report shall be submitted on the next working day.

5. The report referred to in item 3 shall be submitted to:
   a. The Sharia Banking Department, for Banks with their headquarters in the Jakarta, Bogor, Depok, Tangerang, and Bekasi (Jabodetabek) area, and Banten Province; or b. The Regional Office and the local Financial Services Authority Office, for Banks with their headquarters outside the Jakarta, Bogor, Depok, Tangerang, and Bekasi (Jabodetabek) area, and Banten Province.

6. Banks that fail to submit reports or submit reports that do not comply with the provisions referred to in item 3 and item 4 shall be subject to sanctions as regulated in Article 47 of POJK KPMM BUS.

IV. OTHERS

Appendix I and Appendix II are an integral part of this Financial Services Authority Circular.

V. CLOSING

With the implementation of this Financial Services Authority Circular, item III.4 and Appendix 2 of the Bank Indonesia Circular Number 7/53/DPBS dated 22 November 2005 concerning Minimum Capital Provision Requirements for Commercial Banks Conducting Business Activities Based on Sharia Principles, as amended by Bank Indonesia Circular Number 8/10/DPbS dated 7 March 2006, are repealed and declared invalid.

This Financial Services Authority Circular shall take effect on 1 January 2016.

Established in Jakarta on 21 December 2015

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY,

signed

NELSON TAMPUBOLON

A copy consistent with the original
Legal Director 1
Legal Department

signed

Sudarmaji

APPENDIX I
FINANCIAL SERVICES AUTHORITY CIRCULAR
NUMBER 35 /SEOJK.03/2015
CONCERNING
RISK-WEIGHTED ASSET CALCULATION FOR MARKET RISK USING THE STANDARD METHOD FOR SHARIA COMMERCIAL BANKS

Form VI
Additional Disclosures and Explanations

Established in Jakarta
On 21 December 2015

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY,

signed

NELSON TAMPUBOLON

A copy consistent with the original
Legal Director 1
Legal Department

signed

Sudarmaji

APPENDIX II
FINANCIAL SERVICES AUTHORITY CIRCULAR
NUMBER 35 /SEOJK.03/2015
CONCERNING
RISK-WEIGHTED ASSET CALCULATION FOR MARKET RISK USING THE STANDARD METHOD FOR SHARIA COMMERCIAL BANKS

GUIDELINES FOR FILLING OUT
MARKET RISK RWAS CALCULATION REPORT
USING THE STANDARD METHOD

I. GENERAL INSTRUCTIONS

1. Form I.A, Form I.B, Form II, Form III, Form IV.A, Form IV.B, Form V.A, Form V.B, and Form VI are the Forms referred to in Appendix I of this Financial Services Authority Circular.

2. Banks shall only fill in data in the provided cells and are not permitted to change the format (adding and/or reducing rows and/or columns in the Form) unless otherwise determined by the Financial Services Authority.

3. Banks individually must fill out Form I.A, Form I.B, Form II, and Form V.A, jointly. For Banks with Indonesian legal entity status, this covers the headquarters and all branches located domestically and abroad.

4. Banks on a consolidated basis with Subsidiary Companies and having Subsidiary Companies exposed to equity risk and/or commodity risk, in addition to filling out the forms referred to in item 1 (on a consolidated basis), must also fill out Form III and Form IV.A or Form IV.B, and Form V.B.

5. Form VI is only filled out if there are additional disclosures and explanations deemed necessary to complete the filling out of the forms referred to in item 3 and item 4.

6. The filling out of all forms is expressed in Millions of Rupiah. In the event that a Bank does not have positions/exposures that must be reported, the data in the provided cells shall be filled in with the number zero.

7. The filling out of forms must cover all positions on the balance sheet (on balance sheet) as well as transaction positions in administrative accounts (off balance sheet).

8. The information used as a reference in filling out the forms must be the same as the information used to prepare the Monetary and Financial System Stability Report (LSMK) at the same month-end position.

9. The filling out of forms must use fair value on the report date (current market value).

II. SPECIFIC INSTRUCTIONS

1. FORM I – Benchmark Interest Rate Risk
   a. Form I.A - Specific Risk
   Filled in with long positions of Sharia securities that fall into the Trading Book category based on issuer category. Long positions include commitments to purchase securities (e.g., securities transactions with repurchase agreements (repo) for trading purposes).

   b. Form I.B - General Risk (Maturity Method) Filled in with long positions that fall into the Trading Book category as previously reported on Form I.A.

2. FORM II – Exchange Rate Risk
   Filled in with long and short positions for each foreign currency (including gold), both recorded on the Asset side, Liabilities, and Administrative Account Transactions as regulated in the applicable provisions regarding Net Foreign Exchange Position (PDN).

3. FORM III – Equity Risk on a Consolidated Basis
   a. Filled in with long positions of financial instruments that fall into the Trading Book category. Positions are reported on a market-by-market basis. b. In the event that financial instruments exposed to equity risk are traded in more than one financial market, the Bank reports the financial instrument in the financial market where the instrument is primarily traded (primary listing).

4. FORM IV – Commodity Risk on a Consolidated Basis
   a. Form IV.A – Simple Method
   Filled in with long and short positions of financial instruments that fall into the Trading Book category and/or Banking Book. b. Form IV.B – Maturity Method Filled in with long and short positions of financial instruments that fall into the Trading Book category and/or Banking Book based on a time scale in maturity buckets. In addition, Banks

Banks must fill in the Capital Charge column for residual positions calculated into the next time scale and the Capital Charge for Overall Net Position.

Established in Jakarta on 21 December 2015

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY,

signed

NELSON TAMPUBOLON

A copy consistent with the original
Legal Director 1
Legal Department

signed

Sudarmaji