Technical Standards for the Investment of Liquidity Reserves Abroad

NPB3-10
TECHNICAL STANDARDS FOR THE INVESTMENT OF LIQUIDITY RESERVES ABROAD Approval: 11/12/2002 Effective Date: 01/01/2003

The Board of Directors of the Superintendency of the Financial System, in coordination with the Central Reserve Bank of El Salvador, based on the powers granted by the first paragraph of Article 45 and Article 47 of the Banks Law, agrees to issue the:

TECHNICAL STANDARDS FOR THE INVESTMENT OF LIQUIDITY RESERVES ABROAD

CHAPTER I
OBJECTIVE AND SUBJECTS

Objective
Art. 1.- The objective of these Standards is to determine the requirements for the entities that can be custodians of the liquidity reserves invested abroad and the requirements for the controls related to said reserves.

Subjects
Art. 2.- The subjects obliged to comply with these Standards are the following:
a) Banks established in El Salvador; b) Branches of foreign banks established in El Salvador; c) Savings and credit companies regulated by the Law of Non-Bank Financial Intermediaries; and d) Entities legally established, which the Superintendency of the Financial System generally disposes, when these entities capture money from the public in a habitual manner, through any passive operation.

In the text of these Standards, the expression Central Bank is comprehensive of the Central Reserve Bank of El Salvador; Superintendency, of the Superintendency of the Financial System; reserve, of Liquidity Reserve; and the obliged subjects, of the entities related in the previous letters.

CHAPTER II
GENERAL PROVISIONS

Investment of the Liquidity Reserve
Art. 3.- Except for the funds that they have deposited in the Central Bank for the compensation of their own operations in the National Payments System, the obliged subjects may invest funds corresponding to the first two tranches of the liquidity reserve, in demand deposits in United States dollars in first-line foreign banks, qualified and authorized by the Superintendency according to the requirements established in these Standards.(1)

To invest the resources of the second tranche abroad, the obliged subjects must have maintained for at least one year, funds of the first tranche of their reserve abroad without non-compliance with the requirements established in these Standards.

The obliged subjects must maintain the funds corresponding to the third tranche of the reserves, invested in securities issued by the Central Bank.

CHAPTER III
INVESTMENT OF TRANCHE I AND II OF THE LIQUIDITY RESERVE

Administrative Requirements
Art. 4.- For the demand deposits abroad to be considered part of the reserves, they must be maintained in first-line foreign banks qualified and authorized previously by the Superintendency.(1)

The foreign banks interested in being qualified must present a request, accompanying the following information:(1) a) The short-term credit rating issued by two of the main internationally recognized risk rating agencies, which must be the lowest risk category; if the rating is for the parent company, certification of the responsibility assumed for the branch must be added;(1) b) The background and generalities of the bank; c) The financial information and references of the bank's clients; d) The security, continuity, and reliability of the information systems; e) The location and customer service hours; and f) Contingency plan that allows ensuring the continuity of operations. (1)

The Superintendency may require the information described above after the qualification granted and in the case that it considers any risk situation that it considers inconvenient for the bank to continue being a recipient of the liquidity reserve, it must revoke the qualification; an act that must be communicated simultaneously to the foreign bank and the obliged subject.

Contracts with foreign banks
Art. 5.- The obliged subjects must deliver to the Superintendency the contracts celebrated with foreign banks, prior to the transfer of funds abroad, so that it verifies compliance with the requirements established in these Standards.

When the Superintendency communicates the resolution on the compliance of the referred requirements, the obliged subject may proceed to make the corresponding deposit.

Management of current accounts
Art. 6.- The obliged subjects that deposit reserves abroad must open in their name a separate account from other funds or current accounts managed by the same foreign bank, in such a way that the balances maintained in said account are exclusive resources for the compliance of the required liquidity reserve.

The obliged subjects must not merge liquidity reserve funds to invest them jointly abroad.

Art. 7.- The obliged subjects may not deposit the liquidity reserves in their parent companies, subsidiaries, or branches.

Art. 8.- The obliged subjects may not deposit more than ten percent of the required reserves in the same foreign bank. In the case that there are excesses, these will not be considered liquidity reserves.

Contract Requirements
Art. 9.- The contracts that the obliged subjects sign with foreign banks to deposit reserve funds must contain at least the following clauses:
a) Information Requirements: The foreign bank commits to inform daily by electronic means to the Central Bank and the Superintendency, the detail of movements and daily and intra-day balances in the accounts assigned to the liquidity reserve. These reports must contain at least the following data:
i. Account number
ii. Name of the obliged subject holding the account
iii. Date of reported operations
iv. Operation reference
v. Time of intra-day transactions
vi. Concept of transactions
vii. Opening, intra-day, and closing balances
b) Sending of reports: The data reported by foreign banks to the Central Bank and the Superintendency must be sent no later than 9:00 a.m. El Salvador time, on the next business day to the reported date;(1) c) Audited Reports: Foreign banks will send a report of the audited transactions carried out during each month to the Superintendency, in the first ten business days following the closing of the reported month; d) Audit by the Superintendency and the external auditors of the foreign bank: Foreign banks must allow the Superintendency to carry out audits on the operations related to the liquidity reserve of the obliged subjects that operate with them, when it deems convenient; in addition, they will require their external auditors to inform and report annually to the Superintendency on the operations and management of the reserve funds

e) Payment of Fees: The payment of costs and expenses to foreign banks cannot be debited directly from the current accounts assigned to the reserves maintained abroad.

Art. 10.- In the contracts that the obliged subjects sign with foreign banks to deposit liquidity reserve funds, they must agree to authorize the Superintendency so that when it considers risk situations on the reserves invested abroad, it can require the foreign bank to transfer the reserve funds to accounts in the Central Bank for custody; the Superintendency will make known to the obliged subject the reasons that motivated the decision.(1)

Among the risk situations are:
a) Illegal practices of the obliged subjects that put public deposits in danger; b) Deficient management of credit, country, market, liquidity, operational, legal, and reputation risks, which put the solvency and recovery of public deposits in danger; c) Serious and repeated non-compliance with prohibitions, limits, or operational guidelines established in the Laws and current Regulations, which affect solvency or liquidity; d) Contagion risk from other entities that are part of the Conglomerate.(1)

CHAPTER IV
FOLLOW-UP AND COMPUTATION OF LIQUIDITY RESERVES

Follow-up
Art. 11.- The Central Bank will inform the Superintendency about the daily liquidity reserve levels maintained by the obliged subjects.

In the case that the daily information reported by foreign banks is presented or substituted after the hour indicated in letter b) of article nine of these Standards, the lowest reserve balance recorded in the immediate fourteen-day period will be taken.

Computation of the Liquidity Reserve
Art. 12.- For the computation of compliance with the liquidity reserve maintained abroad, only investments that comply with the provisions established in these Standards will be considered.

CHAPTER V
UNFORESEEN CASES AND VALIDITY

Unforeseen cases
Art. 13.- What is not provided for in these Standards will be resolved by the Board of Directors of the Superintendency.

Validity
Art. 14.- These Standards will be effective as of January 1, 2003.

MODIFICATIONS:
(1) Reforms approved by the Board of Directors of the Superintendency of the Financial System, in Session No. CD-23/03 dated June 18, 2003), with effect from July 1, 2003.