(Unofficial translation by the Financial and Capital Market Commission)
In effect as of 11 May 2007
Published in the newspaper “Latvijas Vēstnesis” No. 75 of 10 May 2007
As amended
by Regulations No. 173 of 14 December 2007 of the Board of the Financial and Capital Market Commission (minutes No. 51, Paragraph 2)
(published in the newspaper “Latvijas Vēstnesis” No. 203 of 19 December 2007, in effect as of 20 December 2007)
2 May 2007 Regulations No. 60
Riga (minutes No 19, Paragraph 4)
Regulations for Calculating the Minimum Capital Requirements
Issued in line with Paragraph 6 of Article 35, Paragraph 6 of Article 508 of the Credit Institution Law, and Paragraphs 2 and 8 of Article 121 and Paragraph 6 of Article 1233 of the Law on the Financial Instruments Market
list of abbreviations
ABKV programma - uz aktīviem balstīto komerciālo vērtspapīru programma / ABCP programme – asset–backed commercial paper programmeĀKNI – piemērotā ārējā kredītu novērtējuma institūcija (reitingu aģentūra) / ECAI – eligible external credit assessment institution (rating agency)
BNT kapitāla vērtspapīri - biržā netirgotie kapitāla vērtspapīri / PE – private equity securities
BT kapitāla vērtspapīri - biržā tirgotie kapitāla vērtspapīri / ETE – exchange–traded equity securities
CVR metode – darījumu ar iestādēm kredītriska kapitāla prasības noteikšanas metode, kas balstās uz centrālajām valdībām piešķirtajiem reitingiem / CGR Method – a method whereby capital requirement for credit risk in transactions with institutions is determined on the basis of the rating assigned to the central government
DPKR − darījuma partnera kredītrisks / CCR – counterparty credit risk
EK − Eiropas Kopiena / EC – European Community
EKA – eksporta kreditēšanas aģentūra / ECA – export credit agency
ESAO – Ekonomiskās sadarbības un attīstības organizācija / OECD – Organisation for Economic Cooperation and Development
IFA – ieguldījumu fondu ieguldījumu apliecības un tām pielīdzināmie vērtspapīri / CIU – collective investment undertakings (units of collective investment undertakings and securities equivalent to such units)
IMM - iekšējo modeļu metode / IMM – Internal Model Method
ĪNIS − īpašam nolūkam izveidota sabiedrība, kas veic vērtspapirizēšanu / SSPE – securitisation special purpose entity
IR metode – darījumu ar iestādēm kredītriska kapitāla prasības noteikšanas metode, kas balstās uz pašām iestādēm piešķirtajiem reitingiem / IR Method – a method whereby capital requirement for credit risk in transactions with institutions is determined on the basis of the rating assigned to the institutions themselves
IRB pieeja – uz iekšējiem reitingiem balstītā pieeja kredītriska kapitāla prasības noteikšanai / IRB Approach – Internal Ratings Based Approach to determining capital requirement for credit risk
KP - korekcijas pakāpe / CF – conversion factor
MEAP – minimālā eksporta apdrošināšanas prēmija / MEIP – minimum export insurance premium
MVK (SME) – mazās un vidējās komercsabiedrības / SME – small and medium–sized enterprizes
PZ – paredzamie zaudējumi / EL – expected loss
PZPA – iespējami precīza paredzamo zaudējumu aplēse / ELBE – best estimate of expected loss
Reitings – ĀKNI kredīta novērtējums vai iestādes iekšējais kredīta novērtējums (reitings) / Rating – ECAI credit assessment or internal credit assessment of an institution
RP - riska pakāpe / RW – risk weighting
RPV iekšējais modelis - riskam pakļautās vērtības iekšējais modelis / VaR model – value–at–risk model
RTN atvasinātie instrumenti – regulētā tirgū netirgotie atvasinātie instrumenti / OTC derivative instruments – derivative instruments that are not admitted to trading on the regulated market
RTT atvasinātie instrumenti – regulētā tirgū tirgotie atvasinātie instrumenti / TRM derivative instruments – derivative instruments that are admitted to trading on the regulated market
SNV – saistību nepildīšanas varbūtība / PD – probability of default
SNZ – zaudējumi, kas var rasties saistību nepildīšanas gadījumā) / LGD – loss given default
SP – standartizētā pieeja kredītriska kapitāla prasības noteikšanai / SA – Standardised Approach to determining capital requirement for credit risk
SPRDV ─ sagaidāmā pozitīvā riska darījumu vērtība / EPE – expected positive exposure
SRDV ─ sagaidāmā riska darījumu vērtība / EE – expected exposure
T - termiņš / M – maturity
CONTENTS
Section 1 / Framework
Section 2 / Terms Used in the Regulations
Title II / Capital Adequacy
Chapter 1 / General Provisions
Section 1 / Trading Book and Non–trading Book
Section 2 / Minimum Own Funds
Chapter 2 / Minimum Capital Requirement for Credit Risk
Section 1 / General Principles
Section 2 / Standardised Approach
Section 3 / Internal Ratings Based Approach
Section 4 / Credit Risk Mitigation
Section 5 / Securitisation
Chapter 3 / Minimum Capital Requirements for Market Risks
Section 1 / Calculation of Capital Requirement for Position Risk
Section 2 / Calculation of Capital Requirements for Settlement Risk
Section 3 / Calculation of Capital Requirements for Counterparty Credit Risk
Section 4 / Calculation of Capital Requirements for Foreign Exchange Risk
Section 5 / Calculation of Capital Requirements for Commodities Risk
Section 6 / Use of Value–at–Risk Internal Models to Calculate Capital Requirements
Chapter 4 / Minimum Capital Requirement for Operational Risk
Section 1 / General Requirements
Section 2 / Basic Indicator Approach
Section 3 / Standardised Approach
Section 4 / Alternative Standardised Approach
Section 5 / Advanced Operational Risk Measurement Approach
Title III / Own Funds
Title IV / The Procedure Whereby the Commission Issues its Approval and the Commission is Notified
Section 1 / Receiving Approvals
Section 2 / Reporting to the Commission
Title V / Closing Issues
Informative Reference to the European Union Directives
Annex 1 / Establishing the Exposure Value of Derivative Instruments, Repurchase Transactions, Securities or Commodities Lending or Borrowing Transactions, Long Settlement Transactions and Margin Lending Transactions
Section 1. Terms Used in the Annex
Section 2. Choice of the Method
Section 3. Original Exposure Method
Section 4. Mark–to–Market Method
Section 5. Standardised Method
Section 6. Internal Model Method
Section 7. Contractual Netting (Contracts for Novation and Other Netting Agreements)
Annex 2 / Standardised Approach to Calculating Capital Requirements for Credit Risk
Section 1. Determining Risk Weights
Section 2. Using ECAI Ratings to Establish the Risk–Weighted Value
Annex 3 / Credit Risk Mitigation
Section 1. Eligible Methods for Credit Risk Mitigation
Section 2. Minimum Requirements for Recognising Credit Risk Mitigation
Section 3. Calculation of the Effects of Credit Risk Mitigation
Section 4. Maturity Mismatches
Section 5. Specific Cases of Credit Risk Mitigation
Annex 4 / Calculation of the Risk–Weighted Value of a Securitisation Position
Section 1. Definitions
Section 2. Minimum Requirements for the Recognition of a Significant Credit Risk Transfer and Calculation of the Risk–weighted Value and Expected Loss Amounts for Securitised Exposures
Section 3. External Credit Assessments
Section 4. Calculation
Annex 5 / Foreign Countries whose Supervisory Practice and Legal Acts are at least Equivalent to the Requirements of EC Directives 2006/48/EC and 2006/49/EC
Annex 6 / Calculation of Capital Requirement for Credit Risk Under the Internal Ratings Based Approach
Section 1. Risk–weighted Exposure Amount and Expected Loss Amount
Section 2. PD, LGD and Maturity
Section 3. Exposure Value
Section 4. Minimum Requirements for Using the Internal Ratings Based Approach
Annex 7 / Requirements for a Trading Book
Section 1. Trading Intent
Section 2. Internal Control System
Section 3. Internal Hedging
Section 4. Inclusion in the Trading Book
Annex 8 / Calculation of Capital Requirements for Options under the Delta–plus Method
Annex 9 / Calculation of Capital Requirements for Options under the Simple Method
Annex 10 / Conditions for the Calculation of Capital Requirements for the Specific Risk and for the General Risk of the Derivative Instruments that are Subject to Position Risk
Annex 11 / Minimum Ratings by International Rating Agencies that Correspond to the Investment Grade
Annex 12 / Indices of Highly Liquid Shares
Annex 13 / List of Eligible ECAI and Mapping of Their Rating
6
Title I
Scope and Definitions
Section 1. Framework
1. The Regulations establish the procedure whereby the regulatory requirements for banks set out in Articles 35 and 49 of the Credit Institution Law and for investment brokerage firms set out in Article 121 of the Law on the Financial Instruments Market are calculated.
2. The Regulations shall be binding on banks registered in the Republic of Latvia and on the investment brokerage firms which are registered in the Republic of Latvia and to which the regulatory requirements governing capital adequacy apply in accordance with Article 121 of the Law on the Financial Instruments Market, in view of the conditions set out in Article 1191 thereof. These institutions shall comply with the requirements set out therein on an solo basis, except in cases when a bank has received the consent referred to in Clauses 4 and 5 of Section 508 of the Credit Institution Law or an investment brokerage firm has the agreement referred to in Paragraphs 4 and 5 of Article 1233 of the Law on the Financial Instruments Market to comply with this provision only at the level of a consolidation group.
Section 2. Terms Used in the Regulations
3. Institution - a credit institution which complies with the definition in Clause 1 of Section 1 of the Credit Institution Law or an investment (brokerage) firm which complies with the definition in Paragraph 3 of Article 1 of the Law on the Financial Instruments Market, to which the regulatory requirements for capital adequacy apply in accordance with Article 121 of the Law on the Financial Instruments Market, in view of the conditions set out in Article 1191 thereof.
4. Derivative instruments – financial derivatives and commodity derivatives.
5. Financial instruments are the following:
5.1. debt securities;
5.2. equity securities;
5.3. units of collective investment undertakings and other securities that certify a holding in collective investment undertakings or similar entities (hereinafter,CIU);
5.4. money market instruments;
5.5. financial futures;
5.6. forward rate agreements;
5.7. interest rate, foreign exchange, debt securities and equity securities swaps;
5.8. options for buying or selling the instruments referred to in Paragraphs 5.1-5.7;
5.9. other financial instruments that in essence are similar to the financial instruments referred to in Paragraphs 5.1-5.8 and that include both financial instruments and financial derivatives whose value depends on the changes in the price, exchange rate, price or rate index, credit rating or other similar variable of the primary financial instrument or other underlying asset. Other derivative instruments shall include at least all derivatives listed in Subparagraph 4 of Paragraph 2 of Article 3 of the Law on the Financial Instruments Market, if they are not listed herein.
6. Debt securities - securities that certify issuer’s liabilities to the holder of these securities. Debt securities are the following:
6.1. debentures and bonds;
6.2. certificates of deposit;
6.3. mortgage bonds;
6.4. bills of exchange and acceptances;
6.5. convertible securities that may be exchanged for any of the securities referred to in Paragraphs 6.1-6.3;
6.6. other securities which are in essence similar to such securities and whose price depends on interest rate changes.
7. Equity securities - securities that certify a holding in the capital of an entity and entitle to receive dividends or gains. Equity securities are the following:
7.1. shares;
7.2. depositary receipts (Global Depositary Receipts (GDR), American Depositary Receipts(ADR));
7.3. convertible securities that may be exchanged for any of the securities referred to in Paragraphs 7.1 or 7.2;
7.4. other securities which are in essence similar to such securities and whose price depends on the changes in share prices.
8. Future contracts - derivative instruments establishing a commitment to buy or to sell an amount of the underlying asset or financial instrument determined in the contract (hereinafter, the underlying asset) at a stipulated price on a predetermined date. There are futures and forwards.
9. Forward rate agreements - financial derivatives establishing a compensation payment to a party to the contract where the market interest rate of the underlying asset on the predetermined date is different from the interest rate established in the agreement.
10. Swaps - OTC derivative instruments establishing a payment flow whose volume depends on the notional principal amount of the derivative instrument and which is exchanged between both parties during a predetermined period.
11. Options - derivative instruments that give rise to a commitment for the seller of the option and grant rights to the buyer of the option (but does not give rise to a commitment) to buy (exercise a call option) or sell (exercise a put option) an amount of the underlying asset of the contract at a stipulated price on any date that is between the signing date of the contract until the execution date of the contract (an American option) or on the execution date of the contract (a European option).
12. Delta ratio - a ratio that shows the change in an option price caused by a change in the price of the underlying asset.
13. Delta equivalent – the market price of an amount of the asset underlying the option that is multiplied with the delta ratio.
14. Warrant - a security entitling the holder to purchase the underlying asset at a stipulated price until or at the expiry date of the warrant. The warrant may be settled by either the delivery of the asset itself or by cash settlement.
15. Cash assimilated instrument - a depository receipt or a similar instrument issued by the lending institution.
16. Margin – a guarantee deposit that is placed in a special account indicated by a regulated market organiser or a central counterparty by making deals on the financial markets; it is supplemented where the market price of the underlying asset changes and becomes unfavourable to a counterparty between the signing date of the deal until the execution date of the deal.
17. Repurchase agreements - agreements whereby an institution sells securities, commodities or title to securities or commodities provided that such title is certified by a regulated market organiser who is a holder of the respective securities or commodities and whereby an institution is prohibited from transferring or pledging securities or commodities to more than one counterparty at one time, subject to a commitment to repurchase these securities or commodities or equivalent securities or commodities at a specified price on a specified future date or on the date specified by the institution.
18. Reverse repurchase agreements – agreements whereby an institution buys securities, commodities or title to securities or commodities provided that such title is certified by a regulated market organiser who is a holder of the respective securities or commodities, subject to a commitment to repurchase these securities or commodities or equivalent securities or commodities at a specified price on a specified future date or on the date specified by the counterparty selling the securities or commodities.