Prudential Framework for Large Exposures Monitoring Threshold

BANGKS STNTRAL NG PILIPINAS OFFICE OF THE COVERNOR CIRCULAR NO. II5O Series of 2c22 Subject: Prudential Framework for large Exposures Monitoring Threshold The Monetary Board, in its Flesolution No. l'179 dated 11 August 2022, approved the amendments to the prudential guidelines on large exposures as embodied under Section 361 of the Manual of Regulations for Banks (MORB) and Section 34'l-Q of the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI). Section l. Section 361R41-Q of the MoRB/MoRNBFI on large exposures are hereby amended to read, as follows: Section 36US4I-Q FRAMEWORK FOR LARCE EXPOSURES MONITORING THRESHOLD Policy Statemenf. The Bangko Sentral is cognizant that risks arising from large exposures of banks/quasi-banks (QBs) or "covered banks/QAs" to a single counterparty or group of connected counterparties could pose concerns to the stability of each bank/QB and the financial system. In this light, covered banks/QBs shall identifu, measure, monitor and control large exposures to protect covered banksTQBs'solvency from maximum possible losses in the event of sudden counterparty failure pursuant to Sec.1431143-Q. Scope of application The large exposures framework shall be applicable to all universal/commercial banks (UBs/KBs) and their subsidiary banks and QBs or "covered banks/QBs". Large exposures of covered banks/QBs shall be computed and compared with Tier I capital on both solo and consolidated bases. Defrnition. For purposes of this Section, the following terms shall apply: "Large exposuret shall refer to exposures to a single counterparty or a group of connected counterparties equal to or greater than ten percent ('lOolo) of a covered bank's/QB's Tier 'l capital as defined under applicable and existing capital adequacy fra mework/Sec.'l 25-Q. "Connected counterpartieg refer to a group of counterparties that are connected through (a) direct or indirect control of one of the counterparties over the other(s) or (b) economic interdependencies and must be treated as a single counterparty. Control shall be determined in accordance with ltem "d" of Section 131 (Definition of Terms)/ltem t" of Section 131-Q(Definition of Termsl. 'Economic lnterdependence'' refers to a situation where counterparties are reliant on each other, such that if one of the counterparties experiences financial problems in repaying its obligations, the creditworthiness of the otherA would also likely deteriorate. Covered banks/QBs shall define in their credit policy criteria in determining connectedness based on economic interdependence, which shall consider, among others, significant dealings or transactions of one or Page I of 6

more counterparty/ies that impact the financial capacity or ability to repay the obligations of the other counterpartyles. In establishing connectedness based on economic interdependence, covered banks/QBs shall consider the following criteria: a. fifty percent (5O%) or more of a counterparty's annual gross receipt or gross expenditures is derived from transactions with the other counterparly; b. one (l ) counterparty has fully or partly guaranteed the exposure of the other counterparty, or is liable by other means, and the exposure is significant that the guarantor is likely to default if a claim occurs; c. fifty percent (5O%) or more of a counterpart/s production/output is sold to another counterparty, which cannot be easily replaced by other customers; d. the expected source of funds to repay the loans of both counterparties is the same and neither counterparty has another independent source of income from which the loans may be serviced and fully repaid; e. it is likely that the financial difficulties of one counterparty would cause difficulties for the other counterpartyles in terms of full and timely repayment of liabil ities; f. the insolvency or default of one counterparty is likely to be associated with the insolvency or default of the other counterparty/ies; or g. the counterparties rely on the same source for the majority of their funding and, in the event of the common provider's default, an alternative provider could not be found. Covered banks/QBs shall identiff possible connected counterparties on the basis of economic interdependence in all cases where the sum of all exposures to a singfe counterparty exceeds five percent (5o/ol of Tier 'l capital. Covered banks/QBs shall maintain adequate documentation of the basis of its determination of a connected counterparty group and the due diligence conducted based on the above criteria. In cases where the covered bank/Qg's assessment of the criteria differs from that of the Bangko Sentral, covered banks/QBs shall upon request, provide the basis for its assessment to the Bangko Sentral. Large exposures monitoring threshold. Covered banks/QBs shall comply with the arge exposures monitoring threshold of twenty five percent (25Vo) of Tier 'l f capital, on a solo and consolidated basis. The large exposures monitoring threshold shall be implemented to protect covered banksTQBs' solvency from maximum possible losses in case of sudden failure of a counterparty or group of connected counterparties and to facilitate monitoring by the Bangko Sentral of concentration risks in the financial system. Covered banks/QBs shall consider the large exposures monitoring threshold at the time of grant of new loan, credit accommodation, or guarantee, as well as renewal, restructuring or refinancing of existing credit exposures. Aggregation and measurement of exposures. A covered bank's/QB's exposure to all of its counterparties or connected counterparties, excluding those listed under this Section on Exclusionsshall be subject to large exposures monitoring Page 2 of6

threshold. An exposure to a counterparty shall include both on- and off-balance sheet exposures in the banking book and/or the trading book and instruments with counterparty credit risk. The exposure values shall be measured in accordance with the following: a. On-balance sheet exposures in the banking book such as loans, receivables or advances shall be measured at net carrying amount of the exposure (i.e.. net of specific allowance, and unamortized discount/premium). Debt and equity securities shall be measured at fair value or net carrying amount (i.e., book value net of accumulated market gains/osses and specific allowance), as applicable, in accordance with Philippine Financial Reporting Standards (PFRS) 9 Financial lnstruments. The netting of loans and deposits shall not be allowed; b. Traditional off-balance sheet assefs (e.9., direct credit substitutesr, transaction-related contingencies2, trade-related contingencies arising from movement of goods3) shall be measured at their credit equivalent amount derived by multiplying the nominal amount by the appropriate credit conversion factor as provided in Part V of Appendix 59/Q-45 on Risk- Based Capital Adequacy Frameworks; c. Over-the-counter (OTC) derivative contracts or instruments other than securities financing transactions (SFT)that give rise to counterparty credit risk shall be measured at their credit equivalent amount derived by adding the current credit exposure (or replacement cost) and an estimate of the potential future credit exposure (or add-on) in accordance with Part V of Appendix 59/Q-45 on Risk-Based Capital Adequacy Framework; d. Repo-style transactions or SFT, (e.9., repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions) that give rise to counterparty credit risk shall be measured in accordance with Part V of Appendix 59/Q-45 on Flisk-Based Capital Adequacy Framework; e. Exposures held in the trading booksuch as: 0) Plain vanilla debt and equity instruments shall be measured at fair value: (2) Derivative contracts (other than option contracts) such as swaps, futures, forwards and credit derivatives shall be decomposed into their individual legs. Only transaction legs representing exposures on the part of the covered bank/QB (i.e., receivable) shall be measured similar to item c above: (3) In case of credit derivatives that represent sold protection, the exposure to the reference entity shall be based on the amount that is due in case the reference entity triggers the instrument minus the absolute fair value of the credit protection. From the perspective of a covered bank/QB as a protection seller, in case the fair value of the Guarantees and financial standby letters of credit (LC) Performance standby LCs (net of margin deposit), note issuance facilities and revolving underwriting facilities, and other commitments (e.9., formal standby facilities and credit lines with maturity of more than one year) Trade related guarantees, sight LCs, usance LCs, deferred LCs, revolving LCs, other commitments with maturity of up to one (l ) year Page 3 of6

credit derivative is positive, it shall be considered as an exposure by the protection seller to the protection buyer. For credit-linked notes, a covered bank/QB as a protection seller shall consider the positions measured at market value both in the bond of the note issuer and in the underlying asset referenced by the note; (4) Options shall be measured based on the change in option prices that would result from a default of the respective underlying instrument (i.e., loss in case of a jump to default" of the underlying) as follows: Option Position Exposure Measu rement Approach Lonq call optron Short call option Option market value Long put option Option strike price minus option market Short put option value The resulting positions shall in all cases be aggregated. A resulting negative net exposure must be set to zero. (5) Offsetting of positions in the trading book shall be allowed only in case of long and short positions in identical issues with exactly the same issuer, coupon, currency and maturity. When the result of the offtetting is a net short position with a single counterparty, such net exposure need not be considered as an exposure for purposes of compliance with the framework for large exposures monitoring th reshold. Netting across banking and trading books is not permitted;and f. An exposure amount to a counterparty that is deducted from capital should not be added to other exposures to a counterparty for the purpose of this Section. Eligible credit risk mitigation (CRM). The eligible CRM techniques shall be limited to those that meet the operational requirements for collaterals, guarantees and credit derivatives and eligibility criteria for CRM providers pursuant to Parts V and Vl of Appendix 59/Q-45 on Risk-Based Capital Adequacy Framework. A covered bank/Qe shall be allowed to recognize a reduction in the value of the exposure to the original counterparty by the amount of the eligible CRM technique following the measurement approaches provided in the Risk-Based CapitalAdequacy Framework. The recognized amount shall be: a. the value of the protected portion in case of unfunded credit protection; b. the value of the portion of a claim collateralized by the fair value of the recognized financial collateral using simple (substitution) approach for risk-based capital requirements; and c. the value of the collateral adjusted after applying the required haircuts under Part V of Appendix 59/Q-45 on Risk-Based Capital Adequacy Framework, in the case of financial collateral using the comprehensive approach for risk-based capital requirements. Page 4of 6

When the exposure value to a counterparty is reduced due to the recognition of applicable CRM technique, the covered bank/QB shall also recognize an exposure to the CRM provider equal to the amount that the exposure value to the original counterparty was reduced. Maturity mismatches in CRM shall be recognized only when the original maturities are equal to or greater than one (l ) year and the residual maturity of the hedge is not less than three (3)months. lf there is a maturity mismatch, the adjustment of the credit protection shall be determined using the same approach as prescribed in the Risk-Based Capital Adequacy Framework. Exclusions. The following exposures shall be excluded from the large exposures monitoring threshold: a. Exposures to sovereigns and their central banks, including exposures to the extent guaranteed by or secured by financial instruments issued by sovereigns and their central banks; b. Exposures to intra-group companies (i.e., between covered bank/QB and its parent, subsidiaries, affiliates or related parties); c. Exposures to project finance as defined under Sec.344825-Q, including those that are funding green or sustainable projects; d. Exposures to finance infrastructure projects for public use as defined under Item "a" of Sec.363-A of the MORB: e. Loans to micro, small and medium enterprises as defined under Sec. 332 of the MORB: f. Loans, other credit accommodations and guarantees that are excluded from the single borrower's limit (SBL) except item '9" under Sec. 362 (Exclusions from loan limitl /Sec.342-Q: g. lnterbank call loans as well as intraday and end-of-day interbank exposures arising from interbank payment and settlement processes shall be excluded from large exposures; and h. Such other exposures as may be approved by the Monetary Board. Monitoring and reporting requiremenf,s. Covered banks/QBs shall have a system on the monitoring of large exposures and conducting the related due diligence in determining connected counterparties. The records or documentation thereof shall be made available to the Bangko Sentral for verification at any given time. Covered banks/QBs shall likewise include the impact of material concentration risk from large exposures into their stress testing exercise for purposes of enhancing risk management system and assessing capital adequacy pursuant to Ouidelines on lnternal Capital Adequacy Assessment Process (ICAAP) under Appendix 94lQ-54. Covered banks/QBs shall report to the Bangko Sentral on a semi-annual basis or every 30 June and 5'l December of each year, its large exposures on both solo and consolidated bases using the prescribed format (Appendix A of this Circular). The following exposures shall be included in the said report: Page 5 of5

(1) all exposures that meet the definition of large exposures and net of allowed exclusions shall be measured in accordance with the foregoing provisions on Aggregation and measurement of exposures, and shall be reported in both gross and net of the effects of eligible CRM technique/s; and (2) all excluded exposures under item "('l)" and those excluded exposures with values equal to or above ten percenl (lO%o) of covered bank's/Qg's tier t capital which are not captured under item "(l )". The Report on Large Exposures shall be considered a Category A-l report and shall be electronically submitted to the Department of Supervisory Analytics of the Bangko Sentral within fifteen ('15) banking/business days from end of the reference semester. The submission of the Report on Large Exposures shall be subject to penalties provided under Sec. l7l (Sanctions on Reports for Non- complia nce with th e Reporting Sta nda rds )/Sec. 172-Q (Reports ). Section 2. Appendix 7 of the MORB on Reports Required of Banks and Appendix Q-3 of the MORNBFI on List of Reports Flequired from Quasi-Banks are hereby amended to include the "Report on Large Exposures", a primary report applicable to universal and commercial banks and their subsidiary bank/quasi bank. Category Form MOR Ref. Report Title Frequency Submission Submission No. Deadline Procedure/ E-mailAddress A-t Sectron Report on Semestral r5 panKtn9/ Department of 361134l-Q of Large business days Supervisory the MORB/ Exposures from end of Analytics MORNBFI reference semester Section 3. The guidelines governing the mode and submission of the semestral report on large exposures shall be covered by a separate issuance. Section 4. Transitory.Provision. The following provisions shall be incorporated as footnote to Section 361R41-Q of the MORB/MORNBFI on framework for large exposures monitori ng threshold. For monitoring purposes, covered banks/QBs shall submit the reportorial template on large exposures, on both solo and consolidated bases, starting with the reporting period ending 3'l December 2023. Starting from the effectivity of the Circular up to the full implementation of the farge exposures framework on O1 January 2024, covered banks/QBs are also expected to make the necessary adjustments or enhancements in its risk management system to ensure adherence to the foregoing guidelines particularly in determining connectedness of counterparties. Section 5. This Circular shall take effect fifteen (15) calendar days following its publication either in the Official Gazette or in a newspaper of general circulation. FOR THE MONETARY BOARD: + A.- f-'* FELIPE M. MEDALLA Governor U eugustzoz2 Page 6 of6

AppendixA Submission Original coPY to the DePartment of supervisory Analytics Category: A-l Deadline: 15 banklng daysafter end of leference semester (Name -bank (Code) (Address) REPORT ON LARCE EXPOSURES (lndicate if for solo Basis or consolidated Basis) As of (Semester- End ) we hereby certify that all matters set forth in this report and all its supporting schedules true and correct, to the best of our knowledge and belief. (sig nature over Pri nted Name of Chief Executive officer or Executive Vice President and Comptroller/Chief Accountant)

Sch€dule A (Name of covcred Bank/Quasi-bank) Report on Large Exposures to Single Counterparty or Cfoup ofConnected Counterparties Largeexposures netofallowed exclusions, beforeand afterconsidering theeffuctsofeligible credit risk mitigation {CRM } For the Semester ending [3O June 20,81 December 20-l e Type of Cross Exoosures Eligible Credit Risk Mitigation (CRM)Techniques Counterparty (i.e.,Singleor Name of Counterparty/ croup of Counterparty Connected On-Balance Sheet )ff-Balance sheet Financial 7o to Tier I No. Counterparties) t b c )ther Exposures ' Total Collaterals Guarantees Others Total Net ExDosures Tier I Capital Cenit:l 6 r(sum ofcolumns 4to6 8 9 lo sum of columns 8 to' l5 4 (column lzl l5 :olumnl4ll - ado rows as necessafy - r'hdenc.g|.otgMpoloni*!d6uddp.n|.!PuMtbthe.'b'irin|e5ing6nrchd[Eba.d$@iomk|ntrd.Fnd.mundds..d455l[Qdih.M.dR{uhdBf b.tLarftrbh.m','ft.d.bd.noll|ddporuelnrhrbq*rnrbokuid.tAliE$rr.irndM€auEmir.ff,FcuE.rsrtddsr/stadth. oR&nroR sn, ca,!.*Fi.rtoit m'6rtobl'[email protected]{Eruhd.rA!rr.9*is.ndMEdEhdofErpqBofs.dion!6t^4taofrh.MoRs^roRNsFt. d Ir..* Elbrb6th*.rF6lEs it€nt'.ba'undsArsrg.rlon .nd [email protected] 5or34t{ ofth! MonB^ioexBFt. r R.F|tdr €lbofrh. pbt cr.d p.rlon.t.roo$E! iorro!*lg th..Fpd.h und€r Elisibl. cndit eid( Mltrsario ols..rlon!5ra4r.Qolrh. MonB/i,roRNBFr. I Plud.rbtdlrr.rt 6Fibl.! .qq.y Rdion.porr

Schedule B (Name of Covered Bank/Quasi-bankl Report on Large Exposures to Single Counterparty or Croup of Connected Counterparties All excluded exposures For the Semester ending [30 June 2o-BI December 20_] Type of oross Exposures on Reporting Date Yo to Tier I Capital Counterparty (i.e.,Singleor Eligible credit Before crouP of Name ofRelateo Risk Net ExDosures Considering AfterConsidering Name d Connected Counteroartv On-Balance Off-Balance Other Mitigation (afterconsidering EligiblecRM EligiblecRM Rationale/)ustiflcationfor No. Counterparty Counterparties)a Croup Sheet D sheet c Exposures d Total reclSB{lJes' theeffectofCRM) Tier 1 Capital' r t€chniques techniques NotAggregatingg I z 34s 6 7 8(sumofstoT) 9 l0 (column 8 9) - ll 12 (columnS/ll ) 13 (column l0 /ll ) r"t.r&$1li$N\\\tri;t$iilff ffi lwfl'N?.riii i$B lilillli b. Please referto item'a"foron-balancesheetexposures inthe banking book underAggregation and MeasurementofExposuresofSections6lF4l-eofthe MoRB/MoRNBFl. c.Please refertoitem "r" foroff-balance sheet exposures underAggregation and Measurement ofExposuresofSection 361/341-Qofthe MoRB/MoRN BFl. d. Please refer to other exposures on items'6foe'underAggregation and Measurement of Exposures ofSection 361/341-Q ofthe MORBA,IORNBFI. e. Report the value of the protected portion of exposures following the approach under Eligible Credit Risk Mitigation of Section 361/341-e of the MoRBIT4ORN BFl. f Please refer to the total tier I capital as r€flected in the Risk-Based Capital Adequacy Ratio Report.