Revised Risk-Based Capital Adequacy Framework

August 4, 2006 BSP CIRCULAR NO. 538-06 SUBJECT : Revised Risk-Based Capital Adequacy Framework The Monetary Board in its Resolution No. 697 dated 2 June 2006 approved the attached guidelines implementing the revised risk-based capital adequacy framework for the Philippine banking system to conform to Basel II recommendations. The guidelines apply to all universal banks and commercial banks, as well as their subsidiary banks and quasi-banks. Thrift banks, rural banks, as well as quasi-banks that are not subsidiaries of universal banks and commercial banks shall continue to be subject to the existing applicable risk-based capital adequacy framework, as contained in Circular No. 280 dated 29 March 2001, as amended, and Circular No. 400 dated 1 September 2003. The appropriate supervisory reporting template to implement the revised framework shall be issued at a later date. Such reports shall be submitted quarterly, and shall be classified under Category A-1 Reports. This Circular shall take effect on 1 July 2007. FOR THE MONETARY BOARD: (SGD.) AMANDO M. TETANGCO, JR. Governor RISK-BASED CAPITAL ADEQUACY FRAMEWORK FOR THE PHILIPPINE BANKING SYSTEM A Revision Table of contents Introduction Part I: Risk-based capital adequacy ratio Part II: Qualifying capital Part III: Credit risk-weighted assets Part IV: Credit derivatives Part V: Securitization Part VI: Market risk-weighted assets Part VII: Operational risk-weighted assets Part VIII: Disclosures in the annual reports Part IX: Enforcement RISK-BASED CAPITAL ADEQUACY FRAMEWORK FOR THE PHILIPPINE BANKING SYSTEM A Revision INTRODUCTION This document outlines the Bangko Sentral ng Pilipinas' (BSP) implementing guidelines of the revised International Convergence of Capital Measurement and Capital Standards , or popularly known as Basel II. Basel II is the new international capital standards set by the Basel Committee on Banking Supervision (BCBS). 1 It aims to replace Basel I, which was issued in 1988 with an amendment in 1996, to make the risk-based capital framework more risk-sensitive. This document revises the risk-based capital adequacy framework for universal banks and commercial banks, as well as their subsidiary banks and quasi-banks. Thrift banks and rural banks as well as quasi-banks that are not subsidiaries of universal banks and commercial banks shall continue to be subject to the current risk-based capital adequacy framework, pending issuance of applicable revised regulations. The guidelines contained in this document shall take effect on 1 July 2007. PART I. Risk-based capital adequacy ratio 1. The risk-based capital adequacy ratio (CAR) of universal banks (UBs) and commercial banks (KBs) and their subsidiary banks and quasi-banks, expressed as a percentage of qualifying capital to risk-weighted assets, shall not be less than 10%. 2. Qualifying capital is computed in accordance with the provisions of Part II. Risk weighted assets is the sum of (1) credit-risk weighted assets (Parts III, IV, and V), (2) market risk weighted assets (Parts IV and VI), and (3) operational risk weighted assets (Part VII) 3. The CAR requirement will be applied to all UBs and KBs and their subsidiary banks, and quasi-banks on both solo and consolidated bases. The application of the requirement on a consolidated basis is the best means to preserve the integrity of capital in banks with subsidiaries by eliminating double gearing. However, as one of the principal objectives of supervision is the protection of depositors, it is essential to ensure that capital recognized in capital adequacy measures is readily available for those depositors. Accordingly, individual banks should likewise be adequately capitalized on a stand-alone basis. 4. To the greatest extent possible, all banking and other relevant financial activities (both regulated and unregulated) conducted by a bank and its subsidiaries will be captured through consolidation. Thus, majority-owned or -controlled financial allied undertakings should be fully consolidated on a line by line basis. Exemptions from consolidation shall only be made in cases where such holdings are acquired through debt previously contracted and held on a temporary basis, are subject to different regulation, or where non-consolidation for regulatory capital purposes is otherwise required by law. All cases of exemption from consolidation must be made with prior clearance from the BSP. 5. Banks shall comply with the minimum CAR at all times notwithstanding that supervisory reporting shall only be on quarterly basis. Any breach, even if only temporary, shall be reported to the bank's Board of Directors and to BSP-SES within 3 banking days. For this purpose, banks shall develop an appropriate system to properly monitor their compliance. 6. The BSP reserves the right, upon authority of the Deputy Governor-SES, to conduct on-site inspection outside of regular or special examination, for the purpose of ascertaining the accuracy of CAR calculations as well as the integrity of CAR monitoring and reporting systems. PART II. Qualifying capital 1. Qualifying capital consists of Tier 1 (core plus hybrid) capital and Tier 2 (supplementary) capital elements, net of required deductions from capital. IATHaS A. Tier 1 Capital 2. Tier 1 capital is the sum of core Tier 1 capital and allowable amount of hybrid Tier 1 capital, as set in paragraph 12. 3. Core Tier 1 capital consists of: a) Paid-up common stock; b) Paid-up perpetual and non-cumulative preferred stock; c) Additional paid-in capital; d) Retained earnings; e) Undivided profits (for domestic banks only); f) Net gains on fair value adjustment of hedging instruments in a cash flow hedge of available for sale equity securities; g) Cumulative foreign currency translation; and h) Minority interest in subsidiary financial allied undertakings which are less than wholly-owned: Provided , That a bank shall not use minority interests in the equity accounts of consolidated subsidiaries as avenue for introducing into its capital structure elements that might not otherwise qualify as Tier 1 capital or that would, in effect, result in an excessive reliance on preferred stock within Tier 1: Less: i. Common stock treasury shares; ii. Perpetual and non-cumulative preferred stock treasury shares; iii. Net unrealized losses on available for sale equity securities purchased; iv. Gains (Losses) resulting from designating financial liabilities at fair value through profit or loss that are due to own credit worthiness; v. Unbooked valuation reserves and other capital adjustments based on the latest report of examination as approved by the Monetary Board; vi. Total outstanding unsecured credit accommodations, both direct and indirect, to directors, officers, stockholders and their related interests (DOSRI); vii. Deferred income tax; viii. Goodwill, including that relating to unconsolidated subsidiary banks, financial allied undertakings (excluding subsidiary securities dealers/brokers and insurance companies) (on solo basis) and unconsolidated subsidiary securities dealers/brokers, insurance companies and non-financial allied undertakings (on solo and consolidated bases); and ix. Gain on sale resulting from a securitization transaction. 4. Hybrid Tier 1 capital in the form of perpetual preferred stock and perpetual unsecured subordinated debt may be issued subject to prior BSP approval and to the conditions in paragraph 12. 5. In the case of foreign banks, Tier 1 capital is equivalent to: a) Assigned capital including earnings not remitted to the head office which the bank elects to consider as part of assigned capital (in which case it can no longer be remitted to the head office); and b) "Net due to" head office, branches, subsidiaries and other offices outside the Philippines as defined under Subsec. X121.5.d of the MORB (inclusive of earnings not remitted to head office per Subsec. X121.5.c of the MORB, unless considered as part of the assigned capital by the bank), subject to the limit prescribed under Subsec. X121.6 of the MORB, Less: i. Any balance in the "Net due from" account. B. Tier 2 Capital 6. Tier 2 capital is the sum of upper Tier 2 capital and lower Tier 2 capital. 7. The total amount of lower Tier 2 capital before deductions enumerated in paragraph 10 that may be included in total Tier 2 capital shall be limited to a maximum of 50% of total Tier 1 capital (net of deductions enumerated in paragraph 3). The total amount of upper and lower Tier 2 capital both before deductions enumerated in paragraph 10 that may be included in total qualifying capital shall be limited to a maximum of 100% of total Tier 1 capital (net of deductions enumerated in paragraph 3). 8. Upper Tier 2 capital consists of: a) Paid-up perpetual and cumulative preferred stock; b) Paid-up limited life redeemable preferred stock issued with the condition that redemption thereof shall be allowed only if the shares redeemed are replaced with at least an equivalent amount of newly paid-in shares so that the total paid-in capital stock is maintained at the same level prior to redemption; c) Appraisal increment reserve bank premises, as authorized by the Monetary Board; d) Net unrealized gains on available for sale equity securities purchased subject to a 55% discount; e) General loan loss provision, limited to a maximum of 1.00% of credit risk-weighted assets, and any amount in excess thereof shall be deducted from the credit risk-weighted assets in computing the denominator of the risk-based capital ratio; f) With prior BSP approval, unsecured subordinated debt with a minimum original maturity of at least ten (10) years issued subject to the conditions in paragraph 13, in an amount equivalent to its carrying amount discounted by the following rates: Remaining maturity Discount factor 5 years & above 0% 4 years to <5 years 20% 3 years to <4 years 40% 2 years to <3 years 60% 1 year to <2 years 80% < 1 year 100% g) Deposit for common stock subscription; ADSIaT h) Deposit for perpetual and non-cumulative preferred stock subscription; and i) Hybrid Tier 1 capital as defined in paragraph 4 in excess of the maximum allowable limit of 15% of total Tier 1 capital (net of deductions enumerated in paragraph 3): Less: i. Perpetual and cumulative preferred stock treasury shares; ii. Limited life redeemable preferred stock treasury shares with the replacement requirement upon redemption; iii. Sinking fund for redemption of limited life redeemable preferred stock with the replacement requirement upon redemption; and iv. Net losses in fair value adjustment of hedging instruments in a cash flow hedge of available for sale equity securities. 9. Lower Tier 2 capital consists of: a) Paid-up limited life redeemable preferred stock without the replacement requirement upon redemption in an amount equivalent to its carrying amount discounted by the following rates: Remaining maturity Discount factor 5 years & above 0% 4 years to <5 years 20% 3 years to <4 years 40% 2 years to <3 years 60% 1 year to <2 years 80% < 1 year 100% b) With prior BSP approval, unsecured subordinated debt with a minimum original maturity of at least five (5) years, issued subject to the conditions in paragraph 14, in an amount equivalent to its carrying amount discounted by the following rates: Remaining maturity Discount factor 5 years & above 0% 4 years to <5 years 20% 3 years to <4 years 40% 2 years to <3 years 60% 1 year to <2 years 80% < 1 year 100% c) Deposit for perpetual and cumulative preferred stock subscription; and d) Deposit for limited life redeemable preferred stock subscription with the replacement requirement upon redemption. Less: i. Limited life redeemable preferred stock treasury shares without the replacement requirement upon redemption; and ii. Sinking fund for redemption of limited life redeemable preferred stock without the replacement requirement upon redemption up to the extent of the balance of redeemable preferred stock after applying the cumulative discount factor. C. Deductions from the total of Tier 1 and Tier 2 capital 10. The following items should be deducted 50% from Tier 1 and 50% from Tier 2 capital: a) Investments in equity of unconsolidated subsidiary banks and quasi-banks, and other financial allied undertakings (excluding subsidiary securities dealers/brokers and insurance companies), after deducting related goodwill, if any (for solo basis); b) Investments in other regulatory capital instruments of unconsolidated subsidiary banks and quasi-banks (for solo basis); c) Investments in equity of unconsolidated subsidiary securities dealers/brokers, insurance companies, and non-financial allied undertakings, after deducting related goodwill, if any (for both solo and consolidated bases); d) Capital shortfalls of unconsolidated subsidiary securities dealers/brokers and insurance companies (for both solo and consolidated bases); e) Significant minority investments (20%-50% of voting stock) in banks and quasi-banks, and other financial allied undertakings (for both solo and consolidated bases); f) Reciprocal investments in equity of other banks/enterprises; g) Reciprocal investments in other regulatory capital instruments of other banks and quasi-banks; and h) Materiality thresholds in credit derivative contracts purchased; i) Securitization tranches which are rated below investment grade or are unrated; and j) Credit enhancing interest only strips in relation to a securitization structure, net of the amount of "gain-on-sale" that must be deducted from core Tier 1 capital referred to in paragraph 3. 11. Any asset deducted from qualifying capital in computing the numerator of the risk-based capital ratio shall not be included in the risk-weighted assets in computing the denominator of the ratio. Available for sale debt securities shall be risk weighted net of specific provisions as provided in paragraph 1 of Part III.A, but without considering accumulated market gains/losses. D. Eligible instruments under hybrid tier 1 capital 12. Perpetual preferred stock and perpetual unsecured subordinated debt issuances of banks should comply with the following minimum conditions in order to be eligible as hybrid Tier 1 (HT1) capital: a) It must be issued and fully paid-up. Only the net proceeds received from the issuance shall be included as capital; b) The dividends/coupons must be non-cumulative. It is acceptable to pay dividends/coupons in scrip or shares of stock if a cash dividend/coupon is withheld: Provided , That this does not result on issuing lower quality capital: Provided, further , That where such dividend/coupon stock settlement feature is included, the bank should ensure that it has an appropriate buffer of authorized capital stock and appropriate stockholders and board authorization, if necessary, to fulfill their potential obligations under such issues; HcaDTE c) It must be available to absorb losses of the bank without it being obliged to cease carrying on business. The agreement governing its issuance should specifically provide for the dividend/coupon and principal to absorb losses where the bank would otherwise be insolvent, or for its holders to be treated as if they were holders of a specified class of share capital in any proceedings commenced for the winding up of the bank. Issue documentation must disclose to prospective investors the manner by which the instrument is to be treated in loss situation. Alternatively, the agreement governing its issuance can provide for automatic conversion into common shares or perpetual and non-cumulative preferred shares upon occurrence of certain trigger events, as follows: i. Breach of minimum capital ratio; ii. Commencement of proceedings for winding up of the bank; or iii. Upon appointment of receiver for the bank. The rate of conversion must be fixed at the time of subscription to the instrument. The bank must also ensure that it has appropriate buffer of authorized capital stock and appropriate stockholders and board authorization for conversion/issue to take place anytime; d) Its holders must not have a priority claim, in respect of principal and dividend/coupon payments in the event of winding up of the bank, which is higher than or equal with that of depositors, other creditors of the bank and holders of lower Tier 2 (LT2) and upper Tier 2 (UT2) capital instruments. Its holder must waive his right to set-off any amount he owes the bank against any subordinated amount owed to him due to the HT1 capital instrument; e) It must neither be secured nor covered by a guarantee of the issuer or related party or other arrangement that legally or economically enhances the priority of the claim of any holder as against depositors, other creditors of the bank and holders of LT2 and UT2 capital instruments; f) It must not be redeemable at the initiative of the holder. It must not be repayable without the prior approval of the BSP: Provided , That repayment may be allowed only in connection with call option after a minimum of five (5) years from issue date: Provided, however , That a call option may be exercised within the first five (5) years from issue date when i. It was issued for the purpose of a merger with or acquisition by the bank and the merger or acquisition is aborted; ii. There is a change in tax status of the HT1 capital instrument due to changes in the tax laws and/or regulations; or iii. It does not qualify as HT1 capital as determined by the BSP: Provided, further , That such repayment shall be approved by the BSP only if the preferred share/debt is simultaneously replaced with issues of new capital which is neither smaller in size nor of lower quality than the original issue, unless the bank's capital ratio remains more than adequate after redemption. It must not contain any clause which requires acceleration of payment of principal, except in the event of insolvency. The agreement governing its issuance must not contain any provision that mandates or creates an incentive for the bank to repay the outstanding principal of the instrument, e.g., a cross-default or negative pledge or a restrictive covenant, other than a call option which may be exercised by the bank; g) Its main features must be publicly disclosed by annotating the same on the instrument and in a manner that is easily understood by the investor; h) The proceeds of the issuance must be immediately available without limitation to the bank; i) The bank must have full discretion over the amount and timing of dividends/coupons where the bank i. Has not paid or declared a dividend on its common shares in the preceding financial year; or ii. Determines that no dividend is to be paid on such shares in the current financial year. The bank must have full control and access to waived payments; j) Any dividend/coupon to be paid must be paid only to the extent that the bank has profits distributable determined in accordance with existing BSP regulations. The dividend/coupon rate, or the formulation for calculating dividend/coupon payments must be fixed at the time of issuance and must not be linked to the credit standing of the bank; k) It may allow only one (1) moderate step-up in the dividend/coupon rate in conjunction with a call option, only if the step-up occurs at a minimum of ten (10) years after the issue date and if it results in an increase over the initial rate that is not more than: i. 100 basis points less the swap spread between the initial index basis and the stepped-up index basis; or ii. 50% of the initial credit spread less the swap spread between the initial index basis and the stepped-up index basis. The swap spread should be fixed as of the pricing date and reflect the differential in pricing on that date between the initial reference security or rate and the stepped-up reference security or rate. l) It must be underwritten by a third party not related to the issuer bank nor acting in reciprocity for and in behalf of the issuer bank; m) It must be issued in minimum denominations of at least five hundred thousand pesos (P500,000.00) or its equivalent; n) It must clearly state on its face that it is not a deposit and is not insured by the Philippine Deposit Insurance Corporation (PDIC); and o) The bank must submit a written external legal opinion that the abovementioned requirements, including the subordination and loss absorption features, have been met. DTIcSH Provided , That for purposes of reserve requirement regulation, it shall not be treated as time deposit liability, deposit substitute liability or other forms of borrowings: Provided, further , That the total amount of HT1 capital that may be included in the Tier 1 capital shall be limited to a maximum of 15% of total Tier 1 capital (net of deductions enumerated in paragraph 3). Provided , furthermore , That the amount of HT1 capital in excess of the maximum limit shall be eligible for inclusion in the UT2 capital, subject to the limit in total Tier 2 capital. To determine the allowable amount of HT1 capital, the amount of total core Tier 1 capital (net of deductions enumerated in paragraph 3) should be multiplied by 17.65%, the number derived from the proportion of 15% to 85% (i.e., 15%/85% = 17.65%). E. Eligible unsecured subordinated debt 13. Unsecured subordinated debt issuances by banks should comply with the following minimum conditions in order to be eligible as upper Tier 2 (UT2) capital: a) It must be issued and fully paid-up. Only the net proceeds received from the issuance shall be included as capital; b) It must be available to absorb losses of the bank without it being obliged to cease carrying on business. The agreement governing its issuance should specifically provide for the coupon and principal to absorb losses where the bank would otherwise be insolvent, or for its holders to be treated as if they were holders of a specified class of share capital in any proceedings commenced for the winding up of the bank. Issue documentation must disclose to prospective investors the manner by which the instrument is to be treated in loss situation. Alternatively, the agreement governing its issuance can provide for automatic conversion into common shares or perpetual and non-cumulative shares or perpetual and cumulative preferred shares upon occurrence of certain trigger events, as follows: i. Breach of minimum capital ratio; ii. Commencement of proceedings for winding up of the bank; or iii. Upon appointment of receiver for the bank. The rate of conversion must be fixed at the time of subscription to the instrument. The bank must also ensure that it has appropriate buffer of authorized capital stock and appropriate stockholders and board authorization for conversion/issue to take place anytime; c) Its holders must not have priority claim, in respect of principal and coupon payments in the event of winding up of the bank, which is higher than or equal with that of depositors, other creditors of the bank, and holders of LT2 capital instruments. Its holder must waive his right to set-off any amount he owes the bank against any subordinated amount owed to him due to the UT2 capital instrument; d) It must neither be secured nor covered by a guarantee of the issuer or related party or other arrangement that legally or economically enhances the priority of the claim of any holder as against depositors, other creditors of the bank and holders of LT2 capital instruments; e) It must not be redeemable at the initiative of the holder. It must not be repayable prior to maturity without the prior approval of the BSP: Provided , That repayment may be allowed only in connection with a call option after a minimum of five (5) years from issue date: Provided, however , That a call option may be exercised within the first five (5) years from issue date when: i. It was issued for the purpose of a merger with or acquisition by the bank and the merger or acquisition is aborted; ii. There is a change in tax status of the UT2 capital instrument due to changes in the tax laws and/or regulations; or iii. It does not qualify as UT2 capital as determined by the BSP: Provided, further , That such repayment prior to maturity shall be approved by the BSP only if the debt is simultaneously replaced with issues of new capital which is neither smaller in size nor of lower quality than the original issue, unless the bank's capital ratio remains more than adequate after redemption, It must not contain any clause which requires acceleration of payment of principal, except in the event of insolvency. The agreement governing its issuance must not contain any provision that mandates or creates an incentive for the bank to repay the outstanding principal of the instrument, e.g., a cross-default or negative pledge or a restrictive covenant, other than a call option which may be exercised by the bank; f) Its main features must be publicly disclosed by annotating the same on the instrument and in a manner that is easily understood by the investor; g) The proceeds of the issuance must be immediately available without limitation to the bank; h) The bank must have the option to defer any coupon payment where the bank: i. has not paid or declared a dividend on its common shares in the preceding financial year; or ii. determines that no dividend is to be paid on such shares in the current financial year; It is acceptable for the deferred coupon to bear interest but the interest rate payable must not exceed market rates; i) The coupon rate, or the formulation for calculating coupon payments must be fixed at the time of issuance and must not be linked to the credit standing of the bank; j) It may allow only one (1) moderate step-up in the coupon rate in conjunction with a call option, only if the step-up occurs at a minimum of ten (10) years after the issue date and if it results in an increase over the initial rate that is not more than: i. 100 basis points less the swap spread between the initial index basis and the stepped-up index basis; or ii. 50% of the initial credit spread less the swap spread between the initial index basis and the stepped-up index basis. HDIaST The swap spread should be fixed as of the pricing date and reflect the differential in pricing on that date between the initial reference security or rate and the stepped-up reference security or rate; k) It must be underwritten by a third party not related to the issuer bank nor acting in reciprocity for and in behalf of the issuer bank; l) It must be issued in minimum denominations of at least five hundred thousand pesos (P500,000.00) or its equivalent; m) It must clearly state on its face that it is not a deposit and is not insured by the Philippine Deposit Insurance Corporation (PDIC); and n) The bank must submit a written external legal opinion that the abovementioned requirements, including the subordination and loss absorption features, have been met: Provided , That it shall be subject to a cumulative discount factor of 20% per year during the last five (5) years to maturity (i.e., 20% if the remaining life is 4 years to less than 5 years, 40% if the remaining life is 3 years to less than 4 years, etc.): Provided, further , That where it is denominated in a foreign currency, it shall be revalued in accordance with PAS 21: Provided, furthermore , That for purposes of reserve requirement regulation, it shall not be treated as time deposit liability, deposit substitute liability or other forms of borrowings. 14. Unsecured subordinated debt issuances by banks should comply with the following minimum conditions in order to be eligible as lower Tier 2 (LT2) capital: a) It must be issued and fully paid-up. Only the net proceeds received from the issuance shall be included as capital; b) Its holders must not have priority claim, in respect of principal and coupon payments in the event of winding up of the bank, which is higher than or equal with that of depositors and other creditors of the bank. Its holder must waive his right to set-off any amount he owes the bank against any subordinated amount owed to him due to the LT2 capital instrument; c) It must neither be secured nor covered by a guarantee of the issuer or related party or other arrangement that legally or economically enhances the priority of the claim of any holder as against depositors and other creditors of the bank; d) It must not be redeemable at the initiative of the holder. It must not be repayable prior to maturity without the prior approval of the BSP: Provided , That repayment may be allowed only in connection with a call option after a minimum of five (5) years from issue date: Provided , however , That a call option may be exercised within the first five (5) years from issue date when: i. It was issued for the purpose of a merger with or acquisition by the bank and the merger or acquisition is aborted; ii. There is a change in tax status of the LT2 capital instrument due to changes in the tax laws and/or regulations; or iii. It does not qualify as LT2 capital as determined by the BSP: Provided, further , That such repayment prior to maturity shall be approved by the BSP only if the debt is simultaneously replaced with issues of new capital which is neither smaller in size nor of lower quality than the original issue, unless the bank's capital ratio remains more than adequate after redemption, It must not contain any clause which requires acceleration of payment of principal, except in the event of insolvency. The agreement governing its issuance must not contain any provision that mandates or creates an incentive for the bank to repay the outstanding principal of the instrument, e.g., a cross-default or negative pledge or a restrictive covenant, other than a call option which may be exercised by the bank; e) Its main features must be publicly disclosed by annotating the same on the instrument and in a manner that is easily understood by the investor; f) The proceeds of the issuance must be immediately available without limitation to the bank; g) The coupon rate, or the formulation for calculating coupon payments must be fixed at the time of issuance and must not be linked to the credit standing of the bank; h) It may allow only one (1) moderate step-up in the coupon rate in conjunction with a call option, only if the step-up occurs at a minimum of five (5) years after the issue date and if it results in an increase over the initial rate that is not more than: i. 100 basis points less the swap spread between the initial index basis and the stepped-up index basis; or ii. 50% of the initial credit spread less the swap spread between the initial index basis and the stepped-up index basis. The swap spread should be fixed as of the pricing date and reflect the differential in pricing on that date between the initial reference security or rate and the stepped-up reference security or rate; i) It must be underwritten by a third party not related to the issuer bank nor acting in reciprocity for and in behalf of the issuer bank; j) It must be issued in minimum denominations of at least five hundred thousand pesos (P500,000.00) or its equivalent; k) It must clearly state on its face that it is not a deposit and is not insured by the Philippine Deposit Insurance Corporation (PDIC); and l) The bank must submit a written external legal opinion that the abovementioned requirements, including the subordination features, have been met: Provided , That it shall be subject to a cumulative discount factor of 20% per year during the last five (5) years to maturity (i.e., 20% if the remaining life is 4 years to less than 5 years, 40% if the remaining life is 3 years to less than 4 years, etc.): Provided, further , That where it is denominated in a foreign currency, it shall be revalued in accordance with PAS 21: Provided, furthermore , That for purposes of reserve requirement regulation, it shall not be treated as time deposit liability, deposit substitute liability or other forms of borrowings. SIcCTD Part III. Credit risk-weighted assets A. Risk-weighting 1. Banking book exposures shall be risk-weighted based on third party credit assessment of the individual exposure given by eligible external credit assessment institutions listed in Part III.C. The table below sets out the mapping of external credit assessments with the corresponding risk weights for banking book exposures. Exposures related to credit derivatives and securitisation are dealt with in Part IV and V, respectively. Exposures should be risk-weighted net of specific provisions . STANDARDIZED CREDIT RISK WEIGHTS Credit Assessment 2 AAA AA+ to A+ to A- BBB+ to BB+ to B+ to B- Below B- Unrated AA- BBB- BB- Sovereigns 0% 0% 20% 50% 100% 100% 150% 100% MDBs 0% 20% 50% 50% 100% 100% 150% 100% Banks 20% 20% 50% 50% 100% 100% 150% 100% 3 Interbank call loans 20% Local government units 20% 20% 50% 50% 100% 100% 150% 100% 3 Government corporations 20% 20% 50% 100% 100% 150% 150% 100% 3 Corporates 20% 20% 50% 100% 100% 150% 150% 100% 3 Housing loans 50% MSME qualified portfolio 75% Defaulted exposures Housing loans 100% Others 150% ROPA 150% All other assets 100% Sovereign Exposures 2. These include all exposures to central governments and central banks. All Philippine peso (Php) denominated exposures to the Philippine National Government (NG) and the Bangko Sentral ng Pilipinas (BSP) shall be risk weighted at 0%. Foreign currency denominated exposures to the NG and the BSP, however, shall be risk weighted according to the table above. Provided , That only one-third (1/3) of the applicable risk weight shall be applied from 1 July 2007, two-thirds (2/3) from 1 January 2008, and the full risk weight from 1 January 2009. Exposures to the Bank for International Settlements (BIS), the International Monetary Fund (IMF), and the European Central Bank (ECB) and the European Community (EC) shall also receive 0% risk weight. MDB Exposures 3. These include all exposures to multilateral development banks. Exposures to the World Bank Group comprised of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), the Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), the European Investment Bank (EIB), the European Investment Fund (EIF), the Nordic Investment Bank (NIB), the Caribbean Development Bank (CDB), the Islamic Development Bank (IDB), and the Council of Europe Development Bank (CEDB) currently receive 0% risk weight. However, it is the responsibility of the bank to monitor the external credit assessments of multilateral development banks to which they have an exposure to reflect in the risk weights any change therein. Bank Exposures 4. These include all exposures to Philippine-incorporated banks/quasi-banks, as well as foreign-incorporated banks. Interbank Call Loans 5. Interbank call loans refer to interbank loans that pass through the Interbank Call Loan Funds Transfer System of the BSP, the Bankers Association of the Philippines (BAP), and the Philippine Clearing House Corporation (PCHC). Exposures to Local Government Units 6. These include all exposures to non-central government public sector entities. Bonds issued by Philippine local government units (LGU Bonds), which are covered by Deed of Assignment of Internal Revenue Allotment of the LGU and guaranteed by the LGU Guarantee Corporation shall be risk weighted at the lower of 50% or the appropriate risk weight indicated in the table above. Exposures to Government Corporations 7. These include all exposures to commercial undertakings owned by central or local governments. Exposures to Philippine Government Owned or Controlled Corporations (GOCCs) that are not explicitly guaranteed by the Philippine NG are also included in this category. Corporate Exposures 8. These include all exposures to business entities, which are not considered as micro, small, or medium enterprises (MSME), whether in the form of a corporation, partnership, or sole-proprietorship. These also include all exposures to financial institutions, including securities dealers/brokers and insurance companies, not falling under the definition of Bank in paragraph 4. Housing Loans 9. These include all current loans to individuals for housing purpose, fully secured by first mortgage on residential property that is or will be occupied by the borrower. Micro, Small, and Medium Enterprises (MSME) 10. An exposure must meet the following criteria to be considered as a MSME exposure: a) The exposure must be to a micro, small, or medium business enterprise as defined under existing BSP regulations; and b) The exposure must be in the form of direct loans, or unavailed portion of committed credit lines and other business facilities such as outstanding guarantees issued and unused letters of credit, provided that the credit equivalent amounts thereof shall be determined in accordance with the methodology for off-balance sheet items. Qualified portfolio 11. For a bank's portfolio of MSME exposures to be considered as qualified , it must be a highly diversified portfolio, i.e., it has at least 500 borrowers that are distributed over a number of industries. In addition, all MSME exposures in the qualified portfolio must be current exposures. All non-current MSME exposures are excluded from count and are to be treated as ordinary non-performing loans. Current MSME exposures not qualifying under highly diversified MSME portfolio will be risk weighted based on external rating and shall be risk weighted in the same manner as corporate exposures. Defaulted Exposures 12. A default is considered to have occurred in the following cases: a) If a credit obligation is considered non-performing under existing rules and regulations. For non-performing debt securities, they shall be defined as follows: ASEIDH i. For zero-coupon debts securities, and debt securities with quarterly, semi-annual, or annual coupon payments, they shall be considered non-performing when principal and/or coupon payment, as may be applicable, is unpaid for thirty (30) days or more after due date; ii. For debt securities with monthly coupon payments, they shall be considered non-performing when three (3) or more coupon payments are in arrears: Provided, however , That when the total amount of arrearages reaches twenty percent (20%) of the total outstanding balance of the debt security, the total outstanding balance of the debt security shall be considered as non-performing. b) If a borrower/obligor has sought or has been placed in bankruptcy, has been found insolvent, or has ceased operations in the case of businesses; c) If the bank sells a credit obligation at a material credit-related loss, i.e., excluding gains and losses due to interest rate movements. Banks' board-approved internal policies must specifically define when a material credit-related loss occurs; and d) If a credit obligation of a borrower/obligor is considered to be in default, all credit obligations of the borrower/obligor with the same bank shall also be considered to be in default. Housing loans 13. These include all loans to individuals for housing purpose, fully secured by first mortgage on residential property that is or will be occupied by the borrower, which are considered to be in default in accordance with paragraph 12. Others 14. These include the total amounts or portions of all other defaulted exposures, which are not secured by eligible collateral or guarantee as defined in Part III.B. ROPA 15. All real and other properties acquired and classified as such under existing regulations. Other Assets 16. The standard risk weight for all other assets, including bank premises, furniture, fixtures and equipment, will be 100%, except in the following cases: a) Cash on hand and gold, which shall be risk weighted at 0%; b) Checks and other cash items, which shall be risk weighted at 20%; Accruals on a claim shall be classified and risk weighted in the same way as the claim. Bills purchased shall be classified and risk weighted as claims on the drawee bank. The treatments of credit derivatives and securitisation exposures are presented separately in Part IV and V, respectively. Investments in equity or other regulatory capital instruments issued by banks or other financial/non-financial allied/non-allied undertakings will be risk weighted at 100%, unless deductible from the capital base as required in Part II. Off-balance sheet items 17. For off-balance sheet items, the risk-weighted amount shall be calculated using a two-step process. First, the credit equivalent amount of an off-balance sheet item shall be determined by multiplying its notional principal amount by the appropriate credit conversion factor, as follows: a) 100% credit conversion factor this shall apply to direct credit substitutes, e.g., general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances), and shall include: i. Guarantees issued other than shipside bonds/airway bills; ii. Financial standby letters of credit b) 50% credit conversion factor this shall apply to certain transaction-related contingent items, e.g., performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions, and shall include: i. Performance standby letters of credit (net of margin deposit), established as a guarantee that a business transaction will be performed; This shall also apply to i. Note issuance facilities and revolving underwriting facilities; and ii. Other commitments, e.g., formal standby facilities and credit lines with an original maturity of more than one (1) year, and this shall also include Underwritten Accounts Unsold. c) 20% credit conversion factor this shall apply to short-term, self-liquidating trade-related contingencies arising from movement of goods, e.g., documentary credits collateralized by the underlying shipments, and shall include: i. Trade-related guarantees: Shipside bonds/airway bills Letters of credit confirmed ii. Sight letters of credit outstanding (net of margin deposit); iii. Usance letters of credit outstanding (net of margin deposit); iv. Deferred letters of credit (net of margin deposit); v. Revolving letters of credit (net of margin deposit) arising from movement of goods and/or services; and This shall also apply to commitments with an original maturity of up to one (1) year, and shall include Committed Credit Line for Commercial Paper Issued. d) 0% credit conversion factor this shall apply to commitments which can be unconditionally cancelled at any time by the bank without prior notice, and shall include Credit Card Lines. This shall also apply to those not involving credit risk, and shall include: cDAEIH i. Late deposits/payments received; ii. Inward bills for collection; iii. Outward bills for collection; iv. Travelers' checks unsold; v. Trust department accounts; vi. Items held for safekeeping/custodianship; vii. Items held as collaterals; viii. Deficiency claims receivable; ix. Others 18. For derivative contracts, the credit equivalent amount shall be the sum of the current credit exposure (or replacement cost) and an estimate of the potential future credit exposure (or add-on). However, the following shall not be included in the computation: a) Instruments which are traded in an exchange where they are subject to daily receipt and payment of cash variation margin; and b) Exchange rate contract with original maturity of 14 calendar days or less. 19. The current credit exposure shall be the positive mark-to-market value of the contract (or zero if the mark-to-market value is zero or negative). The potential future credit exposure shall be the product of the notional principal amount of the contract multiplied by the appropriate potential future credit conversion factor, as indicated below: Interest Exchange Rate Rate Equity Residual Maturity Contract Contract Contract One (1) year or less 0.00% 1.00% 6.00% Over one (1) year to 0.50% 5.00% 8.00% five (5) years Over five (5) years 1.50% 7.50% 10.00% Provided , That: a) For contracts with multiple exchanges of principal, the factors are to be multiplied by the number of remaining payments in the contract; b) For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be set equal to the time until the next reset date, and in the case of interest rate contracts with remaining maturities of more than one (1) year that meet these criteria, the potential future credit conversion factor is subject to a floor of 0.5%; and c) No potential future credit exposure shall be calculated for single currency floating/floating interest rate swaps, i.e., the credit exposure on these contracts would be evaluated solely on the basis of their mark-to-market value. 20. The credit equivalent amount shall be treated like any on-balance sheet asset, and shall be assigned the appropriate risk weight, i.e., according to the third party credit assessment of the counterparty exposure. B. Credit risk mitigation (CRM) 21. Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralized by first priority claims, in whole or in part with cash or securities, or a loan exposure may be guaranteed by a third party. Physical collateral, such as real estate, buildings, machineries, and inventories are not recognized at this time for credit risk mitigation purposes in line with Basel II recommendations. 22. In order for banks to obtain capital relief for any use of CRM techniques, all documentation used in collateralized transactions and for documenting guarantees must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well-founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability. 23. The effects of CRM will not be double counted. Therefore, no additional supervisory recognition of CRM for regulatory capital purposes will be granted on claims for which an issue-specific rating is used that already reflects that CRM. Principal-only ratings will not be allowed within the framework of CRM. 24. While the use of CRM techniques reduces or transfers credit risk, it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks. Therefore, it is imperative that banks employ robust procedures and processes to control these risks, including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from the bank's use of CRM techniques and its interaction with the bank's overall credit risk profile. 25. The disclosure requirements under Part VIII of this document must also be observed for banks to obtain capital relief (i.e., adjustments in the risk weights of collateralized or guaranteed exposures) in respect of any CRM techniques. Collateralized transactions 26. A collateralized transaction is one in which: a) banks have a credit exposure or potential credit exposure; and b) that credit exposure or potential credit exposure is hedged in whole or in part by collateral posted by a counterparty 4 or by a third party in behalf of the counterparty. 27. In addition to the general requirement for legal certainty set out in paragraph 22, the legal mechanism by which collateral is pledged or transferred must ensure that the bank has the right to liquidate or take legal possession of it, in a timely manner, in the event of default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the counterparty (and, where applicable, of the custodian holding the collateral). Furthermore, banks must take all steps necessary to fulfill those requirements under the law applicable to the bank's interest in the collateral for obtaining and maintaining an enforceable security interest, e.g., by registering it with a registrar, or for exercising a right to net or set off in relation to title transfer collateral. 28. In order for collateral to provide protection, the credit quality of the counterparty and the value of the collateral must not have a material positive correlation. For example, securities issued by the counterparty or by any related group entity would provide little protection and so would be ineligible. 29. Banks must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed, and that collateral can be liquidated promptly. SEHDIC 30. Where the collateral is required to be held by a custodian, the BSP will only recognize the collateral for regulatory capital purposes if it is held by BSP-authorized third party custodians. 31. A capital requirement will be applied to a bank on either side of the collateralized transaction: for example, both repos and reverse repos will be subject to capital requirements. Likewise, both sides of a securities lending and borrowing transaction will be subject to explicit capital charges, as will the posting of securities in connection with a derivative exposure or other borrowing. Banking book 32. Where banks take eligible collateral, as listed in paragraph 34, and satisfies the requirements under paragraphs 27 to 31, they are allowed to apply the risk weight of the collateral to the collateralized portion of the credit exposure (equivalent to the fair market value of recognized collateral), subject to a floor of 20%. The 20% floor shall not apply and a 0% risk weight can be applied when the exposure and the collateral are denominated in the same currency, and either: a) The collateral is cash as defined in paragraph 34.a; or b) The collateral is a sovereign debt security eligible for 0% risk weight, or a Php-denominated debt obligation issued by the Philippine NG or the BSP, which fair market value has been discounted by 20%. 33. For collateral to be recognized, however, the collateral must be pledged for at least the life of the exposure and it must be marked to market and revalued with a minimum frequency of every six (6) months. 34. The following are the eligible collateral instruments: a) Cash (as well as certificates of deposit or comparable instruments issued by the lending bank) on deposit with the bank which is incurring the counterparty exposure; b) Gold; c) Debt obligations issued by the Philippine NG or the BSP; d) Debt securities issued by central governments and central banks (and PSEs treated as sovereigns) of foreign countries as well as MDBs with at least investment grade external credit ratings; e) Other debt securities with external credit ratings of at least BBB- or its equivalent; f) Unrated senior debt securities issued by banks with an issuer rating of at least BBB- or its equivalent, or with other debt issues of the same seniority with a rating of at least BBB- or its equivalent; g) Equities included in the main index of an organized exchange; and h) Investments in Unit Investment Trust Funds (UITF) and the Asian Bond Fund 2 (ABF2) duly approved by the BSP. Trading book 35. A credit risk capital requirement should also be applied to banks' counterparty exposures in the trading book (e.g., repo-style transactions, OTC derivatives contracts). Where banks take eligible collateral for these trading book transactions, as listed in paragraph 34, and satisfies the requirements under paragraphs 27 to 31, they are to compute for the credit risk capital requirement according to the following paragraphs: Provided , That, for repo-style transactions in the trading book, all instruments which are included in the trading book may be used as eligible collateral. 36. For collateralized transactions in the trading book, the exposure amount after risk mitigation is calculated as follows: E* = max {0, [E x (1 + He) C x (1 Hc Hfx)]} Where: E* = the exposure value after risk mitigation E = the current value of the exposure He = haircut appropriate to the exposure C = the current value of the collateral received Hc = haircut appropriate to the collateral Hfx = haircut appropriate for currency mismatch between the collateral and exposure set at 8% (based on a 10-business day holding period and daily marking to market) 37. The treatment of transactions where there is a maturity mismatch between the maturity of the counterparty exposure and the collateral is given in paragraphs 50 to 54. 38. These are the haircuts to be used (based on a 10-business day holding period, daily marking to market and daily remargining), expressed as percentages: Issue rating for Residual Haircut debt securities 5 maturity Sovereign (and PSEs treated as sovereign) Other and MDB issuers (with 0% risk weight) issuers Php- <1 year 0.5 denominated > 1 year to < 5 2 securities issued years by the Philippine > 5 years 4 NG and BSP < 1 year 0.5 1 AAA to AA- > 1 year to < 5 2 4 years > 5 years 4 8 A+ to BBB-/ < 1 year 1 2 Unrated bank > 1 year to < 5 3 6 debt securities as years defined in > 5 years 6 12 paragraph 34.f Equities included 15 in the main index and gold UITF and ABF2 Highest haircut applicable to any security in which the fund can invest Cash per 0 paragraph 34.a in the same currency Other financial 25 instruments in the trading book (applies to repo- style transactions in the trading book only) 39. Where the collateral is a basket of assets, the haircut on the basket will be H = a i H i , where a i is the weight of the asset in the basket and H i is the haircut applicable to that asset. 40. For collateralized OTC derivatives transactions in the trading book, the credit equivalent amount will be computed according to paragraphs 18 to 19, but adjusted by deducting the volatility adjusted collateral amount as computed according to paragraphs 36 to 39. 41. The exposure amount after risk mitigation will be multiplied by the risk weight of the counterparty to obtain the risk-weighted asset amount for the collateralized transaction. Guarantees 42. Where guarantees are direct, explicit, irrevocable and unconditional, banks may be allowed to take account of such credit protection in calculating capital requirements. aHESCT 43. A guarantee must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible. Other than non-payment by a protection purchaser of money due in respect of the credit protection contract, the guarantee must be irrevocable; there must be no clause in the contract that would allow the protection provider unilaterally to cancel the credit cover or that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure. It must also be unconditional; there should be no clause in the protection contract outside the direct control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due. 44. In addition to the legal certainty requirement in paragraph 22, in order for a guarantee to be recognized, the following conditions must be satisfied: a) On the qualifying default/non-payment of the counterparty, the bank may in a timely manner pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterparty for payment; b) The guarantee is an explicitly documented obligation assumed by the guarantor; and c) The guarantee must cover all types of payments the underlying obligor is expected to make under the documentation governing the transaction, for example, notional amount, margin payments, etc. Where a guarantee covers payment of principal only, interests and other uncovered payments should be treated as an unsecured amount. 45. Where the bank's exposure is guaranteed by an eligible guarantor, as listed in paragraph 47, and satisfies the requirements under paragraphs 42 to 44, the bank is allowed to apply the risk weight of the guarantor to the guaranteed portion of the credit exposure. 46. The treatment of transactions where there is a mismatch between the maturity of the counterparty exposure and the guarantee is given in paragraphs 50 to 54. 47. The following are the eligible guarantors: a) Philippine NG and the BSP; b) Central governments and central banks and PSEs of foreign countries as well as MDBs with a lower risk weight than the counterparty; c) Banks with a lower risk weight than the counterparty; and d) Other entities with external credit assessment of at least A- or its equivalent. 48. Where a bank provides a credit protection to another bank in the form of a guarantee that a third party will perform on its obligations, the risk to the guarantor bank is the same as if the bank had entered into the transaction as a principal. In such circumstances, the guarantor bank will be required to calculate capital requirement on the guaranteed amount according to the risk weight corresponding to the third party exposure. In this instance, and provided the credit protection is deemed to be legally effective, the credit risk is considered transferred to the bank providing credit protection. However, the bank receiving credit protection on its exposure to a third party shall recognize a corresponding risk-weighted credit exposure to the bank providing credit protection. 49. An exposure that is covered by a guarantee that is counter-guaranteed by the Philippine NG or BSP, may be considered as covered by the guarantee of the Philippine NG or BSP, provided that: a) the counter-guarantee covers all credit risk element of the exposure; b) both the original guarantee and the counter-guarantee meet all operational requirements for guarantees, except that the counter-guarantee need not be direct and explicit to the original exposure; and c) the cover is robust and that no historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct guarantee of the Philippine NG and BSP. Currently, Php denominated exposures to the extent guaranteed by Industrial Guarantee and Loan Fund (IGLF), Home Guaranty Corporation (HGC), and Trade and Investment Development Corporation of the Philippines (TIDCORP), which guarantees are counter-guaranteed by the Philippine NG receive 0% risk weight. Maturity mismatch 50. For collateralized transactions in the trading book and guaranteed transactions, the credit risk mitigating effects of such transactions will still be recognized even if a maturity mismatch occurs between the hedge and the underlying exposure, subject to appropriate adjustments. 51. For purposes of calculating risk-weighted assets, a maturity mismatch occurs when the residual maturity of a hedge is less than that of the underlying exposure. 52. The maturity of the hedge and the maturity of the underlying exposure should both be defined conservatively. For the hedge, embedded options which may reduce the term of the hedge should be taken into account so that the shortest possible effective maturity is used. Where a call is at the discretion of the guarantor/protection seller, the maturity will always be at the first call date. If the call is at the discretion of the protection buying bank but the terms of the arrangement at origination of the hedge contain a positive incentive for the bank to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the effective maturity. For example, where there is a step-up in cost in conjunction with a call feature or where the effective cost of cover increases over time even if credit quality remains the same or increases, the effective maturity will be the remaining time to the first call. The effective maturity of the underlying, on the other hand, should be gauged as the longest remaining time before the counterparty is scheduled to fulfill its obligation, taking into account any applicable grace period. 53. Hedges with maturity mismatches are only recognized when their original maturities are greater than or equal to one year. As a result, the maturity of hedges for exposures with original maturities of less than one year must be matched to be recognized. In all cases, hedges will no longer be recognized when they have a residual maturity of three months or less. 54. When there is a maturity mismatch with recognized credit risk mitigants, the following adjustment will be applied. aIcDCT Pa = P x (t 0.25)/(T 0.25) Where: Pa = value of the credit protection adjusted for maturity mismatch P = credit protection (e.g., collateral amount, guarantee amount) adjusted for any haircuts t = min (T, residual maturity of the credit protection arrangement) expressed in years T = min (5, residual maturity of the exposure) expressed in years C. Use of third party credit assessments 55. The following third party credit assessment agencies are recognized by the BSP for regulatory capital purposes: International credit assessment agencies: a) Standard & Poor's; b) Moody's; c) FitchRatings; and d) Such other rating agencies as may be approved by the Monetary Board. Domestic credit assessment agencies: a) PhilRatings; and b) Such other rating agencies as may be approved by the Monetary Board. 56. The tables below set out the mapping of ratings given by the recognized credit assessment agencies for purposes of determining the appropriate risk weights: Agency INTERNATIONAL RATINGS S&P AAA AA+ AA AA- A+ A A- Moody's Aaa Aa1 Aa2 Aa3 A1 A2 A3 Fitch AAA AA+ AA AA- A+ A A- Agency DOMESTIC RATINGS PhilRatings AAA Aa+ Aa Aa- A+ A A- Agency INTERNATIONAL RATINGS S&P BBB+ BBB BBB- BB+ BB BB- B+ Moody's Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 Fitch BBB+ BBB BBB- BB+ BB BB- B+ Agency DOMESTIC RATINGS PhilRatings Baa+ Baa Baa- Ba+ Ba Ba- B+ Agency INTERNATIONAL RATINGS S&P B B- Moody's B2 B3 Fitch B B- Agency DOMESTIC RATINGS PhilRatings B B- 57. The BSP will issue the mapping of ratings of other rating agencies as soon as it is recognized by the BSP for regulatory capital purposes. National Rating Systems 58. With prior BSP approval, international credit rating agencies may have national rating systems developed exclusively for use in the Philippines using the Philippine sovereign as reference highest credit quality anchor. Multiple Assessments 59. If an exposure has only one rating by any of the BSP recognized credit assessment agencies, that rating shall be used to determine the risk weight of the exposure; in cases where there are two or more ratings which map into different risk weights, the higher of the two lowest risk weights should be used. Issuer versus issue assessments 60. Any reference to credit rating shall refer to issue-specific rating; the issuer rating may be used only if the exposure being risk-weighted is: a) an unsecured senior obligation of the issuer and is of the same denomination applicable to the issuer rating (e.g., local currency issuer rating may be used for risk weighting local currency denominated senior claims); b) short-term; and c) in cases of guarantees. 61. For loans, risk weighting shall depend on either the rating of the borrower or the rating of the unsecured senior obligation of the borrower: Provided, That in case of the latter, the loan is of the same currency denomination as the unsecured senior obligation. Domestic versus international debt issuances 62. Domestic debt issuances may be rated by BSP-recognized domestic credit assessment agencies or by international credit assessment agencies which have developed a national rating system acceptable to the BSP. Internationally-issued debt obligations shall be rated by BSP-recognized international credit assessment agencies only. Level of application of the assessment 63. External credit assessments for one entity within a corporate group cannot be used to proxy for the credit assessment of other entities within the same group. Such other entities should secure their own ratings. PART IV. Credit Derivatives 1. This Part sets out the capital treatment for credit derivatives. Banks may use credit derivatives to mitigate its credit risks or to acquire credit risks. For credit derivatives that are used as credit risk mitigants (CRM), the general requirements for the use of CRM techniques in paragraphs 21 to 25, Part III.B, have to be satisfied, in addition to the specific operational requirements for credit derivatives in paragraphs 8 to 14. 2. The contents of this Part are just the general rules to be followed in computing capital requirements for credit derivatives. A bank, therefore, is expected to consult the BSP-SES when there is uncertainty about the computation of capital requirements, or even about whether a given transaction should be treated under the credit derivatives framework. A. Definitions and general terminology 3. Credit derivative a contract wherein one party called the protection buyer or credit risk seller transfers the credit risk of a reference asset or assets issued by a reference entity or entities, which it may or may not own, to another party called the protection seller or credit risk buyer . In return, the protection buyer pays a premium or interest-related payments to the protection seller reflecting the underlying credit risk of the reference asset/s. Credit derivatives may refer to credit default swaps (CDS), total return swaps (TRS), and credit-linked notes (CLN) and similar products. cTECHI 4. Credit default swap a credit derivative wherein the protection buyer may exchange the reference asset or any deliverable obligation of the reference entity for cash equal to a specified amount, or get compensated to the extent of the difference between the par value and market value of the asset upon the occurrence of a defined credit event. 5. Total return swap a credit derivative wherein the protection buyer exchanges the actual collections and variations in the prices of the reference asset with the protection seller in return for a fixed premium. 6. Credit-linked note a pre-funded credit derivative wherein the note holder acts as a protection seller while the note issuer is the protection buyer. As such, the repayment of the principal to the note holder is contingent upon the non-occurrence of a defined credit event. All references to CLNs shall be taken to generically include similar instruments, such as credit-linked deposits (CLDs). 7. Special purpose vehicle refers to an entity specifically established to issue CLNs of a single, homogeneous risk class that are fully collateralized as to principal by eligible collateral instruments listed in paragraph 34, Part III.B, and which are purchased out of the proceeds of the note issuance. B. Operational requirements for credit derivatives 8. A credit derivative must represent a direct claim on the protection seller and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible. Other than non-payment by a protection buyer of money due in respect of the credit derivative contract it must be irrevocable; there must be no clause in the contract that would allow the protection seller unilaterally to cancel the credit cover or that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure. It must also be unconditional; there should be no clause in the credit derivative contract outside the direct control of the protection buyer that could prevent the protection seller from being obliged to pay out in a timely manner in the event of a defined credit event. 9. The credit events specified by the contracting parties must at a minimum cover: a) failure to pay the amounts due under terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with the grace period in the underlying obligation); b) bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and c) restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account). 10. The credit derivative shall not terminate prior to expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay, subject to the provisions of paragraph 52 of Part III.B. 11. Credit derivatives allowing for cash settlement are recognized for capital purposes insofar as a robust valuation process is in place in order to estimate loss reliably. There must be a clearly specified period for obtaining post-credit event valuations of the underlying obligation. 12. If the protection buyer's right or ability to transfer the underlying obligation to the protection seller is required for settlement, the terms of the underlying obligation must provide that any required consent to such transfer may not be unreasonably withheld. 13. The identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the protection seller. The bank as protection buyer must have the right/ability to inform the protection seller of the occurrence of a credit event. 14. Asset mismatches (underlying obligation is different from the obligation used for purposes of determining cash settlement or the deliverable obligation, or from the obligation used for purposes of determining whether a credit event has occurred) are permissible if: a) the obligation used for purposed of determining cash settlement or the deliverable obligation, or the obligation used for purposes of determining whether a credit event has occurred ranks pari passu with or is junior to the underlying obligation; and b) both obligations share the same obligor (i.e., the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place. C. Capital treatment for protection buyers 15. A bank that enters into a credit derivative transaction as a protection buyer in order to hedge an existing exposure in the banking book may only get capital relief if all the general requirements for the use of CRM techniques in paragraphs 21 to 25, Part III.B and the conditions in paragraphs 8 to 14 are satisfied. In addition, only the eligible guarantors listed in paragraph 47, Part III.B are considered as eligible protection sellers. 16. If all of the conditions in paragraph 15 are satisfied, banks that are protection buyers may apply the risk weight of the protection seller to the protected portion of the exposure being hedged. The risk weight of the protection seller should therefore be lower than the risk weight of the exposure being hedged for capital relief to be recognized. Exposures that are protected through the issuance of CLNs will be treated as transactions collateralized by cash and a 0% risk weight is applied to the protected portion. The uncovered portion shall retain the risk weight of the bank's underlying counterparty. 17. The protected portion of an exposure is measured as follows: a) The fixed amount, if such is to be paid upon the occurrence of a credit event; or b) The notional value of the contract if either (1) par is to be paid in exchange for physical delivery of the reference asset, or (2) par less market value of the asset is to be paid upon the occurrence of a credit event. 18. A bank may obtain credit protection for a basket of reference entities where the contract terminates and pays out on the first entity to default. In this case, the bank may substitute the risk weight of the protection seller for the risk weight of the asset within the basket with the lowest risk-weighted amount, but only if the notional amount is less than or equal to the notional amount of the credit derivative. 19. Where the contract terminates and pays out on the nth (other than the first) entity to default, the bank will only be able to recognize any reductions in the risk weight of the underlying asset if (n-1)th default-protection has also been obtained or when n-1 of the assets within the basket has already defaulted. HSaIET 20. Where the contract is referenced to entities in the basket proportionately, reductions in the risk weight will only apply to the extent of the underlying asset's share of protection in the contract. 21. When a bank conducts an internal hedge using a credit derivative (i.e., hedging the credit risk of an exposure in the banking book with a credit derivative booked in the trading book), in order for the bank to receive any reduction in the capital requirement for the exposure in the banking book, the credit risk in the trading book must be transferred to an outside third party (i.e., an eligible protection seller). 22. Where a bank buys credit protection through a TRS and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection will not be recognized. 23. Materiality thresholds on payments below which no payment is made in the event of loss are equivalent to retained first loss positions and must be deducted in full from the capital of the bank buying the credit protection. 24. Where the credit protection is denominated in a currency different from that in which the exposure is denominated i.e., there is a currency mismatch the protected portion of the exposure will be reduced by the application of a haircut, as follows: Ga = G x (1 Hfx) Where: Ga = adjusted protected portion of the exposure G = protected portion of the exposure prior to haircut Hfx = haircut appropriate for currency mismatch between the credit protection and underlying obligation set at 8% (based on a 10-business day holding period and daily marking to market) 25. Where a maturity mismatch occurs between the credit protection and the underlying exposure, the protected portion of the exposure adjusted for maturity mismatch will be computed according to paragraph 50 to 54, Part III.B. D. Capital treatment for protection sellers 26. Where a bank is a protection seller in a CDS or TRS transaction, it must calculate a capital requirement on the reference asset as if it were a direct investor in the reference asset. The risk weight of the reference asset is multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted exposure. 27. For a bank holding a CLN, credit exposure is acquired on two fronts. As such, the on-balance sheet exposure arising from the note should be weighted by adding the risk weights of the reference entity and the risk weight of the note issuer. The amount of exposure is the carrying amount of the note. If the CLN principal is fully collateralized by an eligible collateral listed in paragraph 34, Part III.B, and which satisfies the requirements in paragraphs 27 to 31, Part III.B, the risk weight of the note issuer is substituted with the risk weight associated with the relevant collateral. 28. When the credit derivative is referenced to a basket of reference entities and the contract terminates and pays out on the first entity to default in the basket, capital should be held to consider the cumulative risk of all the reference entities in the basket. This means that the risk weights of all the reference entities are added up and multiplied by the amount of the protection provided by the credit derivative to obtain the risk-weighted exposure to the basket. However, the risk-weighted exposure is capped at 10 times the protection provided under the contract. Accordingly, the maximum capital charge is 100% of the protection provided under the contract. The multiplier 10 is the reciprocal of the BSP-required minimum capital adequacy ratio of 10%. For CLNs, the risk weight of the issuer is likewise included in the summing of the risk weights. 29. When the contract terminates and pays out on the nth (other than the first) entity to default, the treatment above shall apply except that in aggregating the risk weights of the reference entities, the risk weight/s of the n-1 lowest risk-weighted entity/ies is/are excluded from the computation. For CLNs, the risk weight of the issuer is likewise included in the summing of the risk weights. 30. When a first or an nth-to-default credit derivative has an external credit rating acceptable to the BSP, the risk weight in paragraph 21, Part V.F will be applied. 31. A contract that is referenced to entities in the basket proportionately should be risk-weighted according to each reference entity's share of protection under the contract. E. Credit derivatives in the trading book 32. The following describes the positions to be reported for credit derivative transactions for purposes of calculating specific risk and general market risk charges under the standardized approach. 33. A CDS creates a notional position in the specific risk of the reference obligation. A TRS creates notional positions on the specific and general market risks of the reference obligation, and an opposite notional position on a zero coupon government security representing the fixed payments or premium under the TRS. A CLN creates a notional position in the specific risk of the reference obligation, a position on the specific risk associated with the issuer, and a position on the general market risk of the note. Specific risk 34. The specific risk position/s on the reference obligation/s created by credit derivatives are reported as short positions by protection buyers and long positions by protection sellers. In addition, holders of CLNs should report a long position on the specific risk of the note issuer. 35. The protection buyer in a first-to-default transaction should report a short position in the reference obligation with the lowest specific risk charge. A protection buyer in an nth (other than the first)-to-default transaction shall only be allowed to report a short position in a reference obligation only if n-1 obligations in the reference basket has/have already defaulted. 36. When a credit derivative is referenced to multiple entities and the contract terminates and pays out on the first obligation to default in the basket, the transaction should be reported by the protection seller as long positions in each of the reference obligations in the basket. A CLN should likewise be reported as a long position on the note issuer. The total capital charge is capped at the notional amount of the derivative or, in the case of a CLN, the carrying amount of the note. 37. When the contract terminates and pays out on the nth (other than the first) entity to default in the basket, the treatment above shall apply except that the protection seller may exclude the long position/s on n-1 reference obligations with the lowest risk-weighted exposures in its report. A CLN should likewise be reported as a long position on the note issuer. The total capital charge is capped at the notional amount of the derivative or, in the case of a CLN, the carrying amount of the note. 38. When an nth-to-default credit derivative has an external credit rating acceptable to the BSP, the specific risk weights in Part VI.B will be applied. 39. When the contract is referenced to multiple obligations under a proportionate structure, positions in the reference obligations should be reported according to their respective proportions in the contract. SDAcaT General market risk 40. A protection buyer/seller in a TRS should report a short/long notional position on the reference obligation and a long/short notional position on a zero coupon government security representing the fixed payment under the contract. 41. A protection buyer/seller in a CLN should report a short/long position on the note. Counterparty credit risk 42. CDS and TRS transactions in the trading book attract counterparty credit risk charges. A 5% add-on factor for the computation of the potential future credit exposure shall be used by both protection buyers and protection sellers if the reference obligation has an external credit rating of at least BBB- or its equivalent. A 10% add-on factor applies to all other reference obligations. However, a protection seller in a CDS shall only be subject to the add-on factor if it is subject to close-out upon the insolvency of the protection buyer while the underlying is still solvent. The add-on in this case should be capped to the amount of unpaid premiums. 43. Where the credit derivative is a first to default transaction, the add-on will be determined by the lowest credit quality underlying in the basket, i.e. if there are any non-investment grade or unrated items in the basket, the 10% add-on should be used. For second and subsequent to default transactions, underlying assets should continue to be allocated according to the credit quality, i.e. the second lowest credit quality will determine the add-on for a second to default transaction etc. 44. Where the credit derivative is referenced proportionately to multiple obligations, the add-on factor will follow the add-on factor applicable for the obligation with the biggest share. If the protection is equally proportioned, the highest add-on factor should be used. PART V. Securitization 1. Banks must apply the securitization framework for determining regulatory capital requirements on their securitization exposures. Securitization exposures can include but are not restricted to the following: asset-backed securities, mortgage-backed securities, credit enhancements, liquidity facilities, interest rate or currency swaps, and credit derivatives. Underlying instruments in the pool being securitized may include but are not restricted to the following: loans, commitments, asset-backed and mortgage-backed securities, corporate bonds, equity securities, and private equity investments. 2. Since securitizations may be structured in many different ways, the capital treatment of a securitization exposure must be determined on the basis of its economic substance rather than its legal form. The contents of this Part are just the general rules to be followed in computing capital requirements for securitization exposures. A bank should therefore consult the BSP-SES when there is uncertainty about the computation of capital requirements, or even about whether a given transaction should be considered a securitization. A. Definitions and general terminology 3. Traditional securitization a structure where the cash flow from an underlying pool of exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of credit risk. Payments to the investors depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the entity originating those exposures. The stratified/tranched structures that characterize securitizations differ from ordinary senior/subordinated debt instruments in that junior securitization tranches can absorb losses without interrupting contractual payments to more senior tranches, whereas subordination in a senior/subordinated debt structure is a matter of priority of rights to the proceeds of liquidation. 4. Synthetic securitization a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of funded (e.g. credit-linked notes) or unfunded (e.g. credit default swaps) credit derivatives or guarantees that serve to hedge the credit risk of the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool. 5. Originating bank a bank that originates directly or indirectly underlying exposures included in the securitization. 6. Clean-up call an option that permits the securitization exposures to be called before all of the underlying exposures or securitization exposures have been repaid. In the case of traditional securitizations, this is generally accomplished by repurchasing the remaining securitization exposures once the pool balance or outstanding securities have fallen below some specified level. In the case of a synthetic transaction, the clean-up call may take the form of a clause that extinguishes the credit protection. 7. Credit enhancement a contractual arrangement in which the bank retains or assumes a securitization exposure and, in substance, provides some degree of added protection to other parties to the transaction. 8. Early amortization provisions mechanisms that, once triggered, allow investors to be paid out prior to the originally stated maturity of the securities issued. For risk-based capital purposes, an early amortization provision will be considered either controlled or non-controlled. A controlled early amortization provision must meet all of the following conditions: a) The bank must have an appropriate capital/liquidity plan in place to ensure that it has sufficient capital and liquidity available in the event of an early amortization; b) Throughout the duration of the transaction, including the amortization period, there is the same pro rata sharing of interest, principal, expenses, losses and recoveries based on the bank's and investors' relative shares of the receivables outstanding at the beginning of each month; c) The bank must set a period for amortization that would be sufficient for at least 90% of the total debt outstanding at the beginning of the early amortization period to have been repaid or recognized as in default; and d) The pace of repayment should not be any more rapid than would be allowed by straight-line amortization over the period set out in criterion (c). An early amortization provision that does not satisfy the conditions for a controlled early amortization provision will be treated as non-controlled early amortization provision. 9. Eligible liquidity facilities an off-balance sheet securitization exposure shall be treated as an eligible liquidity facility if the following minimum requirements are satisfied: a) The facility documentation must clearly identify and limit the circumstances under which it may be drawn. Draws under the facility must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements. In addition, the facility must not cover any losses incurred in the underlying pool of exposures prior to a draw, or be structured such that draw-down is certain (as indicated by regular or continuous draws); SHAcID b) The facility must be subject to an asset quality test that precludes it from being drawn to cover credit risk exposures that are considered non-performing under existing BSP regulations. In addition, liquidity facilities should only fund exposures that are externally rated investment grade at the time of funding; c) The facility cannot be drawn after all applicable (e.g., transaction-specific and program-wide) credit enhancements from which the liquidity would benefit have been exhausted; and d) Repayment of draws on the facility (i.e., assets acquired under a purchase agreement or loans made under a lending agreement) must not be subordinated to any interests of any note holder in the program or subject to deferral or waiver. 10. Eligible servicer cash advance facilities cash advance that may be provided by servicers to ensure an uninterrupted flow of payments to investors. The servicer should be entitled to full reimbursement and this right is senior to other claims on cash flows from the underlying pool of exposures. 11. Excess spread generally defined as gross finance charge collections and other income received by the trust or special purpose entity (SPE, specified in paragraph 13) minus certificate interest, servicing fees, charge-offs, and other senior trust or SPE expenses. 12. Implicit support arises when a bank provides support to a securitization in excess of its predetermined contractual obligation. 13. Special purpose entity a corporation, trust, or other entity organized for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the credit risk of an originator or seller of exposures. SPEs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust. B. Operational requirements for the recognition of risk transference in traditional securitizations 14. An originating bank may exclude securitized exposures from the calculation of risk-weighted assets only if all of the following conditions have been met. Banks meeting these conditions, however, must still hold regulatory capital against any securitization exposures they retain. a) Significant credit risk associated with the securitized exposures has been transferred to third parties. b) The transferor does not maintain effective or indirect control over the transferred exposures. The assets are legally isolated from the transferor in such a way (e.g., through the sale of assets or through subparticipation) that the exposures are put beyond the reach of the transferor and its creditors, even in bankruptcy or receivership. These conditions must be supported by an opinion provided by a qualified legal counsel. The transferor is deemed to have maintained effective control over the transferred credit risk exposures if it: i. is able to repurchase from the transferee the previously transferred exposures in order to realize their benefits; or ii. is obligated to retain the risk of the transferred exposures. The transferor's retention of servicing rights to the exposures will not necessarily constitute indirect control of the exposures. c) The securities issued are not obligations of the transferor. Thus, investors who purchase the securities only have claim to the underlying pool of exposures. d) The transferee is an SPE and the holders of the beneficial interests in that entity have the right to pledge or exchange them without restriction. e) Clean-up calls must satisfy the conditions set out in paragraph 17. f) The securitization does not contain clauses that (i) require the originating bank to alter systematically the underlying exposures such that the pool's weighted average credit quality is improved unless this is achieved by selling assets to independent and unaffiliated third parties at market prices; (ii) allow for increases in a retained first loss position or credit enhancement provided by the originating bank after the transaction's inception; or (iii) increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the underlying pool. C. Operational requirements for the recognition of risk transference in synthetic securitizations 15. For synthetic securitizations, the use of CRM techniques (i.e., collateral, guarantees and credit derivatives) for hedging the underlying exposure may be recognized for risk-based capital purposes only if the conditions outlined below are satisfied: a) Credit risk mitigants must comply with the requirements as set out in Part III.B and Part IV of this Framework. b) Eligible collateral is limited to that specified in paragraph 34, Part III.B. Eligible collateral pledged by SPEs may be recognized. c) Eligible guarantors are defined in paragraph 47, Part III.B. SPEs are not recognized as eligible guarantors in the securitization framework. d) Banks must transfer significant credit risk associated with the underlying exposure to third parties. e) The instruments used to transfer credit risk must not contain terms or conditions that limit the amount of credit risk transferred, such as those provided below: i. Clauses that materially limit the credit protection or credit risk transference (e.g., significant materiality thresholds below which credit protection is deemed not to be triggered even if a credit event occurs or those that allow for the termination of the protection due to deterioration in the credit quality of the underlying exposures); ii. Clauses that require the originating bank to alter the underlying exposures to improve the pool's weighted average credit quality; iii. Clauses that increase the banks' cost of credit protection in response to deterioration in the pool's quality; SEcAIC iv. Clauses that increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the reference pool; and v. Clauses that provide for increases in a retained first loss position or credit enhancement provided by the originating bank after the transaction's inception. f) An opinion must be obtained from a qualified legal counsel that confirms the enforceability of the contracts in all relevant jurisdictions. g) Clean-up calls must satisfy the conditions set out in paragraph 17. 16. For synthetic securitizations, the effect of applying CRM techniques for hedging the underlying exposure are treated according to Part III.B and Part IV of this Framework. In case there is a maturity mismatch, the capital requirement will be determined in accordance with paragraphs 50 to 54, Part III.B. When the exposures in the underlying pool have different maturities, the longest maturity must be taken as the maturity of the pool. Maturity mismatches may arise in the context of synthetic securitizations when, for example, a bank uses credit derivatives to transfer part or all of the credit risk of a specific pool of assets to third parties. When the credit derivatives unwind, the transaction will terminate. This implies that the effective maturity of the tranches of the synthetic securitization may differ from that of the underlying exposures. Originating banks of synthetic securitizations with such maturity mismatches must deduct all retained positions that are unrated or rated below investment grade. Accordingly, when deduction is required, maturity mismatches are not taken into account. For all other securitization exposures, the bank must apply the maturity mismatch treatment set forth in paragraphs 50 to 54, Part III.B. D. Operational requirements and treatment of clean-up calls 17. For securitization transactions that include a clean-up call, no capital will be required due to the presence of a clean-up call if the following conditions are met: (i) the exercise of the clean-up call must not be mandatory, in form or in substance, but rather must be at the discretion of the originating bank; (ii) the clean-up call must not be structured to avoid allocating losses to credit enhancements or positions held by investors or otherwise structured to provide credit enhancement; and (iii) the clean-up call must only be exercisable when 10% or less of the original underlying portfolio, or securities issued remain, or, for synthetic securitizations, when 10% or less of the original reference portfolio value remains. 18. Securitization transactions that include a clean-up call that does not meet all of the criteria stated in paragraph 17 result in a capital requirement for the originating bank. For a traditional securitization, the underlying exposures must be treated as if they were not securitized. Additionally, banks must not recognize in regulatory capital any gain-on-sale, as defined in paragraph 23. For synthetic securitization, the bank purchasing protection must hold capital against the entire amount of the securitized exposures as if they did not benefit from any credit protection. Same treatment applies for synthetic securitization that incorporates a call, other than a clean-up call, that effectively terminates the transaction and the purchased credit protection on a specified date. 19. If a clean-up call, when exercised, is found to serve as a credit enhancement, the exercise of the clean-up call must be considered a form of implicit support provided by the bank and must be treated in accordance with paragraph 26. E. Operational requirements for use of external credit assessments 20. The following operational criteria concerning the use of external credit assessments apply in the securitization framework: a) To be eligible for risk-weighting purposes, the external credit assessment must take into account and reflect the entire amount of credit risk exposure the bank has with regard to all payments owed to it. For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with timely repayment of both principal and interest. b) The external credit assessments must be from an eligible ECAI as recognized by the bank's national supervisor in accordance with Part III.C. An eligible credit assessment must be publicly available. In other words, a rating must be published in an accessible form and included in the ECAI's transition matrix. Consequently, ratings that are made available only to the parties to a transaction do not satisfy this requirement. c) Eligible ECAIs must have a demonstrated expertise in assessing securitizations, which may be evidenced by strong market acceptance. d) A bank must apply external credit assessments from eligible ECAIs consistently across a given type of securitization exposure. Furthermore, a bank cannot use the credit assessments issued by one ECAI for one or more tranches and those of another ECAI for other positions (whether retained or purchased) within the same securitization structure that may or may not be rated by the first ECAI. Where two or more eligible ECAIs can be used and these assess the credit risk of the same securitization exposure differently, paragraph 59 of Part III.C will apply. e) Where CRM is provided directly to an SPE by an eligible guarantor defined in paragraph 47 of Part III.B and is reflected in the external credit assessment assigned to a securitization exposure(s), the risk weight associated with that external credit assessment should be used. In order to avoid any double counting, no additional capital recognition is permitted. If the CRM provider is not an eligible guarantor, the covered securitization exposures should be treated as unrated. f) In the situation where a credit risk mitigant is not obtained by the SPE but rather applied to a specific securitization exposure within a given structure (e.g., ABS tranche), the bank must treat the exposure as if it is unrated and then use the CRM treatment outlined in Part III.B to recognize the hedge. F. Risk-weighting 21. The risk-weighted asset amount of a securitization exposure is computed by multiplying the amount of the position by the appropriate risk weight determined in accordance with the following table. For off-balance sheet exposures, banks must apply a credit conversion factor (CCF) and then risk weight the resultant credit equivalent amount. cHAaEC Credit AAA to AA- A+ to A- BBB+ to Below BBB- assessment 6 BBB- and unrated Risk weight 20% 50% 100% Deduction from capital (50% from Tier 1 and 50% from Tier 2) 22. The capital treatment of implicit support, liquidity facilities, securitizations of revolving exposures, and credit risk mitigants are identified separately. 23. Banks must deduct from Tier 1 capital any increase in equity capital resulting from a securitization transaction, such as that associated with expected future margin income resulting in a gain-on-sale that is recognized in regulatory capital. Such an increase in capital is referred to as a "gain-on-sale" for the purposes of the securitization framework. 24. Credit enhancing IOs (interest only), net of the amount that must be deducted from Tier 1 as in paragraph 23, are to be deducted 50% from Tier 1 capital and 50% from Tier 2 capital. 25. Deductions from capital may be calculated net of any specific provisions taken against the relevant securitization exposures. 26. When a bank provides implicit support to a securitization, it must, at a minimum, hold capital against all of the exposures associated with the securitization transaction as if they had not been securitized. Additionally, banks would not be permitted to recognize in regulatory capital any gain-on-sale, as defined in paragraph 23. Furthermore, the bank is required to disclose publicly that (a) it has provided non-contractual support and (b) the capital impact of doing so. 27. As a general rule, off-balance sheet securitization exposures will receive a CCF of 100%, except in the cases below. 28. A CCF of 20% and 50% will be applied to eligible liquidity facilities as defined in paragraph 9 above with original maturity of one year or less and more than one year, respectively. However, if an external rating of the facility itself is used for risk weighting the facility, a 100% CCF must be applied. A 0% CCF may be applied to eligible liquidity facilities that are only available in the event of a general market disruption (i.e., whereupon more than one SPE across different transactions are unable to roll over maturing commercial paper, and that inability is not the result of an impairment in the SPE's credit quality or in the credit quality of the underlying exposures). To qualify for this treatment, the conditions provided in paragraph 9 must be satisfied. Additionally, the funds advanced by the bank to pay holders of the capital market instruments (e.g., commercial paper) when there is a general market disruption must be secured by the underlying assets, and must rank at least pari passu with the claims of holders of the capital market instruments. 29. A CCF of 0% will be applied to undrawn amount of eligible servicer cash advance facilities, as defined in paragraph 10 above, that are unconditionally cancellable without prior notice. 30. An originating bank is required to hold capital against the investors' interest (i.e., against both the drawn and undrawn balances related to the securitized exposures) when: a) It sells exposures into a structure that contains an early amortization feature; and b) The exposures sold are of a revolving nature. These involve exposures where the borrower is permitted to vary the drawn amount and repayments within an agreed limit under a line of credit (e.g., credit card receivables and corporate loan commitments). 31. Originating banks, though, are not required to calculate a capital requirement for early amortizations in the following situations: a) Replenishment structures where the underlying exposures do not revolve and the early amortization ends the ability of the bank to add new exposures; b) Transactions of revolving assets containing early amortization features that mimic term structures (i.e., where the risk of the underlying facilities does not return to the originating bank); c) Structures where a bank securitizes one or more credit line(s) and where investors remain fully exposed to future draws by borrowers even after an early amortization event has occurred; d) The early amortization clause is solely triggered by events not related to the performance of the securitized assets or the selling bank, such as material changes in tax laws or regulations. 32. As described below, the CCFs depend upon whether the early amortization repays investors through a controlled or non-controlled mechanism. They also differ according to whether the securitized exposures are uncommitted retail credit lines (e.g., credit card receivables) or other credit lines (e.g., revolving corporate facilities). A line is considered uncommitted if it is unconditionally cancelable without prior notice. 33. For uncommitted retail credit lines (e.g., credit card receivables) that have either controlled or non-controlled early amortization features, banks must compare the three-month average excess spread defined in paragraph 11 to the point at which the bank is required to trap excess spread as economically required by the structure (i.e., excess spread trapping point). In cases where such a transaction does not require excess spread to be trapped, the trapping point is deemed to be 4.5 percentage points. 34. The bank must divide the excess spread level by the transaction's excess spread trapping point to determine the appropriate segments and apply the corresponding conversion factors, as outlined in the following tables: Controlled Non-controlled 3-month average Credit 3-month average Credit excess spread - conversion excess spread - conversion credit conversion factor (CCF) credit conversion factor factor (CCF) factor (CCF) (CCF) Uncommitted Committed Uncommitted Committed Retail 133.33% of 90% CCF 133.33% of 100% CCF credit trapping point or trapping point or lines more 0% CCF more 0% CCF less than 133.33% less than 133.33% to 100% of trapping to 100% of trapping point 1% CCF point 5% CCF less than 100% to less than 100% to 75% of trapping 75% of trapping point 2% CCF point 15% CCF less than 75% to less than 75% to 50% of trapping 50% of trapping point 10% CCF point 50% CCF less than 50% to less than 50% of 25% of trapping trapping point point 20% CCF 100% CCF less than 25% of trapping point 40% Non- 90% CCF 90% CCF 100% CCF 100% CCF retail credit lines 35. All other securitized revolving exposures with controlled and non-controlled early amortization features will be subject to CCFs of 90% and 100%, respectively, against the off-balance sheet exposures. AHcaDC 36. The CCF will be applied to the amount of the investors' interest. The resultant credit equivalent amount shall then be applied a risk weight applicable to the underlying exposure type, as if the exposures had not been securitized. 37. For a bank subject to the early amortization treatment, the total capital charge for all of its positions will be subject to a maximum capital requirement (i.e., a 'cap') equal to the greater of (i) that required for retained securitization exposures, or (ii) the capital requirement that would apply had the exposures not been securitized. In addition, banks must deduct the entire amount of any gain-on-sale and credit enhancing IOs arising from the securitization transaction in accordance with paragraphs 23 and 25. G. Credit risk mitigation 38. The treatment below applies to a bank that has obtained or given a credit risk mitigant on a securitization exposure. Credit risk mitigants include collateral, guarantees, and credit derivatives. Collateral in this context refers to that used to hedge the credit risk of a securitization exposure rather than the underlying exposures of the securitization transaction. Collateral 39. Eligible collateral is limited to that recognized in paragraph 34, Part III.B. Collateral pledged by SPEs may be recognized. Guarantees and credit derivatives 40. Credit protection provided by the entities listed in paragraph 47, Part III.B may be recognized. SPEs cannot be recognized as eligible guarantors. 41. Where guarantees or credit derivatives fulfill the minimum operational requirements as specified in Part III.B and Part IV, respectively, banks can take account of such credit protection in calculating capital requirements for securitization exposures. 42. Capital requirements for the collateralized or guaranteed/protected portion will be calculated according to Part III.B and Part IV. 43. A bank other than the originator providing credit protection to a securitization exposure must calculate a capital requirement on the covered exposure as if it were an investor in that securitization. A bank providing protection to an unrated credit enhancement must treat the credit protection provided as if it were directly holding the unrated credit enhancement. Maturity mismatches 44. For the purpose of setting regulatory capital against a maturity mismatch, the capital requirement will be determined in accordance with paragraphs 50 to 54, Part III.B, except for synthetic securitizations which will be determined in accordance with paragraph 16. PART VI. Market risk-weighted assets 1. Market risk is defined as the risk of losses in on- and off-balance sheet positions arising from movements in market prices. The risks addressed in these guidelines are: a) The risks pertaining to interest rate-related instruments and equities in the trading book; and b) Foreign exchange risk throughout the bank. A. Definition of the trading book 2. A trading book consists of positions in financial instruments held either with trading intent or in order to hedge other elements of the trading book. To be eligible for trading book capital treatment, financial instruments must either be free of any restrictive covenants on their tradability or able to be hedged completely. In addition, positions should be frequently and accurately valued, and the portfolio should be actively managed. 3. A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments include both primary financial instruments (or cash instruments) and derivative financial instruments. A financial asset is any asset that is cash, the right to receive cash or another financial asset; or the contractual right to exchange financial assets on potentially favorable terms, or an equity instrument. A financial liability is the contractual obligation to deliver cash or another financial asset or to exchange financial liabilities under conditions that are potentially unfavorable. 4. Positions held with trading intent are those held intentionally for short-term resale and/or with the intent of benefiting from actual or expected short-term price movements or to lock in arbitrage profits, and may include for example proprietary positions, positions arising from client servicing (e.g. matched principal brooking) and market making. 5. The following will be the basic requirements for positions eligible to receive trading book capital treatment: a) Clearly documented trading strategy for the position/instrument or portfolios, approved by senior management (which would include expected holding horizon); b) Clearly defined policies and procedures for the active management of the position, which must include: i. positions are managed on a trading desk; ii. position limits are set and monitored for appropriateness; iii. dealers have the autonomy to enter into/manage the position within agreed limits and according to the agreed strategy; iv. positions are marked to market at least daily, and when marking to model the parameters must be assessed on a daily basis; v. positions are reported to senior management as an integral part of the institution's risk management process; and vi. positions are actively monitored with reference to market information sources (assessment should be made of the market liquidity or the ability to hedge positions or the portfolio risk profiles). This would include assessing the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market, etc. c) Clearly defined policy and procedures to monitor the positions against the bank's trading strategy including the monitoring of turnover and stale positions in the bank's trading book. 6. The documentations of the basic requirements of paragraph 5 should be submitted to the BSP. TASCEc 7. In addition to the above documentation requirements, the bank should also submit to the BSP a documentation of its systems and controls for the prudent valuation of positions in the trading book including the valuation methodologies. B. Measurement of capital charge 8. The market risk capital charge shall be computed according to the methodology set under Circular No. 360 dated 3 December 2002, as amended, subject to certain modifications as outlined in the succeeding paragraphs. 9. The specific risk weights for trading book positions in debt securities and debt derivatives shall depend on the third party credit assessment of the issue or the type of issuer, as may be appropriate, as follows: Credit ratings of Credit ratings of Credit ratings of Unadjusted debt securities/ debt securities/ debt securities/ specific derivatives issued derivatives issued derivatives issued risk weight by sovereigns 7 by MDBs by other entities Php-denominated debt securities/derivatives issued by the Philippine NG and BSP LGU Bonds covered by Deed of Assignment of Internal Revenue 4.00% Allotment and guaranteed by LGU Guarantee Corporation AAA to AA- AAA 0.00% A+ to BBB- AA+ to BBB- AAA to BBB Residual maturity < Residual maturity < Residual maturity < 6 0.25% 6 months 6 months months Residual maturity > Residual maturity > Residual maturity > 6 1.00% 6 months, < 24 6 months, < 24 months, < 24 months months months Residual maturity > Residual maturity > Residual maturity > 1.60% 24 months 24 months 24 months All other debt 8.00% securities/derivatives 10. Foreign currency denominated debt securities/derivatives issued by the Philippine NG and BSP shall be risk-weighted according to the table above. Provided, That only one-third (1/3) of the applicable risk weight shall be applied from 1 July 2007, two-thirds (2/3) from 1 January 2008, and the full risk weight from 1 January 2009. 11. A security, which is the subject of a repo-style transaction, shall be treated as if it were still owned by the seller/lender of the security, i.e., to be reported by the seller/lender. 12. In addition to capital charge for specific and general market risk, a credit risk capital charge should be applied to banks' counterparty exposures in repo-style transactions and OTC derivatives contracts. The computation of the credit risk capital charge for counterparty exposures arising from trading book positions are discussed in paragraphs 35 to 41 of Part III.B. C. Measurement of risk-weighted assets 13. Market risk-weighted assets are determined by multiplying the market risk capital charge by 10 (i.e., the reciprocal of the minimum capital ratio of 10%). PART VII. Operational risk-weighted assets A. Definition of operational risk 1. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk. 2. Banks should be guided by the Basel Committee on Banking Supervision's recommendations on Sound Practices for the Management and Supervision of Operational Risk (February 2003). The same may be downloaded from the BIS website ( www.bis.org ). B. Measurement of capital charge 3. In computing for the operational risk capital charge, banks may use either the basic indicator approach or the standardized approach. 4. Under the basic indicator approach, banks must hold capital for operational risk equal to 15% of the average gross income over the previous three years of positive annual gross income. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the average. 5. Banks that have the capability to map their income accounts into the various business lines given in paragraph 7 may use the standardized approach subject to prior BSP approval. In order to qualify for use of the standardized approach, a bank must satisfy BSP that, at a minimum: a) Its board of directors and senior management are actively involved in the oversight of the operational risk management framework; b) It has an operational risk management system that is conceptually sound and is implemented with integrity; and c) It has sufficient resources in the use of the approach in the major business lines as well as the control and audit areas. 6. Operational risk capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, negative capital charges (resulting from negative gross income) in any business line may offset positive capital charges in other business lines without limit. However, where the aggregate capital charge across all business lines within a given year is negative, then figures for that year shall be excluded from both the numerator and denominator. 7. The business lines and their corresponding beta factors are listed below: Business lines Activity Groups Beta Level 1 Level 2 factors Corporate Finance Mergers and acquisitions, underwriting, privatizations, Corporate Municipal/Government securitization, research, debt 18% finance Finance (government, high yield), Advisory Services equity, syndications, IPO, secondary private placements Sales Fixed income, equity, foreign Market Making exchanges, commodities, Trading and credit, funding, own position 18% Sales Proprietary Positions securities, lending and repos, Treasury brokerage, debt, prime brokerage Retail Banking Retail lending and deposits, banking services, trust and estates Retail Private Banking Private lending and deposits, Banking banking services, trust and 12% estates, investment advice Card Services Merchant/commercial/corporate cards, private labels and retail Commercial Banking Project finance, real estate, Commercial export finance, trade finance, 15% Banking factoring, leasing, lending, guarantees, bills of exchange Payment External Clients Payments and collections, and funds transfer, clearing and 18% Settlement settlement Custody Escrow, depository receipts, securities lending (customers) Agency corporate actions 15% Services Corporate Agency Issuer and paying agents Corporate Trust Discretionary Fund Discretionary and non- Asset Management discretionary fund Management Non-Discretionary management, whether pooled, 12% Fund Management segregated, retail, institutional, closed, open, private equity Retail Retail Brokerage Execution and full service 12% Brokerage 8. Gross income, for the purpose of computing for operational risk capital charge, is defined as net interest income plus non-interest income. This measure should: a) be gross of any provisions for losses on accrued interest income from financial assets; SDATEc b) be gross of operating expenses, including fees paid to outsourcing service providers; c) include fees and commissions; d) exclude gains/(losses) from the sale/redemption/derecognition of non-trading financial assets and liabilities; e) exclude gains/(losses) from sale/derecognition of non-financial assets; and f) include other income (i.e., rental income, miscellaneous income, etc.) C. Measurement of risk-weighted assets 9. The resultant operational risk capital charge is to be multiplied by 125% before multiplying by 10 (i.e., the reciprocal of the minimum capital ratio of 10%). PART VIII. Disclosures in the Annual Reports and Published Statement of Condition 1. This section lists the specific information that banks have to disclose, at a minimum , in their Annual Reports, except item h, paragraph 4 which should also be disclosed in banks' quarterly published statement of condition. These enhanced disclosures shall commence with Annual Reports for financial year 2007 and quarterly published statement of condition from end-September 2007. 2. Full compliance of these disclosure requirements is a prerequisite before banks can obtain any capital relief (i.e., adjustments in the risk weights of collateralized or guaranteed exposures) in respect of any credit risk mitigation techniques. A. Capital structure and capital adequacy 3. The following information with regard to banks' capital structure and capital adequacy shall be disclosed in banks' Annual Reports, except item h below which should also be disclosed in banks' quarterly published statement of condition: a) Tier 1 capital and a breakdown of its components (including deductions solely from Tier 1); b) Tier 2 capital and a breakdown of its components; c) Deductions from Tier 1 (50%) and Tier 2 (50%) capital; d) Total qualifying capital; e) Capital requirements for credit risk (including securitization exposures); f) Capital requirements for market risk; g) Capital requirements for operational risk; and h) Total and Tier 1 capital adequacy ratio on both solo and consolidated bases. B. Risk exposures and assessments 4. For each separate risk area (credit, market, operational, interest rate risk in the banking book), banks must describe their risk management objectives and policies, including: a) Strategies and processes; b) The structure and organization of the relevant risk management function; c) The scope and nature of risk reporting and/or measurement systems; and d) Policies for hedging and/or mitigating risk, and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants. Credit risk 5. Aside from the general disclosure requirements stated in paragraph 4, the following information with regard to credit risk have to be disclosed in banks' Annual Reports: a) Total credit risk exposures (i.e., principal amount for on-balance sheet and credit equivalent amount for off-balance sheet, net of specific provision) broken down by type of exposures as defined in Part III; b) Total credit risk exposure after risk mitigation, broken down by: i. type of exposures as defined in Part III; and ii. risk buckets, as well as those that are deducted from capital c) Total credit risk-weighted assets broken down by type of exposures as defined in Part III; d) Names of external credit assessment institutions used, and the types of exposures for which they were used; e) Types of eligible credit risk mitigants used including credit derivatives; f) For banks with exposures to securitization structures, aside from the general disclosure requirements stated in paragraph 4, the following minimum information have to be disclosed: i. Accounting policies for these activities; ii. Total outstanding exposures securitized by the bank; and iii. Total amount of securitization exposures retained or purchased broken down by exposure type. g) For banks that provide credit protection through credit derivatives, aside from the general disclosure requirements stated in paragraph 4, total outstanding amount of credit protection given by the bank broken down by type of reference exposures should also be disclosed; h) For banks with investments in other types of structured products, aside from the general disclosure requirements stated in paragraph 4, total outstanding amount of other types of structured products issued or purchased by the bank broken down by type should also be disclosed. Market risk 6. Aside from the general disclosure requirements stated in paragraph 4, the following information with regard to market risk have to be disclosed in banks' Annual Reports: a) Total market risk-weighted assets broken down by type of exposures (interest rate, equity, foreign exchange, and options); and b) For banks using the internal models approach, the following information have to be disclosed: SHADcT i. The characteristics of the models used; ii. A description of stress testing applied to the portfolio; iii. A description of the approach used for backtesting/validating the accuracy and consistency of the internal models and modeling processes; iv. The scope of acceptance by the BSP; and v. A comparison of VaR estimates with actual gains/losses experienced by the bank, with analysis of important outliers in backtest results. Operational risk 7. Aside from the general disclosure requirements stated in paragraph 4, banks have to disclose their operational risk-weighted assets in their Annual Reports. Interest rate risk in the banking book 8. Aside from the general disclosure requirements stated in paragraph 4, the following information with regard to interest rate risk in the banking book have to be disclosed in banks' Annual Reports: a) Internal measurement of interest rate risk in the banking book, including assumptions regarding loan prepayments and behavior of non-maturity deposits, and frequency of measurement; and b) The increase (decline) in earnings or economic value (or relevant measure used by management) for upward and downward rate shocks according to internal measurement of interest rate risk in the banking book. PART IX. Enforcement A. Sanctions for non-reporting of CAR breaches 1. It is the responsibility of the bank CEO to cause the immediate reporting of CAR breaches both to its Board and to the BSP. It is likewise the CEO's responsibility to ensure the accuracy of CAR calculations and the integrity of the associated monitoring and reporting system. Any willful violation of the above will be considered as a serious offense for purposes of determining the appropriate monetary penalty that will be imposed on the CEO. In addition, the CEO shall be subject to the following non-monetary sanctions: a) First offense warning b) Second offense reprimand c) Third offense 1 month suspension without pay d) Further offense disqualification B. Sanctions for non-compliance with required disclosures 2. Willful non-disclosure or erroneous disclosure of any item required to be disclosed under this framework in either the Annual Report or the Published Statement of Condition shall be considered as a serious offense for purposes of determining the appropriate monetary penalty that will be imposed on the bank. In addition, the CEO and the Board shall be subject to the following non-monetary sanctions: a) First offense warning on CEO and the Board b) Second offense reprimand on CEO and the Board c) Third offense 1 month suspension of CEO without pay d) Further offense possible disqualification of the CEO and/or the Board Footnotes 1. The Basel Committee on Banking Supervision is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1975. It consists of senior representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States. It usually meets at the Bank for International Settlements in Basel, Switzerland where its permanent Secretariat is located. 2. The notations follow the rating symbols used by Standard & Poor's. The mapping of ratings of all recognized external rating agencies is in Part III.C. 3. Or risk weight applicable to sovereign of incorporation, whichever is higher. 4. "Counterparty" refers to a party to whom a bank has an on- or off-balance sheet credit exposure or a potential credit exposure. 5. The notations follow the rating symbols used by Standard & Poor's. The mapping of ratings of all recognized external rating agencies is in Part III.C. 6. The notations follow the rating symbols used by Standard & Poor's. The mapping of ratings of all recognized external rating agencies is in Part III.C. 7. The notations follow the rating symbols used by Standard & Poor's. The mapping of ratings of all recognized external rating agencies is in Part III.C. For purposes of this framework, debt securities/derivatives issued by sovereigns include foreign currency denominated debt securities/derivatives issued by the Philippine NG.