REGULATION ON CAPITAL ADEQUACY

ަރާގްނައ 2015 ުޓްސަގޮއ 25 - 1436 ާދިޢަޤްލުޛ 10 :ުޚީރާތ 252 :ުދަދައ 44 :ްމުއިލޮވ 2015/R-166 :ުުރަބްނަނ ުދިއާވަގ REGULATION ON CAPITAL ADEQUACY ްނުކަތްސީފޮއ ެގުރާކުރަސ ،ިއާކަތުދިއާވަގ ،ިއާކަތުނޫނާޤ ،ީނަރުކުޢިއާޝ ިއަގުޓެޒެގ  ްސީފޮއ ެގާޔްއިރޫހްމުޖްލުސީއަރ .ެވެކަތްނުޔިލ ަދަފ ްއަތްނާޔަބްސޫނ ،ިއާކަތްނުވެންނެދ ،ިއާކަތްނާލުޢިއ ާވްއުރެނ .ެވެއުހަވުދ ިތަފްސާރުބ ިއާހަވުދ ަމޯހ ެގްއެއާތުފަހ ެމްނޮކ ީނަރުކުޢިއާޝ ްޓެޒެގ  ުގަމުނާފުރުކަތުޑޮބ ެގުމުވްއުނޮފ ްއަތްނުޔިލ ާވްއުނޮފ ްށަމުވްއެރުކ ުޢިއާޝ ިއަގުޓެޒެގ ެގުހަވުދ ަމޯހ  .ެޖްއާރިހެވިދ ،ެލާމ ެގ 12:00 ުރުދްނެމ ެގުހަވުދ ިތަފްސާރުބ ެގާތުފަހ ީރުކ ،ީކަތުގަވ ުހަފެމްނެއ ްށަމުވްއެރުކ ުޢިއާޝ ިއަގުޓެޒެގ ެގުހަވުދ ިތަފްސާރުބ ިދައ .ެވެންނިރުކ 3336137 ، 3323701 :ުނޯފ ާދްނުމަގނިހ ،ީކަތުގަވ ުހަފެމްނެއ ެގުމުވްއުނޮފ ްއަތްނުޔިލ ާވްއުނޮފ 3325500 :ްސްކެފ ްއަތްނުޔިލ .ެވެންނިރުކ ެގ 12:00 ުރުދްނެމ ެގުހަވުދ ަރާގްނައ ެގާތުފަހ .ެވެމެދެއ ްނުވްއުނޮފ ްށަހެރްޑެއ ްލިއެމ.ީއ ިމ gazette@po.gov.mv gazette@po.gov.mv :ްލިއެމީއ ީނާވްނަންނުހ ިއަފެޔިލ ްއަތްނުޔިލ ާވްއުނޮފ ްށަމުވްއެރުކުޢިއާޝ ިއަގުޓެޒެގ  www.gazette.gov.mv :ްޓިއަސްބެވ .ެވެންނުޓްނޮފ ާމުރަފ ިއަގުޑރާވ ްޓްފޮސޯރްކިއަމ PRUDENTIAL REGULATION REGULATION ON CAPITAL ADEQUACY Arrangement of Paragraphs PART I Preliminary PARAGRAPH 1. Introduction......................................................................................................................................4 2. Title..................................................................................................................................................4 3. Application ......................................................................................................................................4 4. Commencement......................................................................................................................................4 5. Definitions........................................................................................................................................4 PART II Statement of Policy PARAGRAPH 1. Purpose.............................................................................................................................................6 2. Responsibility....................................................................................................................................6 PART III Implementation and Specific Requirements PARAGRAPH 1. Minimum Requirements...................................................................................................................7 2. Basel-II Requirements......................................................................................................................8 3. Restrictions on Cash Dividends, Redemption of capital shares, etc.................................................8 4. Capital Measures and Categories.....................................................................................................8 5. Criteria for Higher Minimum Ratios.................................................................................................10 6. Risk Weights...................................................................................................................................10 7. Credit Conversion Factors...............................................................................................................12 8. Capital Restoration Plan.................................................................................................................16 9. Reporting Requirements.................................................................................................................16 PART IV Corrective Measures PARAGRAPH 1. Remedial Measures and Sanctions ................................................................................................16 3 PART I: PRELIMINARY 1: Introduction – This Regulation is issued pursuant to Section 66 of Law No. 24/2010 (Maldives Banking Act). 2: Title - This Regulation shall be cited as "Regulation on Capital Adequacy." 3: Application – This Regulation applies to all Banks licensed under the Maldives Banking Act (Law no. 24/2010). 4: Commencement – This regulation shall come into effect on 25 August 2015. 5: Definitions – The terms and expressions used in this Regulation shall, except where expressly defined below in this Regulation or where the context otherwise requires, have the same respective meaning as in the Maldives Banking Act (Law no. 24/2010): (1) “Act” – means the Maldives Banking Act (Law no. 24/2010). (2) “bank” – means a party holding a license or permit under the Act, to engage in the banking business; all or part of the banking activities listed in Section 25 of the Act. (3) “capital base” – means Tier 1 capital plus Tier 2 capital less investments in and loans to unconsolidated banking and other financial subsidiaries, investments in the capital of other banks and financial institutions licensed to do business in the Maldives, and loans or investments of a capital nature. All assets required to be deducted from Capital Base are also deducted from Total Risk-Weighted Assets. (4) “encumbered asset” – means an asset that is pledged to secure a loan, advance or other debt obligation such that the asset is no longer available to support liabilities to depositors and creditors. For purposes of capital calculations, the amount to be deducted is the lesser of (i) the book value of the asset pledged or (ii) the outstanding balance of the loan secured by such asset. (5) “leverage capital” – means Tier 1 capital. (6) “loan or investment of capital nature” – means any loan, advance or other debt obligation extended directly or indirectly to a counter-party, whether secured or not, for the purpose of purchasing, investing in, or financing the holding of shares or other capital instruments issued by the lending bank. (7) "MMA" – means the Maldives Monetary Authority established under the Law no. 6/81 (Maldives Monetary Authority Act). 4 (8) “net assets” – means gross assets less goodwill and other intangible assets, loan loss provisions (both general and specific) and all other asset revaluation reserves, future income tax benefits (deferred tax assets), losses carried forward, and encumbered assets. These items are all also excluded from Tier 1 capital. (9) “residential property” – for purposes of applying risk weights in this regulation, means that at least one-half of the property must be occupied by the owner and used by him/her as living space, and at least 75% of all lease income received from the remainder of the property must derive from tenant-occupied living space. (10) “tier 1 capital” or “core capital” – includes permanent shareholders' equity (issued and fully paid-up ordinary shares and non-cumulative perpetual preference shares) plus disclosed reserves (additional paid-in share premium plus undistributed profits) plus minority interests in the equity of consolidated subsidiaries, less goodwill and other intangible assets, loan loss provisions (both general and specific) and all other asset revaluation reserves, future income tax benefits (deferred tax assets), losses carried forward, encumbered assets, and net amounts due from Head office and branches (in the case of foreign bank branches and subsidiaries operating in Maldives). Assets deducted from Tier 1 capital are also deducted from Total Risk- Weighted Assets. For branches of foreign banks operating in Maldives, Tier 1 capital is the same as above with assigned capital substituting for permanent shareholders' equity. A capital instrument does not qualify for Tier 1 capital if it is subject to any condition, covenant, term, restriction, or provision that: (a) restricts the ability of the bank to conduct normal banking operations; (b) requires dividends or interest payments that are unjustified relative to the financial condition of the bank, or permits early redemption at the option of the holder in the event of financial deterioration; (c) impairs the ability of the bank to comply with regulatory requirements regarding the disposition of assets or incurrence of additional debt; or (d) limits the ability of a regulatory authority to take actions to resolve, re-capitalize or re- habilitate a troubled or failing bank. (11) “tier 2 capital” or “supplementary capital”– includes year-to-date earnings1 (or losses), undisclosed reserves, asset revaluation reserves2 (if allowed by MMA and consistent with applicable accounting standards), general loan loss provisions (limited to 1.25% of risk- weighted assets), subordinated term debt (limited to 50% of Tier 1 capital), and hybrid debt- equity capital instruments. Total Tier 2 capital is limited to 100% of Tier 1 capital. 1 Must be net of adequate provisions for taxes, loan and other asset losses and cash dividends declared or paid. 2 Asset revaluation reserves which take the form of latent gains on unrealized equity securities are subject to a discount of 55% on the difference between historic cost book values and current market values. 5 To qualify for Tier 2 capital, a hybrid debt-equity instrument must: (a) be unsecured, subordinated, and fully paid-up; (b) not be redeemable at discretion of the holder or without prior consent of MMA; (c) be available to participate in losses without the bank being obliged to cease trading (unlike conventional subordinated debt); (d) allow debt repayment obligations to be deferred (similar to cumulative preference shares) as when profitability of bank does not support repayments even if the capital instrument may carry an obligation to pay interest that cannot permanently be reduced or waived (unlike dividends on ordinary shareholders' equity). Cumulative preference shares and mandatory convertible debt instruments having the above characteristics will be eligible for Tier 2 capital, unless otherwise instructed by the MMA. Subordinated term debt includes conventional, unsecured subordinated term debt (also called debt equity or loan capital) which has an original minimum maturity of at least five years. It also includes limited life redeemable preference shares. During the five years immediately preceding maturity, a cumulative discount amortization factor of 20% per annum will be applied to reflect the diminishing value of these instruments as a source of capital strength. Since subordinated debt is normally not available to participate in losses, the amount included for capital adequacy calculations is limited to 50% of Tier 1 capital. (12) “total risk-adjusted assets” or “total risk-weighted assets” – means the total of risk-weighted assets as calculated and reported in financial returns required to be submitted to the MMA. PART II: STATEMENT OF POLICY 1: Purpose – The purpose of this regulation is to ensure that each bank maintains a level of capital which (i) is adequate to protect the interests of depositors and creditors, (ii) is commensurate with the risk profile and activities of the bank, and (iii) promotes public confidence in the bank and the overall banking system. 2: Responsibility – It is the responsibility of the board of directors of each bank to establish and maintain a level of capital that is fully adequate at all times. The capital levels required by this regulation are the minimum levels acceptable for banks that are fundamentally sound, well- managed, and have no material financial or operational weaknesses. Higher capital levels may be required for individual banks based on circumstances listed under paragraph 5, Part III, below. 6 PART III: IMPLEMENTATION AND SPECIFIC REQUIREMENTS 1: Minimum Requirements – the following minimum requirements shall apply: 1.1 Unimpaired Paid-up Capital or Assigned Capital: A Tier I or Tier II domestic bank shall maintain unimpaired paid-up capital at all times of not less than Rufiyaa 150 million, or Rufiyaa 60 million respectively; as specified under Section 12 of the Act. A foreign bank branch operating in the Maldives shall maintain capital allocated to its operations in the Maldives (assigned capital) at minimum in an amount equal to the level of paid-up capital required for the operation of a domestic bank, as required under Section 13 of the Act. 1.2 Capital Reserve: A domestic bank or a foreign bank branch operating in the Maldives shall build a capital reserve of not less than the minimum required unimpaired paid-up capital or assigned capital, respectively; as specified under Sections 12 and 13 of the Act. The reserve shall be built by allocating at least 50% of the bank’s net, distributable profits after tax until the reserve totals 50% of the bank’s minimum required paid-up or assigned capital; and by allocating at least 25% of the net, distributable profits after tax until the reserve totals an amount equal to the bank’s minimum required paid-up or assigned capital. 1.3 Capital Ratios: all banks shall have and maintain capital ratios that are not less than the greater of (i) the minimum ratios specified below or (ii) such higher ratios that may be set by the MMA based on criteria set forth in paragraph 5 below: (a) Leverage Capital Ratio: the minimum acceptable leverage capital ratio is 5.0%. However, if a bank is pursuing or experiencing significant growth, has an inordinate level of risk and/or inadequate risk management systems, or less-than-satisfactory asset quality, management, earnings or liquidity, a higher minimum may be required. (b) Tier 1 Risk-Based Capital Ratio: the minimum acceptable Tier 1 Risk-Based Capital ratio is 6.0%. However, if a bank is pursuing or experiencing significant growth, has an inordinate level of risk and/or inadequate risk management systems, or less-than-satisfactory asset quality, management, earnings or liquidity, a higher minimum may be required. (c) Total Risk-Based Capital Ratio: the minimum acceptable Total Risk-Based Capital ratio is 12.0%. However, if a bank is pursuing or experiencing significant growth, has an inordinate level of risk and/or inadequate risk management systems, or less-than-satisfactory asset quality, management, earnings or liquidity, a higher minimum may be required. 7 Before making calculations to determine whether a bank complies with capital ratios specified above, all accounts must be adjusted to reflect (a) fully adequate provisions for potential loan losses, (2) write-off of operating and accumulated losses including depreciation and amortization expenses, provisions for taxes on profits, write-downs of repossessed assets to current market value, and bad debts not yet written off, (3) write-off of preliminary expenses, organizational costs, goodwill and underwriting commissions, and (4) such other items as the MMA may specify. 2: Basel-II Requirements – banks are allowed to apply the new methods for computing capital requirements (commonly known as Basel-II) in a manner prescribed by the MMA. Initially, banks must use the “standard approach” and the “basic indicator approach” to establish capital requirements (Pillar I); however, in no event will a bank be allowed to have a leverage capital ratio less than 5.0%. The adequacy of a bank’s capital will remain subject to supervisory review (Pillar II) and market discipline (Pillar III), and higher capital levels may be required depending on the risk profile and activities of a bank. 3: Restriction on Cash Dividends, Redemption of Capital Shares and Distributions of Profits – a bank shall not declare or pay a cash dividend, or redeem any of its capital shares or other capital instruments, or make any payment to shareholders, or make any other distribution of its profits, if such transfer or payment will result in a reduction in its capital or reserves below the capital requirements set by the MMA. Cash dividends to be declared or paid and distributions of profits may only be made from earnings that have been reviewed and certified by an external auditor; however, interim distributions may be made with the prior written approval of the MMA. 4: Capital Measures and Categories – for purposes of evaluating capital adequacy and assigning a category for supervisory purposes, the following measures and capital categories shall apply: (a) Capital measures – the ratios used for measuring capital adequacy are: • Leverage capital ratio: Tier 1 Capital divided by Net Assets. • Tier 1 risk-based capital ratio: Tier 1 Capital divided by Total Risk-Weighted Assets. • Total risk-based capital ratio: Capital Base divided by Total Risk-Weighted Assets. (b) Capital categories – for purposes of supervisory responses and enforcement actions, banks will be grouped into capital adequacy categories as follows: (1) Well capitalized – • Provisions for loan losses account is fully adequate and funded; • Leverage capital ratio > 8%; • Tier 1 risk-based capital ratio > 10%; • Total risk-based ratio > 15%; • Not subject to any written agreement, corrective or supervisory order, or capital directive issued by the MMA; 8 • At least three years have elapsed since commencing banking operations; and • Not pursuing or experiencing rapid growth in deposits, loans or assets. (2) Adequately capitalized – • Provisions for loan losses account are fully adequate and funded; • Leverage capital ratio 5% < 8%; • Tier 1 risk-based capital ratio 6% < 10%; • Total risk-based ratio 12% < 15%; • Not subject to any written agreement, corrective or supervisory order, or capital directive issued by the MMA; and • Not "well capitalized" as defined in sub-paragraph (b)(1) above. (3) Undercapitalized – • Provisions for loan losses account are inadequate and/or not fully funded; • Leverage capital ratio 4% < 5% (or between 5% and 8% and pursuing or experiencing rapid growth); • Tier 1 risk-based capital ratio 4% < 6%; • Total risk-based ratio 8% < 12%; and • not in compliance with any capital-related provision of any written agreement, corrective order, or capital directive issued by the MMA. (4) Significantly undercapitalized – • Provisions for loan losses account are materially inadequate and not fully funded; • Leverage capital ratio 2% < 4% (or between 4% and 6% and pursuing or experiencing rapid growth; • Tier 1 risk-based capital ratio < 4%; • Total risk-based ratio < 8%; and • Not in compliance with any capital-related provision of any written agreement, corrective or supervisory order, or capital directive issued by the MMA. (5) Critically undercapitalized – • Provisions for loan losses account are severely inadequate and not fully funded; • Leverage capital ratio < 2% • Tier 1 and Total RBC ratios no longer relevant; and • Not in compliance with any capital-related provision of any written agreement, corrective or supervisory order, or capital directive issued by the MMA. (c) Reclassifications – if the MMA determines that – (1) the existing capital of a bank will become impaired due to the activities, growth trends, or risk profile of a bank, 9 (2) the bank is engaging in unsafe or unsound practices or is conducting its affairs in a manner that threatens the interests of depositors or the general public, or (3) the bank has not corrected previously identified weaknesses in asset quality, management, earnings, liquidity or sensitivity to market risk, then the MMA may downgrade a bank’s capital category defined in sub-paragraph (b) above, and require the bank to comply with a corrective or supervisory order, or a capital directive. 5: Criteria for Higher Minimum Ratios – the MMA may require a bank to maintain higher minimum ratios if a bank – 1) has been operating less than three years; 2) has, or is expected to have, losses resulting in a capital deficiency; 3) has significant exposure to risk, whether credit, concentrations of credit, market, interest rate, liquidity, operational, legal, or from other non-traditional activities; 4) has a high, or particularly severe, volume of poor quality assets; 5) is growing rapidly, either internally or through acquisitions; 6) may be adversely affected by the activities or condition of its parent holding company, associates or subsidiaries; or 7) has deficiencies in ownership, management, shareholding structure or policies and systems for risk management). 8) is a systemically important bank, as determined by the MMA. 6: Risk Weights – the risk weights applicable to on-balance-sheet assets are: 0% - cash (notes and coin) held in the bank’s vault and in transit; - claims on and balances with the MMA of the Maldives; - claims, or portions thereof, on, guaranteed by, or fully secured by securities issued by the Government of the Maldives (GoM)3; - claims on central governments and central banks denominated in national currency and funded in that currency; - other claims on OECD central governments and central banks; - claims, or portions thereof, collateralized by securities of, or guaranteed by, OECD central governments; and - claims, or portions thereof, fully secured by cash or pledged deposits in the same bank. 3 For a guarantee to qualify for 0% weighting, it must be affirmed, irrevocable and unconditional. 10 20% - claims on multilateral development banks (IBRD, ADB, EIB or others as may be approved by the MMA) and claims, or portions thereof, guaranteed by, or collateralized by, securities issued by such banks; - claims on, and loans, or portions thereof, guaranteed by, banks incorporated in the OECD countries; - claims on, and loans, or portions thereof, guaranteed by, domestic commercial banks and other banks incorporated in countries outside the OECD with a residual maturity of up to one year; - claims on, and loans, or portions thereof, guaranteed by, non-domestic OECD public- sector entities, excluding the central government, subject in all cases to prior approval of the MMA; and - cash items in process of collection, both domestic and foreign. 50% - loans fully secured by first priority mortgages on residential property as defined in this regulation4; and - claims on, and loans, or portions thereof, guaranteed by, local government authorities of the Maldives; and - claims on public enterprises if approved by the MMA. 75% - claims, or portions thereof, guaranteed by a credit guarantee scheme, after approval by the MMA; - claims on Small and Medium Enterprises, as defined in the Small and Medium Enterprises Law (Law no. 06/2013). 100% - claims on the private sector; - claims on, or loans guaranteed by, domestic commercial banks and other banks incorporated outside the OECD with a residual maturity of over one year; - claims on central governments outside the OECD (unless denominated in national currency and funded in that currency); - claims on public sector entities not listed above and claims on commercial companies owned by public sector entities; - premises, plant and equipment and other fixed assets; - real estate owned and other investments (including non-consolidated investment participations in other companies); 4 Excludes loans for speculative development of residential property, loans secured by and primarily repayable from rental income on property that is majority occupied by tenants, and loans to finance housing developments. 11 - capital instruments issued by other banks (unless deducted from capital); and - all other assets, excluding those deducted from capital. 7: Credit Conversion Factors – the credit conversion factors listed below shall apply to off-balance- sheet items and shall be multiplied by the weights applicable to the corresponding on-balance sheet asset category. The MMA will, in its discretion, allocate particular instruments into the categories listed below based on the characteristics of the instrument. (a) Factor Off-balance sheet instrument 100% Direct credit substitutes5 (e.g. general guarantees including standby letters of credit used to guarantee loans and securities; and bankers' acceptances and endorsements equivalent to acceptances). 50% Transaction-related contingent items (e.g. performance and bid bonds, warranties, standby letters of credit tied to specific transactions. 20% Short-term self-trade-related contingencies (e.g. documentary credits collateralized by underlying shipments). 100% Sale-and-repurchase agreements and assets sales-with-recourse where credit risk remains with selling bank. 100% Forward asset purchases, forward deposits and partly-paid shares and securities which represent commitments with specific drawdowns. 50% Note issuance facilities and revolving underwriting facilities. 50% Other commitments (e.g. formal stand-by facilities, credit lines) with an original maturity of more than one year 0% Similar commitments with an original maturity of less than one year, or which can be unconditionally cancelled at any time (b) Credit Risk: Forwards, swaps, purchased options and similar derivative contracts - the treatment of forwards, swaps, purchase options and similar derivative contracts require special attention because banks are not exposed to credit risk for the full face value of their contracts, but only to the potential cost of replacing the cash flow (on contracts showing positive value) if the counterparty defaults. The credit equivalent amounts will depend, inter alia, on the contract maturity, and the volatility of rates and prices for the type of instrument. Instruments traded on exchanges may be excluded where they are subject to daily receipt and payment cash variation margin. Options purchased over the counter are included with the same conversion factors as other instruments. 5 Include items where the risk of loss is equivalent to a direct claim on the counterparty. If, however, the risk depends on a future event which is independent of the creditworthiness of the counterparty, the items should be subject to a 50% conversion factor. 12 Interest rate contracts – defined to include single-currency interest rate swaps, basis swaps, forward rate agreements, interest rate futures, interest rate options purchased and similar instruments. Foreign exchange rate contracts – defined to include cross-country interest rate swaps, forward foreign exchange contracts, currency futures, currency options purchased and similar instruments. Exchange rate contracts with an original maturity not exceeding 14 calendar days may be excluded. Gold contracts – Gold contracts are treated the same as exchange rate contracts for the purpose of calculating credit risk except that contracts with original maturity not exceeding 14 calendar days are included. Precious metals (other than gold) contracts – defined to include forwards, swaps, purchased options and similar derivative contracts that are based on precious metals (e.g. silver, platinum and palladium); such contracts receive separate treatment. Other commodities contracts – contracts are treated separately; include forwards, swaps, purchased options and similar derivative contracts based on energy, agriculture, base metals (e.g. aluminum, copper and zinc) and any other non-precious metal commodity contracts. Equity contracts – defined to include forwards, swaps, purchased options and similar derivative contracts based on individual equities or on equity indices. (c) Current exposure method. Banks that engage in any of the instruments defined in paragraph (b) above must calculate the credit equivalent amounts by (i) adding the total replacement cost of all contracts having positive value (obtained by "marking-to-market"), thus capturing the current exposure, and then (ii) adding an amount (called the "add-on") for potential future credit exposure calculated on the basis of the total notional principal amount6 of its book, split by residual maturity as follows: 6 In the event that the stated notional amount is leveraged or enhanced by the structure of the transaction, banks must use the effective notional amount when determining potential future exposures to ensure that the add-ons are based on effective rather than apparent notional amounts. 13 Interest Exchange Precious Other Residual Maturity Equities Rate Rate Metals Commodities One year or less 0.0% 1.0% 10.0% 8.0% 10.0% Over one year, but not more than five 0.5% 5.0% 12.0% 10.0% 12.0% years Over five years 1.5% 10.0% 15.0% 12.0% 15.0% Notes to exposure methods: 1. For contracts with multiple exchanges of principal, the conversion factors are to be multiplied by the number of remaining payments in the contract. 2. For contracts structured to settle outstanding exposures after specified payment dates and where the terms are reset such that the market value of the contract is zero on the specified dates, the residual maturity must be set equal to the time until the next reset date. In the case of interest rate contracts with remaining maturities of more than one year and which meet the above criteria, the add-on factor is subject to a floor of 0.5%. 3. Forwards, swaps, purchased options, and similar derivative contracts not covered by any of the columns in this matrix are to be treated as "other commodities". 4. No potential future credit exposure shall be calculated for single currency floating/ floating interest rate swaps; the credit exposure on such contracts shall be evaluated solely on the basis of its mark-to-market value. Once credit equivalent amounts have been calculated using either method above, the amounts shall be multiplied (i.e. weighted) by the weight applicable to the corresponding on-balance-sheet asset category. (d) Bilateral netting. (1) Subject to MMA discretion, banks may net transactions if subject to valid and binding bilateral netting agreements, i.e. novation (an agreement under which an obligation of a bank to deliver a specified amount of currency on a given value date to a counterparty is combined with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations) and (2) banks may also net transactions subject to any legally valid form of bilateral netting not covered in (1) above, including other forms of novation. In both cases (1) and (2), a bank must satisfy the MMA that it has: (i) a netting contract or agreement with the counterparty which creates a single legal obligation, covering all included transactions, such that the bank would have either a claim to receive or obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions in the event a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstances; (ii) written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and administrative authorities would find the bank’s exposure to be such a net amount under: 14 - the law of the jurisdiction in which the counterparty is chartered and, if the foreign branch of a counterparty is involved, then also under the law of the jurisdiction in which the branch is located; - the law that governs the individual transactions; and - the law that governs any contract or agreement necessary to effect the netting. (iii) procedures in place to ensure that the legal characteristics of netting arrangements are kept under review in the light of possible changes in relevant law. Contracts containing walk-away clauses are not eligible for netting when calculating capital requirements. A walk-away clause is a provision that permits a non-defaulting counterparty to make limited payments, or no payment at all even if the defaulter is a net creditor. Credit exposure on bilaterally netted forward transactions must be calculated as the sum of the net mark-to-market replacement costs, if positive, plus an add-on based on the notional underlying principal. The add-on for netted transactions (A ) is equal to the weighted average of the gross Net add-on (A )7 and the gross add-on adjusted by the ratio of net current replacement cost to gross Gross current replacement cost (NGR). This is expressed through the following formula: A = 0.4*A + 0.6*NGR*A Net Gross Gross where NGR = (level of net replacement cost) divided by (level of gross replacement cost for transactions subject to legally enforceable netting agreements8) (e) Risk weighting – Credit equivalent amounts must be weighted according to the category of counterparty in the same way as on-balance sheet claims, including concessionary weighting for exposures backed by eligible guarantees and collateral (e.g. 0% for cash and guarantees or securities issued by sovereign governments and central banks, whether domestic or foreign; 20% for securities issued by multilateral development banks or public sector entities of OECD countries; and 50% for local government guarantees). Cash collateral must be held by the bank and subject to legal right of setoff at all times, and guarantees must be explicit, irrevocable, unconditional and legally enforceable in order to attract the lower weighting factors. In addition, since most counterparties in these markets, particularly for long-term contracts, tend to be first-class names, a 50% weighting may be applied in respect of counterparties which would otherwise attract a 100% weight. 7 AGrossequals the sum of individual add-on amounts (calculated by multiplying the notional principal amount by the appropriate add-on factors set out above) of all transactions subject to legally enforceable netting agreements with one counterparty. 8 MMA must calculate the NGR on an aggregate basis for all transactions subject to legally enforceable netting agreements. Under the aggregate approach, net negative current exposures to others, i.e. for each counterparty the net current exposure used in calculating the NGR is the maximum of the net replacement cost or zero. Note that under the aggregate approach, the NGR is to be applied individually to each legally enforceable netting agreement so that the credit equivalent amount will be assigned to the appropriate counterparty risk weight category. 15 (f) Market risk: derivative contracts – market risk for un-hedged positions of derivative contracts is included in the risk-weighted capital ratio by allocating a 100% weight. For foreign exchange rate contracts, banks must apply this weighting factor to the higher of the sum of all long foreign exchange positions or the sum of all short positions. 8: Capital Restoration Plan – Any bank which fails to comply with the minimum capital requirements set forth in paragraph 1 above, or with any higher minimum ratio that may be required by the MMA under paragraph 5 above, shall submit to the MMA a detailed capital restoration plan. Such plan must state how and when the bank will comply with the required capital ratios and must be submitted within 60 days following written request by the MMA unless a shorter time is specified due to the severity of the capital deficiency. 9: Reporting Requirements – Each bank shall submit returns in respect of capital adequacy in the form and frequency as the MMA may prescribe. PART IV: CORRECTIVE MEASURES 1: Remedial measures and sanctions – If a bank, its administrators, or any other person associated with the bank violates any provision of this regulation, or fails to comply with the instructions and reporting requirements in this regulation, the MMA may take any one or more of the corrective measures or impose any administrative penalties as provided in the Act. Such measures and penalties may include, any or all of the following – (a) Issue a warning to the bank; (b) Enter into an informal agreement with the bank for correcting violations and any unsafe and unsound practices and conditions; (c) Issue an order to the bank requiring it to cease and desist from particular actions and further to take affirmative actions to correct violations and any unsafe and unsound practices and conditions; (d) Require the board of directors to inject additional capital funds; (e) Restrict the scope of activities of the bank including imposing limitations on any foreign exchange activities, granting of credit, making of investments, acceptance of deposits, borrowing of money, or other activities as the MMA may deem appropriate; (f) Suspend access to the credit facilities of the MMA; (g) Require the suspension or removal of any directors or executive officers; (h) Appoint an advisor or a conservator; (i) Impose an administrative penalty on the bank or any of its directors, executive officers or managers; (j) Hold personally liable and seek restitution from, as the law allows, any directors, executive officers or major shareholders of the bank; or (k) Suspend or revoke the bank's license. Questions relating to this regulation should be addressed to the Head of Financial Stability, Maldives Monetary Authority. 16 17 ްއަތިޑަގ ާވްއުނޮފ ްށަރުދ ޭލިހ ްއަތްނުވެގްނެއ ިއާކަތްނުވެންނެދ ިއާކަތްްނާލުޢިއ ެގުޓެޒެގ . 1 . 2 ްށައ 4:00 ްނ 3:30 ުރީވަހ ، ްށައ 1:00 ްނ 12:30 ުރުދްނެމ ުކަހަވުދ ެމްނޮކ - ްށަލަޔިނ ެގުހަވުދ ިތަފްސާރުބ ްނިއަތްއީދާއ ްށައ 4:00 ްނ 3:30 ުރީވަހ ، ްށައ 11:30 ްނ 11:00 ުނުދނެހ - ްސަވުދ ުރުކުހ ްށައ 4:00 ްނ 3:30 ުރީވަހ - ްސަވުދ ުރިހިނޮހ ...yourfriendonair. ްށައ 7:45 ްނ 7:00 ުކައެރ ެމްނޮކ ެގާތުފަހ