Risk Based Capital Adequacy Ratio (RBCA) Rules PDF

TP Trading participant III. Risk Based Capital Adequacy Ratio RBCA Rules Key RBCA Terms Minimum level of capital Required to be maintained by the TP at all times In relation to size and complexity of operations Incorporates different business risks Main objectives...

TP Trading participant III. Risk Based Capital Adequacy Ratio RBCA Rules Key RBCA Terms Minimum level of capital Required to be maintained by the TP at all times In relation to size and complexity of operations Incorporates different business risks Main objectives Manage TPʼs risk appetite level of capital vis-à-vis level of business risk Aid in complying with regulatory requirements Provide common denominator across all TPs. RBCA Rules If equal or more than 120% No problem If less than 120% but more Notify SEC in writing within 24 hours and daily thereafter than 110% 10 days to reduce total risk exposure Less than 110% TP to cease operations (to be put under temporary suspension) Notify SEC and CMIC regarding the breach Reportorial Requirements Bi-monthly submission of RBCA reports with SEC and CMIC (through iPSE Covered Period Date of Submission 1st to 15th day of the month 20th day of the same month 16th to 31st day of the month 5th day of the succeeding month RBCA Formula A Net Liquid Capital NLC. B Total Risk Capital Requirement TRCR A Net Liquid Capital NLC In laymanʼs terms, liquid assets less liquid liabilities ○ Excludes mostly non-current FS items and special deductions ○ Actual NLC should be more than the Minimum Required NLC ○ Required NLC = higher between 5 Million or 5% of Aggregate Indebtedness* In case of Breach: TP to cease operations; notify CMIC and SEC immediately Equity per books + Subordinated Liabilities - Deposit for Future Stock Subscription No Application with SEC - Deferred Income Tax Asset - Minority Interest. Equity Eligible for NLC - Contingent Liability - Guarantees or indemnities - Negative Exposure SCCP - Ineligible Assets (e.g. Fixed Assets, net of accumulated depreciation excluding those used as collateral) Net Liquid Capital Aggregate Indebtedness TPʼs total liabilities less non-cash liabilities, secured loans, and equity-converted loans 1,700% or less of NLC No problem Page 15 of 45 TP Trading participant More than 1,700% but less Notify SEC in writing within 24 hours and daily thereafter than 2,000% of NLC 10 days to reduce total risk exposure More than 2,000% of NLC TP to cease operations (to be put under temporary suspension) Notify SEC and CMIC regarding the breach B Total Risk Capital Requirement Business risks affecting a Trading Participant Operational: ORR = 20% of average of three-year gross revenues based on audited FS Position: PRR = Market value x Position Risk Factor Counterparty: CRR = Net Counterparty Exposure x Counterparty weight x Credit Risk Factor Large exposure B.1 Operational Risk Requirement ORR Operational risk can be defined as the risk of monetary losses resulting from inadequate or failed internal processes, people, and systems or from external events. ORR = 20% of average of three-year gross revenues based on audited FS Net of final tax, if applicable Losses not netted against revenues ORR must be less than Core Equity at all times ○ Core Equity = shareholders funds and other capital reserves In case of breach, TP must submit a capital build-up plan realizable within 90 days B.2 Position Risk Requirement PRR Market risk is the risk that the value of an investment will decrease due to moves in market factors. ○ Hedge Fund Consistency Index Sources of PRR ○ Held-for-trading securities of the TP such as: (a) Within the PSE Index (b) Outside the PSE Index (c) Equities not listed but marketable ○ Debt securities such as bonds and fixed income securities ○ Foreign currency accounts Type of Instrument Valuation Debt or Equities listed in the Exchange End-of-day closing prices or Bid price in the absence of closing prices Equities not listed but marketable Zero or last traded price, whichever is determinable Debt securities not listed Face value Foreign currency accounts End-of-day exchange rates from BSP or PDEx Haircut or Position Risk: Artificial reduction in the value of an asset to account for possible decline in the market value of such asset that can be realized through sale or continuing use of the asset. Equities Equities WITHIN PSEi 25% of total market value Equities OUTSIDE PSEi 35% of total market value Equities not listed but marketable 100% of total market value ROP Bonds or Treasury Bills Up to 1 year 1.2% of face value 1 to 5 years 3.9% of face value 5 to 10 years 5.3% of face value 10 to 20 years 7.6% of face value Page 16 of 45 TP Trading participant > 20 years 10% of face value Other Corporate Bonds Regardless of term 100% of face value Foreign Currency Accounts Based on translated amount 8% of translated amount PRR = Market value x Position Risk Factor Netting of long and short positions are allowed provided it is the same security Short positions generally are not subject to PRR B.3 Counterparty Risk Requirement CRR Credit risk arises from the potential that a borrower or counterparty will fail to perform on an obligation. CRR = Net Counterparty Exposure x Counterparty weight x Credit Risk Factor Customer receivable - Collateral, net of haircut - Allowance for doubtful accounts = Excess of Customer Receivable Provision for Doubtful Accounts CRR for Margin Accounts Margin Account Receivable - Collateral, net of haircut = Counterparty exposure x Credit risk factor 100% B.4 Large Exposure Risk Requirement LERR Risk of investing a proportionally large amount on: ○ (a) A particular counterparty ○ (b) A single issuer of debt security ○ (c) A single issuer of equity security or issuer group LERR for Single Client = Net counterparty exposure - 10% of Core Equity Based on net counterparty exposure Net counterparty exposure exceeds 10% of Core Equity Maximum exposure is 30% of Core Equity In case of breach, TP to report to SEC and CMIC all clients to which it is largely exposed to. LERR for Single Debt = Face value or market value of debt security - 10% of Core Equity) x Applicable Issuer position risk factor Maximum exposure is 30% of Core Equity In case of breach, TP has to report to SEC and CMIC all issuers of debt securities to which it is largely exposed to. LERR for Single Equity Higher of: Issuer or Issuer Group Market value of equity security - 10% of Core Equity x applicable position risk factor AND Market value of equity security - 5% of total market capitalization of listed issue x applicable position risk factor Maximum exposure is 250% of Core Equity In case of breach, TP to report to SEC and CMIC all issuers of equity securities to which it is largely exposed to. Page 17 of 45 TP Trading participant Unimpaired Paid-Up Capital UPC Par value or stated value of capital stock Payment made on subscribed capital stock Capital stock to be distributed arising from stock dividends Additional paid-in capital and donated capital DEFICIT Negative Retained Earnings) Appropriated Retained Earnings Based on the latest audited net income Percentage of appropriation is based on the UPC level of the TP Shall not be available for declaration of dividends If RE beginning balance is a deficit: ○ Net income during the year, if any, shall be applied first on the deficit ○ Excess net income shall then be appropriated Special Reserve Bank Account For the “Exclusive Benefit of Customersˮ Should be covered by a Reserve Bank Agreement Should be maintained in cash accounts or qualified securities Reserve Requirement: Computations may be made weekly or monthly, as deemed applicable ○ ○ However, this does not preclude TPs who are qualified to compute their reserve requirement on a monthly basis to compute on a weekly basis. Additional deposits should be made not later than one 1 hour following the opening of the second banking day Withdrawals from the account should be duly supported by prior computations Page 18 of 45