FIN RMB Procedures 20120718_Final

Bank of China International Limited Bank of China International Limited Finance and Treasury Division Procedures for RMB Business June 2012 Document Sign-off Sheet Document Details： Title Bank of China International Limited - Procedures for RMB Business Document No. Version no. 2 Owner Finance and Treasury Division (“F&T”) Effective Date July 18, 2012 (approved by BOCIL Executive Committee) Prepared by: Thomas Lee/ Suresh Chugani Finance & Treasury Division Signature Date Reviewed by: Brian Choi Head of Risk Management Division Signature Date Reviewed by: Stevenson Chan Head of Business Operations Division Signature Date Reviewed by: Calvin Wong Head of Legal & Compliance Division Signature Date Reviewed by: Albert Yuen Head of Product Marketing Department Equity Sales & Research Division Signature Date Reviewed by: Lawrence Wong Head of Sales Private Banking Signature Date Reviewed by: Wendy Doong Chief Operating Officer Private Banking Signature Date Reviewed by: Herbert Ang Head of Finance - Finance & Treasury Division Signature Date Approved by: Jacky Tsang Head of Treasury - Finance & Treasury Division Signature Date Document Details Document Title : Bank of China International Limited – Procedures for RMB Business Department : Finance & Treasury Version No. : Version 2 Effective Date : July 18, 2012 (approved by BOCIL Executive Committee) Version History Version No. Prepared by : Approved By : Effective Date : Version 1 Thomas Lee & Suresh Chugani Jacky Tsang Nov 8, 2011 Version 2 Thomas Lee & Suresh Chugani Jacky Tsang Jun 20, 2012 Contents No. Topic Pages 1. Background 6 2. RMB as Eligible currency of BOCIL 6 3. Scope of Services 6 4. HKMA’s requirements and internal Controls 7-10 4.1 HKMA’s Requirements 7 4.2 RMB Risk Control parameters 7 4.3 RMB FX, Deposits and Loans 7-8 4.4 RMB Net Open Position Limit (NOP) 8-9 4.5 RMB Risk Management Limit 9 4.6 RMB Liquidity Ratio 9-10 5. Notification procedures for breach on RMB HKMA requirements/Internal limits 10-11 5.1 Breach of HKMA requirements 10-11 5.2 Breach of Internal limits 11 6. New RMB Product Procedures 12 7. Opening of RMB bank account for BOCIL 12 8. RMB intra-day and end of day control workflows 13-14 8.1 Intra-day control procedures 13 8.1.1 F&T’s Treasury Unit 13 8.1.2 F&T’s Treasury Control Unit 13 8.1.3 Risk Management Division (RMD) 13 8.2 End of day control procedures 14 8.2.1 F&T’s Treasury Unit 14 8.2.2 F&T’s Treasury Control Unit 14 8.2.3 Risk Management Division (RMD) 14 9. RMB Risk Reporting 15 10. IT infrastructure and system support 15-16 11. Exhibits 17-18 1 FX Board Rates 17 2 Daily Deposit Board Rates 18 12. Appendixes 19-41 I. HKMA Circulars on RMB Business 19-30 II. HKMA Circulars on RMB Net Open Position 31-36 III. HKMA Circular on RMB Risk Management Limit 37-38 IV HKMA Circular on RMB Liquidity Ratio 39-41 1. Background On 19 July 2010, HKMA issued a circular in relation to the expansion in scope of RMB business and the increased flexibility in the provision of RMB-denominated financial services. The expansion in scope of business has established an offshore RMB inter-bank market in Hong Kong. On 1 Feb 2011, Bank of China International Limited (“BOCIL”) officially commenced the RMB-denominated financial services. The purpose of this procedure is to set out a proper guidance for treasury activities regarding the RMB business. 2. RMB as Eligible Currency of BOCIL Finance & Treasury Division (“F&T”) has obtained approvals from the Asset Liability Management Committee (“ALCO”) and from the Risk Control Committee (“RCC”) to include RMB as an eligible currency for Bank of China International Limited (“BOCIL”) on 30 July 2010 and 6 September 2010, respectively. 3. Scope of Services F&T is responsible for the treasury functions of BOCIL. The scope includes FX conversions, loans and deposits arising from the offshore RMB business. The duties are segregated as below: - F&T’s Treasury Unit is responsible to manage the FX, interest rate, and liquidity exposures, including deal executions. - F&T’s Treasury Control Unit is responsible to monitor the performance and overall RMB profile to ensure the exposure is within regulatory and internal limits. - F&T’s Financial Accounting Unit is responsible to prepare, compute and submit the relevant RMB business activities information and returns in compliance with Hong Kong Monetary Authority (“HKMA”) requirements according to BOCIL accounting ledger records. 4. HKMA’s Requirements on RMB business and Internal Controls 4.1 HKMA’s Requirements F&T has formulated appropriate business rules and procedures to follow through HKMA’s requirements and guidance, including their subsequent changes and modifications. Related circulars issued by HKMA for RMB business are attached under Appendix I. 4.2 RMB Risk Control Parameters The following table depicts the risk control parameters for the RMB business: Risk Type Limit Type Limits Foreign Exchange Internal Net FX Open Position Internal : USD4mm RMB Net Open Position HKMA : 20% maximum ratio (subject to De minimus exemption of HKD100Mio) Liquidity Overall Liquidity Ratio (RMB liquidity ratio is one of the component) Internal : 36% daily minimum; 42% monthly minimum average; HKMA : 30% daily minimum; 35% monthly minimum average Statutory : 25% minimum in each calendar month. RMB Liquidity Ratio Internal : 36% daily minimum; 42% monthly minimum average; Statutory : 25% minimum in each calendar month. 4.3 RMB FX, Deposits and Loans F&T is aware that the offshore RMB inter-bank market is at an early stage of development, therefore the availability of loans will be subject to the internal resources and market liquidity. F&T may apply different spreads when quoting internal RMB loans and deposits rates, taking into considerations the terms of transactions and the prevailing RMB money-market situation. In general, BOCIL does not engage in RMB cross-border transactions. Treasury Unit will seek to square its open positions with other Participating Banks in the offshore RMB inter-bank market. Should cross-border trade-related conversion services arise in the future, F&T will strictly adhere to the HKMA’s rules and guidance on handling of RMB cross-border, trade-related RMB trades. RMB FX conversion rates and deposit rates are included in the Daily FX Board Rates and the Daily Deposit Board Rates. Please refer to Exhibit 1 and 2 for samples of the FX Board Rates and Daily Deposit Board Rates. 4.4 RMB Net Open Position Limit (NOP) In addition to managing the FX positions within the internal limits, F&T Treasury unit/Treasury Control unit manages and monitors the Bank’s RMB net open position in accordance with the requirements of the HKMA. With reference to the HKMA requirements on RMB net open position (NOP), all AIs (i.e. not only Participating AIs) should restrict their RMB net open positions (whether net long or net short) to 20% of their RMB assets or liabilities, whichever is larger. RMB net open position is the difference between on-balance sheet RMB assets and liabilities, but excluding any RMB structural position (e.g. investment in Mainland subsidiary banks – referring to “Adjustment to NOP” below). The formula for calculating RMB net open positions is stated below: Absolute amount of (RMB Assets – RMB Liabilities*) RMB net open position (%) = ____________________________________________ X 100% Maximum (RMB Assets or RMB Liabilities**) *If absolute amount of (RMB Assets – RMB Liabilities) > RMB100 Millions, then 20% limit applies. **The larger amount of RMB assets or RMB liabilities for calculation Furthermore, according to the HKMA refinements to the requirement on RMB net open position (NOP) limit (De minimus exemption) (circular published on 22 May 2012), the 20% standard RMB NOP limit applicable to AIs is replaced by a mechanism whereby AIs are allowed to set their own internal RMB NOP in consultation with the HKMA. AIs that intend to set their own RMB NOP limit above the existing 20% must inform and demonstrate to the HKMA that the proposed NOP limit is prudent and appropriate for the scale and nature of their business. Subsequent increase to the agreed limit should also be discussed with and endorsed by the HKMA. BOCIL currently maintains the 20% limit for the RMB NOP and subject to subsequent change depending upon the upcoming requirements of BOCIL RMB business development. HKMA has increased the RMB NOP de minimis exemption from the RMB50 million to RMB100 million according to the circular published on 22 May 2012. Adjustment to NOP: Referring to the HKMA circular published on 17 January, 2012, RMB net open position is the difference between on-balance sheet RMB assets and liabilities, but excluding any RMB structural position (e.g. investment in Mainland subsidiary banks). The following adjustments can still be applied if the net open position exceeds the required limit. 1. An AI can exclude its actual amount of investments under the Mainland Qualified Foreign Institutional Investors regime and position arising from RMB bond market-making activities (actual position in the RMB bonds concerned or 15% of the issue size of such bonds if no position maintained). 2. The excess can also be offset against any net RMB deliverable forward position in the opposite direction excluding that portion relating to RMB bond market-making activities that has already been taken into account as set out in the preceding point. The detailed HKMA requirements for governing and calculating RMB net open position are laid out in Appendix II 4.5 RMB Risk Management Limit With reference to the HKMA circular published on 14 June 2012, HKMA has decided to replace the RMB Risk Management limit with a RMB liquidity ratio for monitoring AIs’ RMB liquidity position. Therefore, this RMB Risk Management Limit is no longer applied. 4.6 RMB Liquidity Ratio With effect from 9 February, 2012, the inclusion of RMB liquefiable assets in the calculation of the statutory liquidity ratio is subject to the following conditions: (A) AIs that have RMB qualifying liabilities may include RMB liquefiable assets held by them in the calculation of the statutory liquidity ratio to the extent that – (i) if their non-RMB liquidity ratio is not greater than 30%, their RMB liquidity ratio should not be greater than their non-RMB liquidity ratio; or (ii) if their non-RMB liquidity ratio is greater than 30%, their RMB liquidity ratio should not be greater than (a) 30% plus the number of percentage points by which their non-RMB liquidity ratio exceeds 30% multiplied by a factor of 5; and (b) 150%, whichever is lower. (B) AIs that do not have RMB qualifying liabilities may include RMB liquefiable assets held by them in the calculation of the statutory liquidity ratio on condition that – (i) their non-RMB liquidity ratio exceeds 30%; and (ii) the amount of RMB liquefiable assets to be included in the calculation should not be greater than 5% of their total non-RMB qualifying liabilities. The formula for calculating RMB Liquidity Ratio is stated below: RMB Liquidity Ratio (%) = Eligible RMB Liquefiable Assets within one month X 100% RMB Qualifying Liabilities within one month Besides, according to the HKMA circular published on 14 June, 2012, AIs are required to maintain a RMB liquidity ratio at no less than 25%, computed on the same basis as the statutory liquidity ratio. As a replacement of RMB Risk Management Limit to monitor the RMB liquidity, BOCIL also sets internal limits on daily RMB liquidity ratio at a minimum of 36% and monthly average not lower than 42% respectively. The detailed HKMA requirements for governing and calculating the RMB, non RMB and overall Liquidity Ratios and are laid out in Appendix IV. 5. Notification Procedures for Breach of RMB HKMA Requirements/Internal limits 5.1 In case of breach of the HKMA required limits for the RMB business, the following procedures will be stipulated: Breach of HKMA RMB Liquidity Ratio or RMB Net Open Position Limit: ​ In case of breaching the HKMA required limits on RMB Liquidity Ratio/NOP, TC Unit shall inform Head of Treasury to seek authorization for restoration actions within the day of occurrence or finding of breach whichever applicable. ​ TC Unit shall seek confirmation of the limit breach from Finance Team according to the accounting ledger’s reported figures within one business day after the day of occurrence or finding of breach whichever applicable. ​ Head of Treasury will report to ALCO to authorize appropriate restoration action upon confirmation of the breach with Finance Team. ​ Treasury unit shall undertake immediate restoration actions upon ALCO approval. ​ Treasury Unit/TC Unit shall inform the compliance officer and Head of Compliance for further actions upon confirmation of the breach with Finance Team. ​ Legal & Compliance Division shall inform HKMA case officer upon confirmation of the limit breach with Finance and Treasury in accordance with the existing Compliance procedures. ​ Treasury Unit/ TC Unit shall report to ALCO for result of the restoration actions being undertaken and any further remedy action required. ​ Treasury Unit/TC Unit shall prepare an incident report to document the event that triggered the limit breach and the appropriate restoration action. The incident should be reported in the current monthly ALCO report and the next coming ALCO meeting. ​ TC Unit should report the breach of HKMA limit incident to Private Banking Operational Risk Committee (ORC) via the share point web portal before the monthly cut-off time announced by ORC. ​ TC Unit should report the breach of HKMA limit incident to RMD within one working day upon point of discovery through instant communication channels (e.g. e-mail or phone) and record the details of event in the Operational Risk Event Reporting system following BOCI Group Operational Risk Event Reporting Procedure Manual. 5.2 In case of the breach of BOCIL’s internal limits for the RMB business, the following procedures will be stipulated: Breach of internal limits [including the internal RMB Net FX Open Position Limit, and internal limit of RMB Liquidity Ratio]: ​ In case of internal limit violation, TC Unit shall inform Head of Treasury to seek authorization for restoration within the day of occurrence or finding of limit violation whichever applicable. ​ TC Unit shall cross-check the status of internal limit violation with Finance Team according to the accounting ledger’s reported figures within one business day after the day of occurrence or finding of limit violation whichever applicable. ​ Depending on the reasons and materiality of breaches, Head of Treasury will report to ALCO to authorize appropriate restoration action. ​ Treasury Unit shall undertake the restoration action immediately upon management approval. ​ Treasury Unit/ TC Unit shall report to Head of Treasury for result of the restoration actions being undertaken and any further remedy action required. ​ Treasury Unit/TC Unit shall prepare an incident report to document the event that triggered the internal limit breach and the appropriate restoration action undertaken. The internal limit violation event should be reported to ALCO via the current month ALCO reporting / quarterly ALCO meeting. 6. New RMB Product Procedures ​ For new RMB product to be conducted by BOCIL, Product Marketing will circulate a New Product Approval Form to all corresponding departments. ​ F&T’s Treasury Unit/Treasury Control Unit shall study and analyze the risks pertaining to foreign exchange, interest rate and liquidity risks that could potentially be associated with the new RMB product. ​ Treasury Unit/Treasury control shall develop effective internal control and workflow model for the new RMB product. ​ Finance Team shall study and analyze the potential impact of the new RMB product on the relevant regulatory requirements from an accounting prospective. ​ Finance Team shall develop effective internal control and workflow model to cater for the new RMB product in compliance with the standard accounting practice. ​ Treasury Unit/Treasury Control Unit/Finance Team shall participate in the user acceptance test of the new RMB products and raise system or workflow recommendations. ​ Treasury Unit/Treasury Control Unit/Finance Team shall sign-off the New Product Approval Form after the acceptance of the UAT test. 7. Opening of RMB bank account for BOCIL ​ For new RMB bank accounts initiated by Treasury Unit or by other business units (in name of BOCIL) with the clearing bank or other participating AIs, prior approval from Head of Treasury is required. ​ Upon obtaining an approval from Head of Treasury, Treasury Unit shall send a written request via email to Business Operations for the new account set-up, Treasury Control Unit and Finance Team shall also be notified. ​ Upon completion of the account opening process, Business Operations shall inform Treasury Unit, Treasury Control Unit and Finance Team on the effective date of the bank account via email. ​ Finance Team shall update the corresponding ledger account posting, records and reports. ​ Treasury Control Team shall update the control reports to reflect the new bank account activities. 8. RMB intra-day and end of day control workflows 8.1 Intra-day control procedures 8.1.1 F&T’s Treasury Unit: ​ Shall ensure the RMB FX Board Rates and Deposit Board Rates and other RMB reference rates to business units are updated and properly published. ​ Shall ensure all RMB transactions are promptly executed and properly captured in T24 and interfaced to IT2. ​ Shall frequently monitor the change of BOCIL RMB assets and liabilities in particular for the impact of RMB assets and liabilities falling into or outside the one month horizon to the change in RMB Liquidity Ratio. (such as new or withdrawal of RMB deposit, RMB inter-bank placement, etc.) ​ Shall take into account of the impact of BOCIL RMB FX deals executed or settled during the day to the RMB bank balances, RMB Net Open Position and internal RMB FX net open position. ​ Shall alert Treasury Control Unit for any abnormal or significant RMB transaction to be executed during the day. 8.1.2 F&T’s Treasury Control Unit: ​ Shall project the RMB Liquidity Ratio based on the T-1 (Trade date minus one business day) BOCIL RMB bank balances. ​ TC Unit shall base on the confirmed RMB deals in IT2 executed by Treasury Unit and calculate BOCIL intra-day RMB Liquidity Ratio. ​ TC Unit shall perform Intra-day RMB Liquidity Ratio projection at 3:30PM based on the snap shot image of IT2 at respective time slot. ​ TC shall circulate the daily intra-day RMB Liquidity Ratio projection result to Treasury Unit and related parties of Finance Team and Risk Management Division. (RMD) ​ In case of abnormal situation identified where the projected RMB Liquidity Ratio is below the internal limit or HKMA requirement, TC Unit should investigate the underlying reason and inform Head of Treasury for approval of restoration action if required. (To follow 5.1 and 5.2 procedures stated above) ​ TC shall keep record for the intra-day Liquidity Ratio results and the daily reported Liquidity Ratio should be based on the end of day finalized image of IT2. 8.1.3 Risk Management Division (RMD): ​ RMD shall perform an independent checking on intraday RMB Liquidity ratio projected by Treasury Control Unit against the HKMA required limit and internal required limit. 8.2 End of day control procedures 8.2.1 F&T’s Treasury Unit: ​ Shall ensure the end of day RMB Liquidity Ratio for BOCIL is controlled within internal and HKMA limits. In case of limit exceed, Treasury Unit shall follow the procedures stated in 5.1 & 5.2. ​ Shall ensure the end of day HKMA required RMB Net Open Position (NOP) for BOCIL is controlled within HKMA limit. In case of limit exceed, Treasury Unit shall follow the procedures stated in 5.1. ​ Shall ensure the end of day RMB FX net open