Circular No. 40/2018/TT-NHNN Amending and supplementing certain Articles of Circular No. 13/2018/TT-NHNN dated May 18, 2018, issued by the Governor of the State Bank of Vietnam on the internal control system of commercial banks and foreign bank branches

CIRCULAR

Amending and supplementing certain articles of Circular No. 13/2018/TT-NHNN dated May 18, 2018 issued by the Governor of the State Bank of Vietnam

concerning internal control systems of commercial banks,

On the basis of Decree No. 16/2017/NĐ-CP dated February 17, 2017 of the Government stipulating functions, tasks, powers, and organizational structure of the State Bank of Vietnam

foreign bank branches

Pursuant to the Law on the State Bank of Vietnam dated June 16, 2010;

Pursuant to the Law on Credit Institutions dated June 16, 2010 and the Law Amending and Supplementing Certain Articles of the Law on Credit Institutions dated November 20, 2017;

The Governor of the State Bank of Vietnam issues this Circular amending and supplementing certain articles of Circular No. 13/2018/TT-NHNN dated May 18, 2018 of the Governor of the State Bank of Vietnam on internal control systems of commercial banks and foreign bank branches.;

At the proposal of the Director of Banking Inspection and Supervision;

Article 1. Amending and supplementing certain articles of Circular No. 13/2018/TT-NHNN dated May 18, 2018 of the Governor of the State Bank of Vietnam on internal control systems of commercial banks and foreign bank branches (hereinafter referred to as Circular No. 13/2018/TT-NHNN)

1. Supplementing Clause 23, 24, 25, 26, 27, 28, 29, 30, 31 and 32 to Article 3 as follows:

a) Credit risk is the risk arising from a customer not performing or being unable to perform part or all of their debt repayment obligations under a contract or agreement with a commercial bank or foreign bank branch, except for cases provided for in point b of this clause. In which, the customer (including credit organizations, foreign bank branches) has a relationship with a commercial bank or foreign bank branch in receiving credit (including receiving credit through agency), receiving deposits, issuing corporate bonds.

"23. Credit risk including:

b) Counterparty credit risk is the risk arising from a counterparty not performing or being unable to perform part or all of their payment obligations prior to or at maturity of proprietary transactions; repo and reverse repo transactions; derivative product transactions for risk management; foreign currency and financial asset transactions to serve customer and counterparty needs. In which, the counterparty (including credit organizations, foreign bank branches) engages in proprietary transactions; repo and reverse repo transactions; derivative product transactions for risk management; foreign currency and financial asset transactions to serve customer and counterparty needs with a commercial bank or foreign bank branch.

Market risk is the risk arising from adverse movements in interest rates, exchange rates, gold prices, stock prices, and commodity prices in the market. Market risk includes:

24. Market risk a) Interest rate risk is the risk arising from adverse movements in interest rates in the market affecting the value of securities, interest-bearing financial instruments, and interest rate derivative products on the trading books of commercial banks and foreign bank branches;

b) Foreign exchange risk is the risk arising from adverse movements in exchange rates and gold prices in the market when commercial banks and foreign bank branches have foreign currency positions and gold positions;

c) Equity price risk is the risk arising from adverse movements in equity prices in the market affecting the value of equities and equity derivative products on the trading books of commercial banks and foreign bank branches;

d) Commodity price risk is the risk arising from adverse movements in commodity prices in the market affecting the value of commodity derivative products and spot transactions subject to commodity price risk conducted by commercial banks and foreign bank branches.

Interest rate risk

25. on the bank's trading book is the risk arising from adverse movements in interest rates affecting income, asset value, liability value, and off-balance sheet commitment value of commercial banks and foreign bank branches arising from:a) Differences in the timing of setting new interest rates or re-pricing periods;

b) Changes in the relationship between interest rates of different financial instruments with the same maturity date;

c) Changes in the relationship between interest rates of different tenors;

d) Impact from interest rate option products and products with interest rate option factors.

Operational risk is the risk arising from incomplete or erroneous internal procedures, human factors, system errors, or external factors causing financial losses or non-financial negative impacts on commercial banks and foreign bank branches (including legal risk). Operational risk does not include:

26. Operational risk a) Reputation risk is the risk arising from negative reactions from customers, counterparties, shareholders, investors, or the public regarding the reputation of commercial banks and foreign bank branches;

b) Strategic risk is the risk arising from commercial banks and foreign bank branches having or not having timely response strategies or policies to changes in the business environment, reducing the ability to achieve business strategies and profit targets of commercial banks and foreign bank branches.

Trading book

27. is a record of the status of: a) Proprietary transactions (excluding transactions specified in point b of Clause 28 of this Article);

b) Transactions to execute issuance guarantee services for financial instruments;

c) Derivative product transactions for risk management of proprietary transactions of commercial banks and foreign bank branches;

d) Foreign currency and financial asset transactions to serve customer and counterparty needs and transactions corresponding to these transactions.

Bank's trading book

28. is a record of the status of: a) Repo and reverse repo transactions;

b) Derivative product transactions for risk management of balance sheet items (including off-balance sheet items) of commercial banks and foreign bank branches, excluding transactions classified into the trading book of commercial banks and foreign bank branches as specified in point c of Clause 27 of this Article;

c) Financial asset transactions for liquidity reserves;

d) Other transactions not included in the trading book of commercial banks and foreign bank branches.

06 business activities

29. Six groups of business activities including interest income generating activities and similar income; activities generating interest expenses and similar expenses; service activities; foreign exchange trading activities; securities trading activities for business purposes and investment securities; other activities.

30. Proprietary Trading is a transaction involving the purchase, sale, or exchange conducted by commercial banks, branches of foreign banks, and subsidiaries of commercial banks in accordance with the provisions of the law for the purpose of buying, selling, or exchanging within a period of less than one year to earn profits from market price differences for commercial banks, branches of foreign banks on financial instruments, including:

a) Financial instruments in the money market;

b) Currencies (including gold);

c) Securities in the capital market;

d) Derivative products;

e) Other financial instruments traded on formal markets.

31. Repo Transaction is a transaction in which one party sells and transfers ownership of financial assets to another party, while simultaneously committing to repurchase and reclaim ownership of those financial assets at a predetermined price after a specified period.

32. Reverse Repo Transaction is a transaction in which one party buys and receives the transfer of ownership of financial assets from another party, while simultaneously committing to resell and transfer ownership of those financial assets at a predetermined price after a specified period, including term purchases of financial assets under the State Bank's regulations on discounting negotiable instruments and other securities.

2. Clause 2 of Article 21 shall be amended and supplemented as follows:

"2. For commercial banks with subsidiaries, the commercial bank directs and supervises through representatives of its equity holdings to ensure that risk management of subsidiaries is consistent with the commercial bank’s risk management policy and ensures that the commercial bank maintains the minimum consolidated capital adequacy ratio as prescribed by the State Bank."

3. Point b of Clause 1 of Article 38 shall be amended and supplemented as follows:

"b) Market risk management principles under normal conditions, conditions of strong price fluctuations in securities, goods prices, exchange rates, gold prices, and interest rates according to internal regulations of commercial banks, branches of foreign banks;"

4. Point b of Clause 2 of Article 38 shall be amended and supplemented as follows:

"b) Foreign exchange risk limits: Limits on total positive foreign currency positions, total negative foreign currency positions, gold positions; transaction officer limits; loss cut-off limits;"

5. Clause 1 of Article 60 shall be amended and supplemented as follows:

"1. Commercial banks, branches of foreign banks establish adverse scenario projections in accordance with point a of Clause 2 of this Circular, with at least assumptions about interest rates, exchange rates, gold prices, credit quality, and methods to calculate the impact of these assumptions on the minimum capital adequacy ratio to ensure:

a) For interest rate assumptions: Calculating the impact on the capital adequacy ratio based on corresponding changes in total assets calculated according to operational risk, market risk (interest rate risk), and bank book interest rate risk according to interest rate assumptions;

b) For exchange rate and gold price assumptions: Calculating the impact on the capital adequacy ratio based on corresponding changes in total assets calculated according to operational risk, market risk (foreign exchange risk) according to exchange rate and gold price assumptions;

c) For credit quality assumptions: Calculating the impact on the capital adequacy ratio based on corresponding changes in total assets calculated according to operational risk and credit risk according to credit quality assumptions."

6. Point a(iv) of Clause 1 of Article 64 shall be amended and supplemented as follows:

"(iv) Criteria for establishing salaries and other benefits for positions within the internal audit department must be separate from business results and operational outcomes of first-line and second-line protection units;"

Article 2.

1. Repeal point c of Clause 2 of Article 38 of Circular No. 13/2018/TT-NHNN.

2. Remove the phrase "as prescribed by the State Bank regarding the minimum capital adequacy ratio for commercial banks, branches of foreign banks," "as prescribed by the State Bank regarding the minimum capital adequacy ratio of banks, branches of foreign banks," "as prescribed by the State Bank regarding the capital ratio for banks, branches of foreign banks," and "as prescribed by the State Bank regarding the minimum capital adequacy ratio for banks, branches of foreign banks" at point a of Clause 13 of Article 3, point d of Clause 1 of Article 39, point a of Clause 2 of Article 41, Clause 3 of Article 42, and point c of Clause 2 of Article 47 of Circular No. 13/2018/TT-NHNN.

Article 3. Implementation Organization

The Director of the Office, the Head of Banking Inspection and Supervision, Heads of Units under the State Bank; Governors of the State Bank Branches in provinces and centrally-administered cities; Chairmen of the Board of Directors, Chairmen of the Board of Members, and General Directors (Directors) of commercial banks, branches of foreign banks are responsible for organizing the implementation of this Circular.

Article 4. Effective date

This Circular takes effect from February 12, 2019./.