Unofficial Translation* September 12, B.E.2543To: Managers All commercial banks No.BOT.FPG.(12)C.2346/2543 Re: Circulation of the Notification of the Bank of Thailand Re: Permission for commercial banks to engage into securities borrowing and lending and short selling businesses In accordance with the Bank of Thailand's circulation letter No. BOT. X. (C) 2115/2542 Re: Criterial for Granting. Permission to Commercial Banks to Operate the Securities Borrowing and Lending Business as an Agent deated 1st June B.E.2542, the Bank of Thailand is to circulate the Notification of the Bank of Thailand Re: Permission for ommercial banks to engage into securities borrowing and lending and short selling businesses dated 6th September B.E.2543, which was published in the Government Gazette, General Issue, Vol.117, Special Part 92 Ngor, dated 11th September B.E.2543, in order to promote the effective development of debt securities market and to enhance the scope of operation and liquidity management of financial institutions. The Notificationallows commercial banks to engage into other securities borrowing and lending businesses in addition to what has been permitted. The essence of this Notification covers the general permission for qualified commercial banks, with readiness to operate those businesses as well as having efficient internal control system, risk management system and sound operational procedure, to engage into securities borrowing and lending and short selling businesses. A commercial bank shall submit its business plan, showing its readiness, to the Bank of Thailand at least 30 days prior to the commencement of those activities, and a business plan shall at least comprise busness policies and procedures, policies on the review of counter-party's credit orthiness and credit line analysis, and policies on risk management and internal control system. If there is no objection from the Bank of Thailand within 30 days, such commercial bank can proceed with those business operations. In the case that a license from the Office of Securities and Exchange commission is needed, a commercial bank shall inform the Bank of Thailand of the permission granted by the Office of Securities and Exchange commission prior to the commencement of those activities. A commercial bank is permitted to engage into the following businesses. 1. Securities borrowing and lending business as an agent or broker, both for debt and equity instruments, of as a principal, but only for debt instruments (Article 2(1)and 2(2) of the attached Notification of the Bank of Thailand) 2. Securities short selling, only for debt instruments (Article 2(4)of the attached Notification of the Bank of Thailand) 3. Securities lending to counter-parties who have licenses to operate the securities borrowing and lending business under the Securities and Exchange Act or to Thailand Securities Depository Company Limited if a commercial bank does not wish to engage into the securities borrowing and lending business as a principal or an agent or broker (Article 2(3)of the attached Notification of the Bank of Thailand) The Bank of Thailand does not require commercial banks to call for collaterals, but they can do so based on their own judgment and appropriateness as their engagements into those businesses involve credit risk (settlement risk) and market risk from taking positions in debt securities, as well as operational risk from business operations, collateral calling, collateral return, and collateral possession taking when counter3parties default. In the case that a commercial bank calls for the following collaterals from its securities borrowers: (a) cash; (b) Thai government securities; (c) debentures, bonds or debt instruments guaranteed by the Ministry of Finance in respect of both the repayment of principals and the payment of interest thereon; (d) shares, debentures or debt instruments essued by the Bank for Agriculture and Agricultural Cooperatives or the Industrial Finance Corporation of Thailand; (e) debentures or bonds issued by any state orgenization or state enterprise established under any specific law; (f) rights represented by written instruments of deposits in a commercial Bank; a commercial bank is allowed by the Bank of Thailand to deduct the value of those collaterals from the calculation of the amount of money or value of securities lent plus the amount of money in which a commercial bank grants credits or invests in the business of or undertakes contigent liabination, which in total shall not exceed 25 percent of its 1st tier capital funds. In addition, by virtue of the Notification of the Bank of Thailand Re: Permission for commercial banks to engage into securities borrowing and lending and short selling businesses dated 6th September B.E.2543, the Bank of Thailand hereby issues the following rules. 1. In engaging into the securities borrowing and lending business as a principal, only for debt instument, and securities lending transaction, only for debt instruments, either to counter-parties who have licenses to operate the securities borrowing and lending business under the Securities and Exchange Act or to Thailand Securities Depository Company Limited in accordance with Article 2 (2)and(3) of the Notification of the Bank of Thailand Re: Permission for commercial banks to engage into securities borrowing and lending and short selling businesses dated 6th September B.E.2543, a commercial bank shll comply to the following rules. 1.1 Business policies and procedures A commercial bank shall establish written business policies and procedures, which shall be approved by its Board of Directors, The approval from the Board of Directors is also needed for any addition or change to those policies and procedures. 1.2 The review of counter-party's credit worthiness and credit line analysis Before borrowing or lending securities to any counter-party, a commercial bank, by expert credit analysis unit, shall conduct an analysis on a counter-party's credit worthiness and determine a counter-party's credit line, which shall be approved by responsible executives. 1.3 Risk management and internal control system A commercial bank shall establish clear policies and procedures on risk management and control as well as having management system, accounting system, and internal control system for those businesses, including policies and porcedures on the following issues. (1) System to analyze risks of securities and collaterals and to determine credit line and limits, including stop loss limit (2) Policies and procedures on call for initial collateral, call for additional collateral, and collateral possession taking (3) System to keep track on any change in market value of securities and collaterals on a daily basis (Mark to market) (4) Internal control system to ensure the compliance to and the continuous improvement of the policies and procedures (5) Information and reporting system for monitoring, analysis and business performance evaluation in order to report to the bank's executives and the Bank of Thailand 2. In engaging into securities short selling business, only for debt instruments, according to Article 2(4)of the Notification of the Bank of Thailand Re: Permission for commercial banks to engage into securities borrowing and lending and short selling busivesses dated 6th September B.E. 2543, a commercial bank shall also comply to the rules no 1.1 and 1.3. A commercial bank can sell securities without having possession only for hedging purpose and when it has clear evidence that it will gain possession in those securities in the future. Those transactions are not considered part of business activities. Please be informed and observed.Enc: The Notification of the Bank of Thailand Re: Pernission for commercial banks to engage into securities borrowing and lending and short selling businesses dated 6th September B.E.2543Financial Institutions Policy Department Tel: 283-5304,283-5303,283-5837Note [ ] The Bank of Thailand will arrange a meeting to inform at............ [x] No meeting will be arranged._______________________________________________N ote: This Notification does not apply to internationl banking facilities.*This translation is for convenience of those who are not familiar with Thai language.For official purpose, only Thai texts are relevant Unofficial Translation* Notification of the Bank of Thailand Re: Permission for commercial banks to engage into securities borrowing and lending and short selling businesses __________________________________ By virtue of the provisions of Section 9 bis of the Commercial Banking Act B.E.2505 as amended by the Commercial Banking Act (No.2) B.E.2522, the Bank of Thailand hereby issues the following regulations: Article 1.The Bank of Thailand's circulation letter No. BOT. X. (C) 2115/2542 Re: Criteria for Granting Permission to Commercial Banks to Operate the Securities Borrowing and Lending Business as an Agent dated 1st June B.E.2542 shall be repealed. Article 2. A commercial bank is permitted ot engage into the following businesses: (1) Securities borrowing and lending business as an agent or broker (2) Securities borrowing and lending business as a principal, but only for debt instruments (3) Securities lending, only for debt instruments, to counter-parties who have licenses to operate securities borrowing and lending business under the Securities and Exchange Act or to Thailand Securities Depository Company Limited (4) Securities short selling, but only for debt instruments Article 3. A commercial bank, that wishes to engage into the businesses mentioned in Article 2, shall maintain capital adequacy ratio no less than the level specified by the Bank of Thailand on the first day of the operation. Article 4. In engaging into the businesses mentioned in Article 2(2) and (3), a commercial bank shall comply with the following contitions: 4.1 A commercial bank shall borrow and lend securities only to institutional counter-parties, which include: (1) Bank of Thailand (2) Financial Institutions Rehabilitation and Development Fund (3) Export-Import Bank of Thailand (4) The Industrial Finance Corporation of Thailand (5) Commercial banks (6) Finance companies (7) Securities companies (8) Insurance companies (9) Foreign Financial institutions that act either for their own accounts or for customers of foreign domicile (10) Mutual funds (11) Providence funds (12) Private funds (13) Pension funds (14) Financial institutions established under any specific laws with licenses to operate securities borrowing and lending business (15) Other Juristic persons approved by the Bank of Thailand 4.2 The amount of money or value of securities in which a commercial bank lends to any counter-party, combined with the amount of money in which a commercial bank grants credits to or invests in the business of or undertakes contingent liabilities for that counter-party either in one or several transactions in combination, shall not exceed 25 percent of its 1st tier capital funds. The calculations of the amount of money or value of securities, combined with the amount of money in which a commercial bank grants credits to or invests in the business of or undertakes contingent liabilities mentioned above shall be in accordance with the Bank of Thailand's regulation Re:Prescription on ratio of credits granted, investments and contingent liabilities incurred by a commercial bank to any person to its capital funds. In the case that a commercial bank lends securities and receives cash as collateral, the commercial bank is allowed to exclude the value of those securities, only for the portion covered by collateral, from this calculation. Article 5.Commercial banks shall comply with the rules regarding business procedures, internal control system, reporting system and other rules and conditions issued by the Bank of Thailand. Article 6. A commercial bank, that wishes to engage into businesses accouding to the Article 2, shall inform the first date of the operation and submit a business plan to the Bank of Thailand at least 30 days prior to the commencement of the activities. Such plan shall be approved by the banks' Board of Directors and shall at least comprise the follwing issues: (1) Business policies and procedures (2) Policies on the review of credit worthiness and credit line analysis (3) Policies on risk management and internal control system If there is no objection from the Bank of Thailand within 30 days after the date the Bank of Thailand receives the plan, a commercial bank can proceed with those business operations. Article 7. The Notification shall come into force on and from the day following the date of its publication in the Government Gazette._____________________________________* This translation is for convenience of those who are not familiar with Thai language. For official purpose, only Thai texts are relevant