Unofficial Translation prepared by Baker & McKenzie and with the courtesy of The Foreign Banks' Association This translation is for the convenience of those unfamiliar with the Thai language. Please refer to the Thai text for the official version. ______________________________ BANK OF THAILAND 29 September 2004 To Manager All commercial banks* No. ThorPorThor. SorNorSor. (11) Wor. 1647/2547 Re: Submission of the Notification of the Bank of Thailand Regarding Permission for Commercial Banks to Engage in Private Repo Transactions 1. Reason for issuing this Circular letter 1) By virtue of Section 9 bis of the Commercial Banking Act, B.E. 2505 and the amended, the Bank of Thailand would like to repeal its letter No. ThorPorThor. SorNorSor. (11) Wor. 2522/2544 dated 9 November 2001 Re: Permission for Commercial Banks to Borrow from Institutional Investors in the Form of Private Repo Transactions. 2) The Bank of Thailand's Notification Re: Permission for Commercial Banks to Engage in Private Repo Transactions dated 9 September 2004 is hereby submitted. Since all details regarding transactions and rules to supervise the private repo transactions have been stipulated in this Notification, all commercial banks shall no longer refer to the Bank of Thailand's letter No. ThorPorThor. SorNorSor. (11) Wor. 3491/2543 dated 25 December 2000 Re: Bank of Thailand's Policy in relation to Engagement in Private Repo Transaction of Financial Institutions. 2. The issue of the Government Gazette in which the Notification is made General Announcement, Volume 121, Special Section 102 Ngor dated 15 September 2004. 3. Scope of Implementation The Notification shall apply to all commercial banks according to the laws on commercial banking with an exception of the International Banking Facilities (IBF). 4. Important contents (1) The Bank of Thailand has amended the Notification Re: Engagement in Private Repo Transaction where scopes of the contractual parties and types of instruments for the transaction are extended. Details are as follows. (1.1) Scope of contractual parties for private repo transactions Lending: Commercial banks are enabled to lend Baht currency using Baht-denominated debt instruments in a form of private repo transaction to all kinds of natural and juristic persons having residency in Thailand. They may however lend foreign currencies using foreign-denominated debt instruments in a form of private repo transaction only to local financial institutions allowed to conduct a business relating to foreign means of payment according to the Exchange Control Act, B.E. 2485, as well as juristic persons or persons not having residency in Thailand (Non-resident). The extended scope of contractual parties is the private repo transaction whereby foreign currencies are lent to financial institutions permitted to engage in business relating to the means of foreign payment and Non-residents. Borrowing: Commercial banks are enabled to borrow Baht currency using Baht-denominated debt instruments in a form of private repo transaction from all kinds of juristic persons having residency in Thailand, international financial institutions issuing Baht-denominated debt instruments as determined by the Ministry of Finance and foreign governments or financial institutions of foreign governments issuing Baht-denominated debt instruments according to the prescriptions of the Ministry of Finance. They may borrow foreign-currency using foreign-denominated debt instruments in a form of private repo transaction only with local financial institutions permitted to conduct a business relating to the means of foreign payment according to the Exchange control Act, B.E. 2485, as well as juristic persons or persons not having residency in Thailand (Non-resident). The extended scope of contractual parties is the private repo transaction where Baht currency can be borrowed from all kinds of juristic persons with residency in Thailand (as opposed to the past permission to borrow Baht currency from financial institutions only) and Non-residents who issue Baht-denominated debt instruments in Thailand including the borrowing of foreign currencies from financial institutions permitted to conduct a business with regard to the means of foreign payment and Non-residents. (1.2) Scopes of instruments in private repo transactions Baht-denominated debt instruments; namely, 1) Government-sector debt instruments in the same category as instruments traded in the Bank of Thailand's repurchase market 2) Baht-denominated debt instruments issued in Thailand; namely, Baht-denominated debt instrument issued by international financial institutions as prescribed by the Ministry of Finance, Baht-denominated debt instruments issued by governments or financial institutions of foreign governments as prescribed by the Ministry of Finance such as Baht-denominated debt instruments issued by the International Monetary Fund (IMF), the Asian Development Bank (ADB) and the International Finance Corporation (IFC); and Baht-denominated debt instruments receiving credit rating one level higher than the investment grade; namely, higher than BBB or equivalent, from credit-rating agencies approved by the Office of the Securities and Exchange Commission. Foreign-denominated debt instruments; namely, 1) Thai government bonds in foreign currencies 2) Foreign government bonds in foreign currencies 3) Foreign-denominated debt instruments issued by local or international juristic persons whose credit rating is one level higher than the investment grade; namely, higher than BBB or equivalent, from credit-rating agencies approved by the Office of the Securities and Exchange Commission or internationally-recognized credit-rating agencies such as Fitch Ratings, Standard & Poor's and Moody's. The debt instruments described above shall have no other complexity or derivative products attached. The extended scope of the types of instrument refers to Baht-denominated debt instruments in Clause 2 and foreign-denominated debt instruments. (2) To amend supervision rules such as the maintenance of capital fund and liquid assets and the supervision of large exposure for more clarity. 5. Effective Date This Notification shall come into effect starting from 16 September 2004. Yours sincerely, (Mrs. Tarisa Watanagase) Deputy Governor (Financial Institutions Stability) Attachment: Bank of Thailand's Notification Re: Permission for Commercial Banks to Engage in Private Repo Transactions dated 9 September 2004 Financial Institutions Strategy Department Tel. 0-2283-5834, 0-2283-5305 and 0-2283-6875 Note [ ] The Bank of Thailand will arrange a meeting to clarify on...., at...... [x] No meeting for clarification will be arranged. Notification of the Bank of Thailand Re: Permission for Commercial Banks to Engage in Private Repo Transactions _____________________________ 1. Reason for issuing the Notification To increase liquidity to the debt instrument market, to give more options to the Bank of Thailand to operate its financial policy and to develop the money market by encouraging borrowing between financial institutions with collateral to reduce potential risk and help enable financial institutions to manage liquidity more flexibly. 2. Legal authority The Bank of Thailand, by virtue of Section 9 bis and Section 13, quarter, of the Commercial Banking Act, B.E. 2505 amended by the Commercial Banking Act (No. 2) B.E. 2522 and the Commercial Banking Act (No. 3) B.E. 2535, hereby issues the rules regarding engagement in the private repo transactions as stipulated herein. 3. Scope of implementation This Notification shall apply to all commercial banks under the laws on the commercial banking, except the IBF. 4. Contents 4.1 The Notification of the Bank of Thailand Re: Engagement in Private Repo Transaction dated 17 August 2001 shall be repealed. 4.2 Private repo transaction means an engagement in securities trading with a pledge to buy back or sell back for the purpose of lending or borrowing, as the case may be, having a financial instrument as collateral. The private repo transaction is a transaction under Section 4 of the Commercial Banking Act, B.E. 2505 since the nature of the transaction is borrowing with collateral. 4.3 Rules regarding the private repo transaction 4.3.1 Contractual parties in private repo transactions (a) Lending (1) Commercial banks may lend Baht currency using Baht-denominated debt instruments in a form of private repo to all kinds of natural or juristic persons having residency in Thailand. (2) Commercial banks may lend foreign currencies using foreign-denominated debt instruments in a form of private repo only to local financial institutions permitted to conduct business with regard to the means of foreign payment according to the Foreign Exchange Control, Act, B.E. 2485, as well as juristic persons or persons not having residency in Thailand (Non-resident). (b) Borrowing (1) Commercial banks may borrow Baht currencies, using Baht-denominated instruments in a form of private repo, from all kinds of juristic persons having residency in Thailand, international financial institutions issuing Baht-denominated debt instruments as prescribed by the Ministry of Finance and governments or financial institutions of foreign governments which issue Baht-denominated debt instruments as prescribed by the Ministry of Finance. (2) Commercial banks may borrow foreign currencies, using foreign-denominated debt instruments in a form of private repo, transaction only from local financial institutions permitted to conduct business regarding the means of foreign payment according to the Exchange Control Act, B.E. 2485, as well as juristic persons or persons not having residency in Thailand (Non-resident). When lending or borrowing with juristic persons or persons not having residency in Thailand, commercial banks shall comply with the rules and regulations regarding relevant measures against Baht speculation. 4.3.2 Securities used in private repo transactions (a) Commercial banks may use the following Baht-denominated debt instruments in private repo transactions. (1) Government sector debt instrument in the same category as instruments traded in the Bank of Thailand's repurchase market as it is low-risk and has market price that can be referred to with transparency. (1.1) Treasury bills and government bonds (1.2) Bank of Thailand bonds (1.3) State enterprise bonds and debentures guaranteed by the government (1.4) Bonds and any other financial instruments issued by state enterprises or financial institutions incorporated by a specific law which the Bank of Thailand approves. (2) Baht-denominated debt instruments issued in Thailand; namely (2.1) Baht-denominated debt instruments issued by international financial institutions as prescribed by the Ministry of Finance. (2.2) Baht-denominated debt instruments issued by foreign governments or financial institutions of foreign governments as prescribed by the Ministry of Finance. (2.3) Baht-denominated financial instruments whose credit rating is one level higher than the investment grade; namely, higher than BBB or equivalent, as rated by reputable credit-rating agencies approved by the Office of the Securities and Exchange Commission. (b) The following foreign-denominated debt instruments may be used in the private repo transaction by commercial banks. (1) Foreign-denominated Thai government bonds. (2) Foreign government bonds in foreign currencies. (3) Foreign-denominated debt instruments issued by local or international juristic persons having credit rating one level higher than the investment grade; namely, higher than BBB or equivalent, from reputable credit-rating agencies approved by the Office of the Securities and Exchange Commission or from internationally recognized credit rating agencies; namely, Fitch Ratings, Standard&Poors and Moody's. (4) Any other securities as prescribed by the Bank of Thailand 4.4 Supervision rules 4.4.1 Commercial banks shall prescribe at least the following internal control system: (a) Business policies and practices (b) Credit rating analysis policy and determination of the limit amount of a contractual party (c) Regulations and procedures of risk management and internal control system such as (1) Criteria of credit rating analysis and determination of the limit amount of contractual party prior to the transaction as well as revision of the contractual party's credit rating after the transaction has taken place for some time in the same manner as credit facility/lending in general (2) Risk management (3) Operation manual (4) Separation of duty between dealer and back office especially the separation of a duty to review contractual party's creditability and to assess the mark-to-market of securities price/collateral from the dealer's duty (5) Preparation of the control registration of securities/collateral received from the private repo transaction 4.4.2 Maintenance of capital fund Commercial banks shall comply with the Notification of the Bank of Thailand regarding maintenance of capital fund as ratio to assets and obligations of commercial banks and the Bank of Thailand's circular letter Re: Prescription for commercial banks to maintain capital fund. 4.4.3 Maintenance of liquid assets: when engaging in a private repo transaction, commercial banks shall act as follows: (a) Lender (instrument buyer) who is a transferee of ownership in the particular instrument at the end of any day may count such instrument as prescribed in the Notification of the Bank of Thailand Re: Prescription on maintenance of liquid assets by commercial banks and the amended as his liquid asset, starting from the settlement date. At the same time, borrower (instrument seller), who is a transferor of the instrument, may not count such instrument as his liquid asset on the same day. Upon the due date of the private repo contract, the lender must remove such instrument from his liquid asset and the borrower, who accepts the instrument in return, may count the same as his liquid asset on the same day. (b) The value of instrument transferred as liquid asset or the removal of the instrument value from a pool of liquid assets shall be in accordance with the criteria regarding the calculation of securities value for the maintenance of liquid assets by commercial banks and the amended. 4.4.4 Counting of large exposure: commercial banks shall combine, a private repo transaction with his normal transactions in accordance with Section 13 and Section 13 quarter of the Commercial Banking Act, B.E. 2505 as follows. (a) Lender (instrument buyer) shall count the lending mount when calculating the amount of credit granted to a large exposure according to Section 13 of the Commercial Banking Act, B.E. 2505, which is in accordance with the rules stated in the Bank of Thailand's Notification on prescription of ratio of credits granted, investment and contingent liability by a commercial bank to any person to its capital funds. If the instruments being transferred is exempted and therefore not subject to Section 13, commercial bank who accepts transfer of such instrument shall also be exempted from counting the loan having such instrument as a collateral in the calculation described above. (b) Borrower (instrument seller) shall count instrument transferred to lender based on the price of instrument that exceeds the loan received in the calculation according to the criteria of the Bank of Thailand issued by virtue of Section 13 quarter of the Commercial Banking Act, B.E. 2505. This means instrument transferred to lender limiting to the price of instrument that exceeds the amount of loan received, when adding to the amount such commercial bank has extended as credit or invested in business or created obligations with such contractual party; and value of securities commercial bank has lent limiting to the value that exceeds the collateral (in case of securities lender) received from the securities borrowing and lending transaction (SBL) and the amount of money or value of securities a borrowing commercial bank has placed as collateral limiting to the amount of portion that exceeds the value of securities (in case of securities borrower) borrowed from the SBL transaction with such contractual party shall not exceed 25 per cent of commercial bank's Tier-1 capital fund. (c) In case the borrowing commercial bank (instrument seller) has duly complied with Clause 4.4.4(b), but later, the value of instrument which commercial bank has transferred as collateral limiting to the amount that exceeds the loan received from a private repo transaction, when aggregated with the amount of money such commercial bank has extended as credit or invested in business or created obligation therein with such contractual party, and the amount of the securities it has lent limiting to the part that exceeds the value of collateral received (in case of securities lender) from the securities borrowing and lending transaction (SBL) and the amount of money or securities placed as collateral limiting to the part that exceeds the value of securities borrowed (in case of securities borrower) from the SBL transaction with such contractual party, will cause the ratio to exceed 25 per cent of commercial banks' Tier 1 capital fund, such commercial bank may no longer engage in a private repo transaction with that same contractual party. Any private repo transaction taken place prior to that shall have a binding effect as agreed in the contract. (d) When calculating the ratio under Clause 4.4.4(a) and 4.4.4(b) during the transaction period, securities which act as the collateral shall be marked-to-market. As a result, commercial banks shall comply with the following: (1) In case an instrument which is a collateral declines in value, should the borrowing commercial bank becomes subject to margin call in cash, the loan must be reduced to the same amount of the increased margin. However, if the margin call is in a form of debt instrument, the value of instrument transferred as a collateral shall be increased by including the value of margin instrument being as well. (2) In case the value of a collateral instrument increases, if the borrowing commercial bank receives additional margin in a form of cash, the amount of loans shall be increased to the same amount of the additional money received. However, if the margin is returned in a form of the instrument, the number of instruments acting as a collateral shall be reduced to the number of instruments being returned. However, when there is a change of exposure resulted from the change of the mark-to-market of securities price during the period before additional margin or collateral is called for, when calculating the ratio of total exposure as described in Clause 4.4.4(a) and 4.4.4(b), commercial banks must apply the exposure value stated when the agreement was made in calculating of the total exposure. In other words, even if there is a constant change of exposure due to the mark-to-market, yet, when calculating the same, exposure actually taken place will not be used in the calculation. The value of the original exposure at the time the agreement was made will be used in the calculation instead. As a result, the ratio of the total exposure will never change and remain constant throughout the term of the agreement. (more)