RESPONSE TO FEEDBACK RECEIVED – …

1 RESPONSE TO FEEDBACK RECEIVED CONSULTATION ON proposed MAS NOTICE 639 EXPOSURES TO SINGLE COUNTERPARTY GROUPS 1 Introduction On 13 September 2006, MAS released for consultation, the proposed MAS Notice 639 which sets out the detailed compliance requirements under the revised section 29 of the Banking The consultation period closed on 13 October 2006. We thank all respondents for their comments. MAS has carefully considered the FEEDBACK RECEIVED . Comments that are of general interest to the industry, together with MAS responses, are set out below. Comments on credit risk mitigation, which was the subject of a separate consultation, would be addressed in another document.

2 2 Definitions Some banks sought clarity on certain terms used in the proposed Bank in Singapore One bank asked whether this refers to a bank incorporated in Singapore. MAS RESPONSE Bank in Singapore has the same meaning as defined in the existing Banking Act, and refers to (i) a bank incorporated in Singapore; or (ii) in the case of a bank incorporated outside Singapore, the branches and offices of the bank located within Singapore. 1 This followed an earlier consultation on the policy framework. The consultation paper and MAS responses are available on MAS website. 2 With the introduction of the Banking (Amendment) Act 2007, some terms in the proposed Notice will be defined in the Act.

3 2 Bank Group Bank group was defined in the Notice to mean a bank in Singapore, its subsidiaries and any other company treated as part of the bank s group of companies according to Accounting Standards and in the case of a bank incorporated outside Singapore, only where such subsidiary or company is reflected as an investment in the financial statements of the bank in relation to its operations in Singapore. Clarification was sought on whether in the case of a bank incorporated outside Singapore, the investments refer to those reflected in the books of the bank in Singapore, or those held by its parent bank or Head Office. MAS RESPONSE The investment in subsidiaries or companies refers to those reflected in the books of the Singapore branch.

4 exposure The proposed Notice stated that when determining the maximum loss that may be incurred, a bank shall not take into account any collateral available to the bank and the likelihood of recovery from an administrator or liquidator of the counterparty. A few banks were of the view that this contradicted MAS intent to allow the recognition of collateral to offset a bank s exposures. MAS RESPONSE In recognising an exposure , a bank is required to first quantify the exposure based on the maximum loss to the bank (before recognising any risk mitigation). For the purpose of complying with the large and substantial exposures limits, banks may then compute the net exposure by offsetting the portion which is secured by qualifying collateral.

5 Counterparty Counterparty in relation to a bank, means a person (a) who has an obligation to the bank as a result of the bank s contractual or other arrangements; or (b) in relation to whom the bank is at risk as a result of the bank s contractual or other arrangements or investments. One bank proposed that for greater clarity, obligations should refer only to financial obligations arising from the bank s normal risk-taking activities as the above definition was too broad. MAS RESPONSE It is MAS intention that banks recognise exposures arising from the course of their financial business. Director Group Director group was defined to mean a group of persons comprising: (a) any director of the bank (including his family members); (b) every firm or limited liability partnership in which the director is a partner, manager, agent, guarantor or surety; (c) every individual of whom, and every company of which, the director is a guarantor or surety; and (d) every company in which the director (i) is an executive officer; (ii) owns more than half of the total number of issued shares, whether legally or beneficially; (iii) controls more than half of the voting power; or (iv) controls the composition of the board of directors.

6 One bank sought clarification on whether reference to a director in (b), (c) and (d) includes the family members of the director. MAS RESPONSE Reference to a director includes the director and his spouse, parent and child. Issued Share Capital For the purpose of determining whether an entity is under the control of another entity ( controlling entity ), one of the tests was where the controlling entity holds more than half of the issued share capital of the first mentioned entity. One bank sought clarity on whether preference shares, warrants and options on issued share capital are included. MAS RESPONSE In line with amendments to the Banking Act, issued share capital will be replaced by total number of issued shares.

7 Preference shares are included. Regulatory Capital MAS had informed banks earlier that banks incorporated in Singapore will be allowed to use, for each quarter, their regulatory capital as at end of the quarter falling two quarters ago as the denominator for the large exposures limits and substantial exposures definition. One bank suggested that this be made clear in the Notice. MAS RESPONSE We will provide clarity in the Notice. Other Definitions One bank sought clarification on the definition of substantial shareholder while another bank wanted to clarify if the term related corporation has the same meaning as section 6 of the Companies Act. 4 MAS RESPONSE Substantial shareholder has the same meaning as in section 81 of the Companies Act, and will be defined in the Banking (Amendment) Act 2007.

8 Related corporation is defined under the existing Banking Act, and has the same meaning as in section 6 of the Companies Act. 3 Exemptions Scope of Application A few banks sought clarification on whether the requirements in the Notice apply only to exposures booked in a bank s Domestic Banking Unit, and not the Asian Currency Unit (ACU). MAS RESPONSE For a bank in Singapore which is incorporated outside Singapore, exposures which are booked in the bank s ACU will continue to be excluded from certain requirements under the revised section 29, as provided for under section 77 of the Banking Act. Interbank Exposures Under the proposed Notice, a bank s exposures arising from foreign exchange (FX) or money market (MM) transactions to its related merchant bank in Singapore or another bank (whether or not licensed in Singapore), will be exempted, except that in the case of an exposure of a bank incorporated in Singapore to its bank or merchant bank subsidiary, the residual maturity of the exposure shall not exceed one year.

9 Several banks requested that the exemption be widened to cover all transactions between banks instead of only FX/MM transactions, as is the case currently. Banks highlighted potential compliance difficulty in view of the broad range of products traded between banks. MAS RESPONSE In view of the banks FEEDBACK , MAS will exempt all direct exposures to banks, regardless of products. For exposures of a bank incorporated in Singapore to its bank or merchant bank subsidiary, only direct exposures with a residual maturity of one year or less will be exempted. However, as proposed by MAS earlier, indirect exposures acquired as a result of credit risk mitigation would continue to be subject to the large and substantial exposures limits.

10 The exemption of interbank exposures does not preclude MAS from imposing additional supervisory requirements on specific banks should there be prudential concerns. 5 Telegraphic Transfers Currently, section 29 of the Banking Act exempts the purchase of telegraphic transfers or loans or advances made against telegraphic transfers, from the single borrower limit and substantial loans limit. In RESPONSE to MAS proposal to lift this exemption, banks have requested for the exemption to be retained. Otherwise, it would constrain their operations as the amount of funds transfer daily could be significant. On the other hand, timing differences between the transfer and receipt of funds by the bank are usually small.