Circular No. 40/2018/TT-NHNN dated December 28, 2018 of the State Bank of Vietnam on amendments and supplements to the Circular No. 13/2018/TT-NHNN dated May 18, 2018 of State Bank’s Governor prescribing internal control systems of commercial banks and foreign bank branches

THE STATE BANK OF VIETNAM

CircularNo. 40/2018/TT-NHNN dated December 28, 2018 of the State Bank of Vietnamon amendments and supplements to the Circular No. 13/2018/TT-NHNN dated May 18, 2018 of State Bank’s Governor prescribing internal control systems of commercial banks and foreign bank branches

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

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

Pursuant to the Government s Decree No. 16/2017/ND-CP dated February 17, 2017, defining the functions, tasks, powers and organizational structure of the State Bank of Vietnam;

Upon the request of the Banking Inspection and Supervision Chief;

The Governor of the State Bank of Vietnam hereby promulgates the Circular amending and supplementing the Circular No. 13/2018/TT-NHNN dated May 18, 2018 of State Bank’s Governor prescribing internal control systems of commercial banks and foreign bank branches.

Article 1. Amendments and supplements to Circular No. 13/2018/TT-NHNN dated May 18, 2018 of State Bank’s Governor prescribing internal control systems of commercial banks and foreign bank branches (hereinafter referred to as Circular No. 13/2018/TT-NHNN)

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

 “23.Credit riskincludes:

a) Credit risk refers to the risk of a customer’s failure or incapacity to fulfill part or all of debt repayment obligations under a contract or agreement with a commercial bank or foreign bank branch, unless otherwise prescribed in point b of this clause. In this case, customers (including credit institutions and foreign bank branches) have relationships with commercial banks and foreign bank branches in receiving credit (including receiving credit through entrustment), deposits and issuing corporate bonds.

b) Counterparty credit risk refers to the risk of a counterparty’s failure or incapacity to discharge part or all of payment obligations prior to or by the maturity dates of proprietary trades; repo and reverse repo transactions; trades in derivatives for risk hedging purposes; trades in foreign currencies and financial assets to serve the needs of customers and partners. In this case, counterparties (including credit institutions and foreign bank branches) enter into transactions with commercial banks and foreign bank branches in proprietary trades; repo and reverse repo transactions; trades in derivatives for risk hedging purposes; trades in foreign currencies and financial assets to serve the needs of customers and partners.

24.Market riskrefers to the risk that may arise due to an adverse fluctuation in interest rates, securities prices and commodity market prices. Market risk includes:

a) Interest rate risk refers to the risk incurred due to an adverse variation in market interest rates with respect to value of securities, interest-bearing financial instruments, interest rate derivatives in the trading book of commercial banks and/or foreign bank branches;

b) Foreign exchange risk refers to the risk incurred due to an adverse variation in foreign exchange rates occurring on the market when a commercial bank or foreign bank branch is running a foreign currency position;

c) Equity risk refers to the risk incurred due to an adverse variation in market stock prices with respect to value of stocks, value of derivative securities in the trading book of commercial banks and/or foreign bank branches;

d) Commodity risk refers to the risk that may arise due to an adverse variation in commodity prices with respect to value of commodity derivatives, value of products in spot transactions exposed to the commodity risk of commercial banks and/or foreign bank branches.

25.Interest rate risk in the trading bookrefers to the risk incurred due to an adverse variation in interest rates with respect to income, value of assets, value of liabilities and value of off-balance-sheet commitments of commercial banks and/or foreign banks that may arise as a consequence of:

a) Difference in interest rate determination dates or interest rate redetermination periods;

b) Changes in relationship between interest rate levels of different financial instruments that have the same maturity date;

c) Changes in relationship between the levels of interest rate applied to different tenors;

d) Impacts resulted from interest rate option products or products with embedded interest rate options.

26.Operational riskrefers to the risk arising due to inadequate or failed internal processes, people, system errors, failures or external events that causes financial losses or non-financial negative impacts on commercial banks and/or foreign bank branches (including legal risks). The operational risk shall not include:

a) Reputational risk refers to the risk arising from negative reactions on the part of customers, partners, shareholders or the public to the reputation of commercial banks and/or foreign bank branches;

b) Strategic riskrefers to the risk arising from a commercial bank or foreign bank branch s availability or lack of timely response strategies or policies for business environment changes that may reduce the possibility of fulfilling business strategies or profit targets of commercial banks and/or foreign bank branches.

27.Trading bookrefers to the portfolio used for recognizing the position of:

a) Proprietary trading transactions (except those defined in point b of clause 28 of this Article);

b) Transactions aimed at performing guarantees for issuance of financial instruments;

c) Derivatives transactions aimed at hedging risks arising from proprietary trading transactions of commercial banks and/or foreign bank branches;

d) Foreign exchanges or financial asset trading transactions aimed at serving the demands of customers, partners and transactions that serve the purpose of corresponding to these ones.

28.Banking bookrefers to the portfolio used for recognizing the position of:

a) Repo and reverse repo transactions;

b) Derivatives transactions performed to prevent accounts or entries on the asset balance sheet (including off-balance-sheet accounts or entries) of commercial banks and/or foreign bank branches from being exposed to risks, except for transactions classified into the trading books of commercial banks and/or foreign bank branches as provided in point c of clause 27 of this Article;

c) Financial asset trading transactions performed to create liquidity reserves;

d) Other transactions which are not included in the trading books of commercial banks and/or foreign bank branches.

29.06 groups of business operationscomprise the generation of interest and other similar incomes; the incurring of interest and other similar expenses; the rendering of services; foreign exchange business; trades in trading securities, investment securities; other activities.

30.Proprietary tradingrefers to selling, buying and exchange transactions carried out by commercial banks, foreign bank branches or subsidiaries of banks in accordance with laws and regulations with a view to selling, buying or exchanging financial instruments within a term of one year to earn banks and/or foreign bank branches profit generated from market price differences, including:

a) Financial instruments in the currency exchange market;

b) Currencies (including gold);

c) Securities in the equity market;

d) Derivatives;

dd) Other financial instruments traded in the formal market.

31.Repo transactionrefers to a transaction in which a party sells and transfers the ownership of a financial asset to another party and undertakes to repurchase and restore such ownership after a definite duration at an agreed-upon price.

32.Reverse repo transactionrefers to a transaction in which a party buys and receives the transfer of the ownership of a financial asset from another party, and undertakes to resell and transfer such ownership after a definite duration at an agreed-upon price, including the buying forward of this financial asset under the State Bank’s regulations on the discount on negotiable instruments and other valuable papers."

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

 “2. If a commercial bank has subsidiaries, it may carry out control and oversight through the representative of contributed capital in order to ensure the subsidiaries’ risk management must conform to the commercial bank’s risk management policies, and the commercial bank maintains the prudential ratio of consolidated capital in accordance with the State Bank s regulations."

3. To amend and supplement Point b of clause 1 of Article 38 as follows:

 “b) Principles of market risk management in normal conditions and in case of high volatility in security prices, commodity prices, exchange rates, gold prices and interest rates subject to the commercial bank’s/foreign bank branch’s internal regulations;”

4. To amend and supplement Point b of clause 2 of Article 38 as follows:

 “b) Foreign exchange risk limit: Limits on positive foreign exchange position; negative foreign exchange position, gold position; limit for traders; loss recovery limit;”

5. To amend and supplement Clause 1 of Article 60 as follows:

 “1. The commercial bank and/or the foreign bank branch shall construct stress scenarios as specified in point a of clause 2 of Article 28 hereof, which include at least assumptions on interest rates, exchange rates, gold prices and credit quality, and develop methods for calculating those assumptions’ influence on the capital safety ratio, as detailed below:

a) For interest rate assumptions: Calculate the influence on the prudential ratio, based on the respective change in total asset weighted according to the operational risk, market risk (interest rate risk) and IRRBB based on the interest rate assumption;

b) For exchange rate and gold price assumptions: Calculate the influence on the prudential ratio, based on the respective change in total asset weighted according to the operational risk, market risk (foreign exchange risk) based on the exchange rate and gold price assumption;

c) For credit quality assumptions: Calculate the influence on the prudential ratio, based on the respective change in total asset weighted according to the operational risk and credit risk based on the credit quality assumption.”

6. To amend and supplement Point a (iv) of clause 1 of Article 64 as follows:

 “(iv) The criteria for determining pay levels and other benefits of holders of titles in the internal audit department must be separated from the business and operational results of the units and departments belonging to the first and second lines of defense;’

Article 2.

1.Repealing point c of clause 2 of Article 38 in the Circular No. 13/2018/TT-NHNN.

2. Deleting the paragraph “as specified in the State Bank’s regulations on prudential ratios applied to commercial banks and foreign bank branches”, “specified in the State Bank’s regulations on the prudential ratios of banks and foreign bank branches”, “specified in the State Bank’s regulations on capital ratios applied to banks and foreign bank branches”, and “specified in the State Bank’s regulations on prudential ratios applied to banks and foreign bank branches” 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 in the Circular No. 13/2018/TT-NHNN.

Article 3. Implementation

The Office’s Chief, Banking Inspection and Supervision Chief, Heads of State Bank’s affiliated units, Directors of State Bank Branches in centrally-affiliated cities and provinces, Chairs of Management Boards, Chairs of Members Boards, and Directors General (Directors) of commercial banks and foreign bank branches, shall be responsible for implementing this Circular.

Article 4.Effect

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

For the Governor

Deputy Governor

Doan Thai Son