The State Bank of Pakistan (SBP) has issued new guidelines for banks and DFIs' investment in Mutual Funds and Asset Management Companies (AMCs) for the calculation of Capital Adequacy Ratio (CAR). According to State Bank, new instructions will be effective from June 30, 2013 and all banks and DFIs will be required to follow these directives.
In this regard a BPRD Circular No 04 of 2013 has been sent to Presidents and Chief Executive Officers of all banks/DFIs on May 16, 2013. The new instructions would be applicable to banks/DFIs' investment in units of open-ended as well as closed-ended funds and AMCs for the calculation of CAR. In case of investment/holding up to 30 percent in a single mutual fund, Banks/DFIs investments in the units of mutual funds will be categorised only in the trading book and the capital charge will be calculated in three different manners.
SBP has issued the following instructions
A. Investment in the units of Mutual Funds/Collective Investment Schemes:
a) Investment/holding up to 30 percent in a single mutual fund:
Banks/DFIs investments in the units of mutual funds will be categorised only in the trading book and the capital charge will be calculated by any of the following methods:
Full look through: where the bank is aware of the actual underlying investments of the mutual fund on monthly basis, the bank may calculate the capital charge on its investment as if the underlying exposure/asset class held by the mutual fund is held by the bank itself.
Modified look through: In case the bank is not aware of the underlying investment on a monthly basis, the bank may determine capital charge by assuming that the mutual fund first invests to the maximum extent in the most risky asset class (ie which attracts highest risk weight under existing instructions) allowed under its offering document and then continues making investments in descending order (second highest risk weighted asset) until the total investment limit is reached. Refer to appended Annexure-A for more details.
Conservative approach: If the bank is not in position to implement above approaches, the bank may calculate capital charge based on the most risky asset (ie assigning the highest risk weight) category applicable to any asset the mutual fund is authorised to hold as per its offering document. For further clarity, refer to Annexure-A.
b) Investment/holding in a single fund within the range from 30 percent to 50 percent: The investment/holding up to 30 percent of a mutual fund would attract capital charge based on look through approaches prescribed above and the incremental investment (beyond 30 percent benchmark) would attract a flat capital charge of 20 percent.
c) Investment/holding in a single fund exceeding 50 percent or investment subject to lock-in clause:
In case Banks/DFIs holding in a single mutual fund exceeds 50 percent; then the investment/holding up to 30 percent of a mutual fund would attract capital charge based on look through approaches whereas the incremental amount exceeding 30 percent threshold would be deducted from Tier-1 capital of the bank. Furthermore, where the banks' investment is subject to any lock-in clause (irrespective of its percentage holding) under which the bank cannot liquidate its position (eg seed capital), the entire investment would be deducted from Tier-1 for capital adequacy purposes.
B. Significant Investment in the capital of Asset Management Company (AMC)
Asset Management Company (AMC) is considered as a financial entity for capital adequacy purposes and any significant minority and/or majority investments in the capital of AMC is subject to the same rules as described in the Scope of Application (paragraph 1.1) of SBP Basel II instructions.