BANQUE DU LIBAN. Basic Circular No 2. Addressed to Financial Institutions

Transcription

1 BANQUE DU LIBAN Basic Circular No 2 Addressed to Financial Institutions Attached is a copy of Basic Decision No 7136 of October 22, 1998, relating to the Conditions for Establishing and Operating Financial Institutions. Beirut, October 22, 1998 The Governor of Banque du Liban Riad Toufic Salamé Old Numbering System: No 5

2 BANQUE DU LIBAN Basic Decision No 7136 Conditions for Establishing and Operating Financial Institutions The Governor of Banque du Liban, Pursuant to the Code of Money and Credit, notably Articles 178 to 182 thereof; Pursuant to Law 520 of June 6, 1996, notably Article 15 thereof; and Pursuant to the Decision of the Central Council of Banque du Liban, taken in its meeting of October 21, 1998, Decides the following: Article 1: The license request for the establishment of a Lebanese financial institution under the provisions of Articles 178 to 182 of the Code of Money and Credit, must be signed by the founders and submitted to Banque du Liban, along with an original copy and three copies of the following documents: 1- Documents certifying the identities of the founders, the persons willing to participate in the subscription to and payment of the financial institution s capital, and the persons expected to hold senior managerial positions (individual extract from the Civil Status Register/ identity card/ passport/ registration certificate from the Trade Register when the founder or the subscriber is a legal entity). 2- Statements signed by each of the above-mentioned persons, including their curriculum vitae (degrees, experience, and other information about their financial and moral status), and a precise evaluation of their net worth. 3- A criminal record for each of the above-mentioned persons, issued in the last three months. 4- A statement specifying the percentage of subscribers participation in the financial institution's capital, including the categories of shares, and their distribution among resident and non-resident Lebanese, Arabs, and foreigners. 5- An economic feasibility study on the establishment of the financial institution, covering the next three-year period and showing clearly its financing sources and its investment prospects, including in detail: a- The Profit and loss projections. b- The Balance sheet projections. c- The Cash flow projections. 1

3 6- A statement clarifying any direct or indirect relationship, if any, between the financial institution to be established and any specific economic institution or economic group(s), in Lebanon or abroad. 7- Draft texts of: a- The financial institution s by-laws. b- The organizational chart to be adopted. c- The basic rules for internal control and audit. Article 2: The license request for the establishment of the branch of a foreign financial institution under the provisions of Articles 178 to 182 of the Code of Money and Credit, must be signed by the Management of the concerned foreign financial institution and submitted to Banque du Liban, along with an original copy and three copies of the following documents: 1- A duly certified copy of the by-laws of the foreign financial institution. 2- The documents specifed in Sub-Paragraphs (b) and (c) of Paragraph 7 of Article 1 of this Decision. 3- A duly certified copy of the foreign financial institution s registration in its home country, or of the license granted by the competent authorities to perform financial activities. 4- A duly certified copy of the decision taken by the Boad of Directors of the foreign financial institution, in which the Board: a- Approves the establishment of a branch in Lebanon, whose objects are to perform the activities specified in Article 7 of this Decision. b- Appoints the financial institution s representative in Lebanon and defines its powers. c- Commits to implement the applicable Lebanese laws and regulations, as well as BDL recommendations and instructions, especially in terms of: - Building reserves out of its annual net profits in Lebanon, in accordance with Paragraph (2) of Article 4 of this Decision. - Reconstituting the capital allocated to its activities in Lebanon, in accordance with the provisions of Article 5 of this Decision. - Not reducing the capital allocated to its activities in Lebanon or not restituting any portion of the said capital. - Complying with the provisions of Articles 3, 10, 11 and 12 of this Decision. 2

4 5- The statements and documents specified in Paragraphs (1) and (2) of Article 1 of this Decision regarding the financial institution s representative in Lebanon and the persons expected to hold senior managerial positions. 6- A criminal record for each of the persons mentioned in Paragraph (5) above, issued in the last three months. 7- A feasibility study, as detailed in Paragraph (5) of Article 1 of this Decision. 8- A statement with the information specified in Paragraph (6) of Article 1 of this Decision. 9- The annual reports on its activities during the last three years, along with the relevant balance sheets. Article 3: Financial institutions that are licensed by the Central Council of Banque du Liban must complete their establishment formalities and start effectively their operations within six months from the date of the licensing notification; otherwise, their license shall be cancelled. Article 4 1 : First: The minimum capital of the financial institution licensed after January 25, 2012, is set at seven billion five hundred million Lebanese pounds. This capital and any other subsequent increase shall be paid in full and in cash at Banque du Liban. Second: Financial institutions operating in Lebanon and established after January 25, 2012, must allocate the following amounts, out of their Tier 1 capital: a- Seven billion five hundred million Lebanese pounds, to the head office. b- Five hundred million Lebanese pounds, to each branch. Third 2 : Financial institutions operating in Lebanon and established before January 25, 2012, must allocate the following amounts, out of their Tier 1 capital, whenever necessary and according to their category: a- A minimum amount, as specified in Paragraph Second of Article 7 of this Decision, allocated to the head office. b- Five hundred million Lebanese pounds, allocated to each branch. 1 - The last amendment to this Article was made pursuant to Article 6 of Intermediate Decision of January 27, 2012 (Intermediate Circular 290). 2 - Financial institutions established before the issuance of Intermediate Decision of January 27, 2012 (Intermediate Circular 290), were granted a one-year time limit to comply with the provisions of this Paragraph. 3

5 Fourth 1 : Any Lebanese financial institution intending to open a branch abroad must allocate to this branch the triple of the amount required to open a branch in Lebanon, in addition to the amount imposed by the concerned foreign authorities. Fifth: Financial institutions operating in Lebanon must build reserves, by withholding 10% of their annual net profits. Article 5 2 : Each financial institution must continuously prove that its assets exceed its liabilities to third parties by, at least, an amount equivalent to its capital. The financial institution may not reduce its capital or restitute any portion of it. When incurring losses, the financial institution must reconstitute its capital before June 30 of the fiscal year that follows the year in which these losses ocurred. Article 6: The annual General Assemblies of Lebanese financial institutions convened to examine the accounts of the previous fiscal year, must take place before the end of the first half of each year. Article 7 3 : First: In addition to lending operations, financial institutions licensed after January 25, 2012 may, pursuant to applicable laws and regulations, perform the following operations and activities, as a main or secondary business: 1- Executing customers orders on the various negotiable financial instruments or securities. 2- Introducing Brokerage where these operations are restricted to introduce customers to correspondents or to institutions that shall undertake the requested financial operations. 3- Marketing or promoting various financial instruments and products. 4- Non-discretionary management of securities, financial instruments and cash portfolios. 5- Managing their own financial instruments and securities portfolios, provided none of their customers is a counterpart, whether directly or indirectly. 1 - Financial institutions established before the issuance of Intermediate Decision of January 27, 2012 (Intermediate Circular 290), were granted a one-year time limit to comply with the provisions of this Paragraph. 2 - The last amendment to this Article was made pursuant to Article 7 of Intermediate Decision of January 27, 2012 (Intermediate Circular 290). 3 - This Article was amended pursuant to Article 8 of Intermediate Decision No of January 27, 2012 (Intermediate Circular No 290). 4

6 6- Establishing or contributing in the establishment and management of collective investment schemes, as well as marketing and promoting shares or stakes of collective investment schemes, subject to BDL prior approval. 7- Financial studies and consultancies limited to financial markets. 8- Real estate management. 9- Assistance in the issuing and marketing of bonds and financial rights. 10- Discretionary management of securities, financial instruments, and cash, subject to the customer s explicit written approval. 11- Fiduciary operations 12- Underwriting bonds and financial rights. 13- Market maker s transactions through the purchase and sale of financial instruments and derivatives, without prejudice to the conditions specified in the attached annex. 14- Liquidity providers transactions, in order to provide liquidity at the best price through an electronic platform for financial instruments not listed on regulated markets. These instruments shall be directly purchased and sold from the customer without being confirmed with the correspondents, and with no prejudice to the conditions specified in the attached annex. 15- Activities that are complementary to the aforementioned operations. Second 1 : Financial institutions established before January 25, 2012, may undertake the following operations and activities, based on the category they belong to: First category: Institutions whose capital is at no time inferior to seven billion five hundred million Lebanese pounds, and are entitled to perform all operations and activities specified in the Paragraph First of this Article. Second category: Institutions whose capital is at no time inferior to five billion Lebanese pounds, and are entitled to perform the same operations and activities as the first category, with the exception of those specified in Sub-Paragraphs (12), (13) and (14) of Paragraph First above. Third category: Institutions whose capital is at no time inferior to two billion Lebanese pounds, and are entitled to undertake the same operations and activities as the first category, with the exception of those specified in Sub-Paragraph (7) to (14) of Paragraph First above. Article 7 bis 2 : All financial institutions are prohibited from: 1- Undertaking money exchange operations, except when such operations are complementary or linked to those they perform, within the limits of their objects, on behalf of their customers. 2- Undertaking cross-border transportation of cash, metal coins and bullion. 1 - Financial institutions established before the issuance of Intermediate Decision of January 27, 2012 (Intermediate Circular 290), were granted a one-year time limit to comply with the provisions of this Paragraph. 2 - This Article was added pursuant to Article 1 of Intermediate Decision of May 21, 2011 (Intermediate Circular 266), then amended pursuant to Article 1 of Intermediate Decision of August 22, 2011 (Intermediate Circular 274). 5

7 3- Receiving funds from their customers, unless through checks or transfers, including funds received for the purpose of creating or covering all margins. They are, however, entitled to receive from a single customer cash amounts whose monthly total does not exceed the equivalent of USD 10,000, for reimbursing the advances granted by these institutions (including factoring operations), or for performing, in a secondary manner, various services that do not include financial intermediation (property management, phone bills domiciliation ). 4-1 Executing, at their customers request and in favour of third parties in Lebanon or abroad, foreign or domestic incoming or outgoing transfers in excess of USD 1,500. Article 8 2 : All the shares of a Lebanese financial institution must be in registered form. Article 9 3 : 1- Subscription to, and trading of financial institutions shares are subject to BDL Central Council prior approval, in the following cases: a- If it leads directly or indirectly to the acquisition by the subscriber or the assignee of more than 10% (ten percent) of the financial institution s total shares. b- If the subscriber or the assignee holds, at the time of the assignment, 10% or more of the financial institution s total shares. c- If the subscriber or the assignor or the assignee is a current or elected member of the Board of Directors, regardless of the number of assigned shares. The stake of the spouse, minor children, and any economic group, shall be computed as part of the 10% mentioned in Sub-Paragraphs (a) and (b) above. 2- The provisions of Articles 5 and 5 bis of the Implementation Regulations on Lebanese Banks Shares Issuing and Trading, attached to Basic Decision 7814 of May 11, 2001 shall apply to companies and mutual funds participating in the capital of any Lebanese financial institution, provided a percentage of 10%, instead of 5%, is adopted. 3- Financial institutions must notify Banque du Liban of any assignment of shares that leads to the acquisition by the assignee of 10% or less of their capital. The concerned financial institutions shall check, on their own and full responsibility, the fulfilment of all the legal and regulatory conditions (shareholders preemptive right, Board of Directors approval...) concerning the assignment of shares mentioned 1 - The last amendment to this Paragraph was made pursuant to Intermediate Decision of October 28, 2013 (Intermediate Circular 343). 2 - This Article was amended pursuant to Article 1 of Intermediate Decision 8616 of January 7, 2004 (Intermediate Circular 43). 3 - The last amendment to this Article was made pursuant to Article 3 of Intermediate Decision of February 29, 2016 (Intermediate Circular 411); whose Article 9 reads as follows: Banks and financial institutions whose situation is inconsistent with the provisions of Articles 1, 2 and 3 of this Decision, must adjust their situation within two years from its issuance date. 6

8 in this Paragraph (3), as well as the accuracy of the information they communicate to Banque du Liban. They shall also verify that the by-laws or Articles of Association of the assignee companies and mutual funds explicitly state that all the shares of these companies or funds are in registered form, and are fully and continuously owned, whether directly or indirectly, by natural persons or companies whose shares are in registered form. 4- The Banking Control Commission shall: a- Verify the implementation of the provisions of this Article and monitor the accurate calculation of the percentage of shares, participations and indirect subscriptions. b- Verify, on-site, the authenticity of the documents related to the assignment of shares, as well as the accuracy of submitted information, and immediately notify the Governor of Banque du Liban about any violation. 5- Under this Article, the transfer of shares/stocks through inheritance or will shall not be considered as an assignment. Article 10 1 : 1-2 Financial institutions must comply with the obligations stipulated in Articles 152 (Paragraphs 3 and 4), 154 (Paragraph 1), 153, 156, 160, 161, 164 and 165 of the Code of Money and Credit. 2- The ceiling of facilities granted by any financial institution operating in Lebanon to a non-resident person, whether a natural or moral person or a person belonging to an interconnected group of debtors, is set at five percent (5%) of the financial institution s own funds, provided total facilities do not exceed twenty-five percent (25%) of the own funds. The aforementioned ceiling shall be applicable to directly or indirectly granted or used facilities, whichever higher, after deducting the provisions built up by the financial institution against these facilities, if any. Article 11: The financial institution must clearly and publicly display, at its head office and each of its branches, the decision of Banque du Liban to register it on BDL List of Financial Institutions. 1 - This Article was amended pursuant to Article 1 of Intermediate Decision 8648 of February 24, 2004 (Intermediate Circular 51); Article (2) of the said Decision stipulates the following: Financial institutions whose situation is incompatible with the provisions of Paragraph (2) of Article 1 above, are granted a one-year time limit from the issuance of this Decision to comply with the provisions of this Paragraph. 2 - This Paragraph was amended pursuant to Article 9 of Intermediate Decision of January 27, 2012 (Intermediate Circular 290); and financial institutions whose situation is incompatible with the provisions of Articles 153 and 154 of the Code of Money and Credit were granted a two-year time limit from the issuance of this Decision to comply with the provisions of both Articles. 7

9 Article 12 1 : Financial institutions must: - Comply with the regulatory texts issued by Banque du Liban, whenever undertaking operations that fall within their competence, notably financial intermediation operations or fiduciary operations, or whenever establishing or managing or marketing any collective investment scheme. - Whenever undertaking financial intermediation operations, insert in the contracts and documents concerning the operations performed with their customers a warning statement indicating that financial investments, notably those with a speculative nature, expose them to high risks. Article 13 2 : Without prejudice to the provisions of Article 4 of this Decision, financial institutions are governed by the Regulations attached to Basic Decision No 7147 of November 5, 1998, on the opening and closing of the branches of banks operating in Lebanon, and on the allocations required for head offices and branches. Article 14: The draft Articles of Association of the Lebanese financial institution to be established must expressly state that it complies with the Articles 3 to13 of this Decision. Article 15: The following regulations issued by Banque du Liban are repealed 3 : Circular No 1 of March 3, 1993, addressed to Financial Institutions; Decision No 5994 of September 1 st, 1995, implemented by Circular No 2 of September 1 st, 1995, addressed to Financial Institutions; and Decision No 6453 of January 16, 1997, implemented by Circular No 3 of January 16, 1997, addressed to Financial Institutions. 1 - This Article was amended pursuant to Article 2 of Intermediate Decision of May 21, 2011 (Intermediate Circular 266). 2 - This Article was amended pursuant to Article 3 of Intermediate Decision 9919 of June 10, 2008 (Intermediate Circular 166). 3 - Circulars numbers are according to the old numbering. 8

10 Article 16: This Decision shall enter into force upon its issuance. Article 17: This Decision shall be published in the Official Gazette. Beirut, October 22, 1998 The Governor of Banque du Liban Riad Toufic Salamé 9

11 ANNEX 1 Requirements complementary to market maker and liquidity provider s transactions 1- Quantitative Requirements: a- Daily losses resulting from speculative operations must not exceed 2% of Tier 1 capital, and total cumulative losses must not exceed, at any time, 20% of Tier 1 capital. b- In case these losses exceed 20% of Tier 1 capital, the institution must either liquidate this overrun on the next working day if it cannot do so on the same day, or deposit at Banque du Liban a special reserve in Lebanese pound equivalent to this overrun. c- The notional value of opened positions must not exceed the free Tier 1 capital, i.e. Tier 1 capital after deducting: - The impairment in the provisions and the items of Article 153 of the Code of Money and Credit, and the overrun on the provisions of Article 152 of this Code, for financial institutions. - The impairment in provisions, for financial intermediation institutions. d- Calculate the number of authorized opened positions in a way that the notional value of these positions does not exceed, at any time, the free Tier 1 capital. e- Compute the notional value on the basis of the following equation: Total opened positions x notional value of opened positions x entry price of opened positions n (Q i x N i x P i ) i=1 Qi : number of opened positions for each type of contract Ni: the notional value for each opened position Pi: the entry price of each contract 2- Qualitative Requirements: a- Establish a Risk Committee pursuant to the provisions of Basic Decision No 9956 of July 21, b- Establish a Risk Management Unit that fulfills its mission in conformity with all the relevant issued regulations and Circulars and is in charge of: - Drawing a risk management policy and specifying the financial instruments and derivatives and transactions that may be performed by the financial institution or financial intermediation institution. - Specifying the risk limits for all acceptable positions and financial instruments (daily, weekly, monthly, annual limits ) - Setting a documented methodology for the management of opened positions and their risk reduction, provided this methodology is periodically reviewed by the Risk Committee. 1 - This Annex was added pursuant to Intermediate Decision of January 27, 2012 (Intermediate Circular 290). 10

12 c- Adopt systems for risk measurement and for the pricing of financial instruments and derivatives. d- Create, in addition to the Front Office and the Back office, a Middle Office in charge of controlling all daily positions and verifying compliance with specified limits and margins. e- Comply with the provisions of Basic Decision No 7737 of December 15, 2000, to assess the efficiency of internal control systems and internal audit procedures in terms of risk management. 11