8517.62.00 Machines for the reception, conversion and transmission or
regeneration ofvoice, images or other data, including
switching and routing apparatus :
8st7.62.10 Transmission apparatus with or without reception
apparatus
85t7.62.90 Other
8517.69.00 Other
8517.70.00 Parls
Monitors and projecto,rs, not incorporltilg teffiion;, ',
recrcption appar:atus; reception rpparatus for teleVisiOn; I
whether or not incorporating ra.{io roadcast receivels or
sbund or,video recordihg or reproducing:appaiatusr, i r;'r;85.28
Cathode-ray tube monitors :
8528.42.00 Capable of directly connecting to and designed for use with
an automatic data processing machine of heading 84.71
8s28.49.00 Other:
8528.49.10 Used / reconditioned
8s28.49.90 Other
Other monitors :
8s28.s2.00 Capable of directly connecting to designed for use with an
automatic data processing machine of heading 84.71
8s28.s9.00 Other:
8528.59.10 Used / reconditioned
8s28.59.90 Other
Projectors :
8528.62.00 Capable of directly connecting to designed for use with an
automatic data processing machine of heading 84.71
8528.69.00 Other
Reception apparatus for television, whether or not
incorporating radio- broadcast receivers or sound or video
recording or reproducing apparatus :
8528.71.00 Not designed to incorporate a video display
or screen :
8528.71 .10Used / reconditioned
8528.71.20 Other, colour
8528.71 .90C)ther
8528.72.00 Other. colour


8528.72.10 Unassembled in completely knocked- down
form
8s28.72.20 Used / reconditioned
Other, with cathode ray tube :
8528.72.31 Having a screen of less tban 14 inches
8528.72.32 Having a screen of 14 inches and not exceeding 15 inches
8528.72.33 Having a screen ofexceeding 15 inches and not exceeding 2l
inches
8528.72.34 Having a screen of exceeding 2l inches and not exceeding 25
inches
8s28.72.35 Having a screen ofexceeding 25 inches and not exceeding 29
inches
8528.72.36 Having a screen ofexceeding 29 inches and not exceeding 34
inches
8528.72.39 Other
Other, with LCD :
8528.72.41 Having a screen ofnot exceeding 32 inches
8s28.72.49 Other
Other :
8528.72.91 Having a screen ofnot exceeding 32 inches
8528.72.99 Other
8s28.73.00 Other, monochrome :
8528.73.10 Used / reconditioned and completely knocked-down with or
without cathode ray tube
8s28.73.20 Other, completely knocked-down with or without cathode ray
tube
8s28.73.30 Other, used / reconditioned
8s28.73.90 Other
Machines, each of a dry linen capacity not exceeding 10 kg :
84s0.1 1.00Fully-automatic machines :
8450.1 r.10Unassembled in completely knocked-down form
8450.1 1.20Used / reconditioned
Other, top loading:
84s0.1 1.31Of a dry linen capacity less than 4 kg
84s0.11.32 Of a dry linen capacity exceeding 4 kg and not exceeding 5.5
kg


8450.1 1.33Of a dry linen capacity exceeding 5.5 kg and not exceeding
7.5 kg
8450.1 1.34Of a dry linen capacity exceeding 7.5 kg and not exceeding
9.5 kg
84s0.1 1.39Other
Other, front loading :
8450.1 l.4lOf a dry linen capacity less than 4 kg
8450.tl.42 Of a dry linen capacity exceeding 4 kg and not exceeding 5.5
kg
84s0.1 1.43Of a dry linen capacity exceeding 5.5 kg and not exceeding
7.5 kg
8450.11.44 Of a dry linen capacity exceeding 7.5 kg and not exceeding
9.5 kg
8450.fi.49 Other
8450.12.00 Other rrachines, with built-in centrifugal drier :
8450.1 2. I 0Unassembled in completely knocked-down form
84s0.12.20 Used / reconditioned
Other:
84s0.t2.31 Of a dry linen capacity less than 4 kg
8450.12.32 Of a dry linen capacity exceeding 4 kg and not exceeding 5.5
kg
84s0.12.33 Of a dry linen capacity exceeding 5.5 kg and not exceeding
7.5 kg
84s0.12.34 Of a dry linen capacity exceeding 7.5 kg and not exceeding
9.5 kg
8450.12.39 Other
84s0.19.00 Other:
8450.19.10 Unassembled in completely knocked-down form
84s0.19.20 Used / reconditioned
Other
84s0.19.31 Of a dry linen capacity less than 4 kg
8450.19.32 Of a dry linen capacity exceeding 4 kg and not exceeding 5.5
kg
8450.19.33 Ofa dry linen capacity exceeding 5.5 kg and not exceeding
7.5 kg
8450.t9.34 Of a dry linen capacity exceeding 7.5 kg and not exceeding
9.5 kg
8450.19.39 Other
8450.20.00 Machines, each of a dry linen capacity exceeding l0 kg
8450.90.00 Parts


CENTRAL BANK OF SRI LANKA BANK SUPERVISION DEPARTMENT28 December 2018CIRCULARNo. 03 of 2018To - Chief Executive Officer of National Savings BankCOMPUTATION OF LEVERAGE RATIO UNDER BASEL III FOR NATIONAL SAVINGS BANKWe refer to Banking Act Directions No. 12 of 2018 on “Leverage Ratio under Basel III for Licensed Commercial Banks and Licensed Specialised Banks” and inform you the following:1 Computation of Leverage Ratio Exposure Measure1.1 The Central Bank of Sri Lanka has decided to permit National Savings Bank to exclude investments in government securities representing sixty per cent of money deposited in savings and deposit accounts of the bank from the exposure measure when calculating the Leverage Ratio.1.2 The amount mentioned in 1.1 shall be deducted from web based return code 36.2.1.1.1.0 in the quarterly return of BSD-QF-36- EM.A A M ThassimDirector of Bank Supervision
1


Bank Supervision Department
Central Bank of Sri Lanka
31 Decem ber 2018
 Guidelines to Licensed Banks on the Adoption of
 Sri Lanka Accounting Standard – SLFRS 9:
Financial Instruments


This page has been left blank intentionally


2
 Guidelines to Licensed Banks on the Adoption of Sri Lanka Accounting
Standard  - SLFRS 9: Financial Instruments
1. Introduction

1.1 The new Sri Lanka Accounting Standard, ‘SLFRS 9: Financial Instruments’  shall be
applicable for financial reporting periods be ginning on or after 01.01.2018 and the adoption of
SLFRS 9 has a significant impact towards banks and other financial institutions.
1.2 While the responsibility of preparation, presentation and disclosure of financial statements in
line with the applicable Sr i Lanka Accounting Standards is vested with the Board of Directors
(BoD) and the senior management of licensed banks, the Central Bank of Sri Lanka (CBSL)
promotes consistent and prudent application of SLFRS 9 in the banking sector.
1.3 In this respect, di scussions were held  with the Institute of Chartered Accountants of S ri Lanka ,
the Panel of Auditors  and the banking sector  to understand the concerns of licensed  banks in
the adoption of SLFRS 9 .
1.4 These guideline s are prepared  based on the ‘Guidance on Credit Risk and Accounting for
Expected Credit Losses’ issued by the Basel Committee on Banking Supervision in December
2015 , the best practices and guidelines issued by the monetary a uthorities/regulators on
implementation of International Financial Reporting Stan dards 9: Financial Instruments and
taking into consideration the comments received from CA Sri Lanka, Panel  of Auditors and
licensed banks in this regard.
1.5 These Guidelines should be adopted within the requirements of SLFRS 9.

2 Objec tives of Issuing Guidelines on Adoption of SLFRS 9

2.1 CBSL  expects to establish consistent and prudent pract ices on adoption of SLFRS 9 by
licensed banks in Sri Lanka.
2.2 Accordingly, licensed banks are required to adhere to the following Guidelines  (in addition to
the existing  applicable  regulations)  as a minimum ; on classification and measurement of


the existing  applicable  regulations)  as a minimum ; on classification and measurement of
financial assets and financial liabilities, management of credit risk, impairment of financial
assets, valuation of collateral s, role of the internal a udit, regulatory and reporting requirements ;
when preparing, presenting and publishing  financial statements .


3
 3. Classification and Measurement of Financial Assets and Financial Liabilities
3.1 Classification and measurement of  Financial Assets
(a) Business models approved by BoD (overseei ng authority in respect of banks incorporated
outside Sri Lanka) shall be in place to facilitate classification of financial assets . For this
purpose,  sufficient  documentation on objectives, definitions, characteristics , criteria  and
operating policies along with adequate procedures  and systems for assessing the  busin ess
models on an on -going basis shall be in place.
(b) Such  operating  policies shall include , at a minimum,  the decision -making  authorities for
business  model decisions, level of sales to be considered as infrequent and insignificant,
time period for near term selling to be considered for trading purposes, election of fair
value option for instruments through profit or loss and through other compr ehensive
income.
(c) In terms of SLFRS 9,  debt instruments shall pass the  SPPI test (contractual cash flows  to
meet  Solely Payments of Principal and Interest ) and if so  such instruments  shall be
classif ied as ‘financial assets at amortised cost (AC) ’ or ‘financial assets at fair value
through other comprehensive income (FVOCI) ’ based on the outcome of the business
model test .
(d) Licensed banks are required to maintain standardised processes, detailed checklists and
decision trees in order to assess and ident ify SPPI features of their products and contracts.
(e) Accordingly, broad classification and subsequent measurement of financial assets are
given in Table 1  below .
Table 1 - Classification and Measurement of Financial  Assets
Business Model  Key Characteristics  Classification &
Subsequent Measurement
Debt Instruments1
Held -to-collect  - Hold assets to collect contractual
cash flows
- Meet SPPI test
- Infrequent and insignificant sales  Amortised Cost


cash flows
- Meet SPPI test
- Infrequent and insignificant sales  Amortised Cost

1 In addition to these key characteristics other features of the product, management compensation, risk management
aspects , frequency and significance of sales, etc.  must also be considered.


4
 Both held to collect and
for sale  - Both collecting contractual cash
flows and sales
- More frequent and significant
sales  Fair value through other
comprehensive income
Other business models,
including;
- Trading
- Managing assets on a
fair value basis
- Maximis ing cash
flows through sale  - Neither ‘held-to-collect ’ nor ‘held
to collect and for sale ’
- Collection of contractual cash
flows is incidental  Fair value through profit or
loss
Equity and Derivative Instruments
Equity Instruments  - Held for trading  Fair value through profit or
loss
- Not for trading and not elected
the irrevocable OCI option  Fair value through profit or
loss
- Not for trading and elected the
irrevocable OCI option  Fair value through other
comprehensive income
Derivative Instruments  Fair value through profit or
loss

3.2 Classification and measurement of Financial Liabilities
(a) Broad classification and m easurement  of financial liabilities are given in Table 2 below.
Table 2 - Classification and Subsequent Measurement of Financial Liabilities
Classification of Financial
Liabilities  Subsequent
Measurement  Accounting for Fair Value Gain
Financial liabilities held for
trading  Fair value  Through profit or loss
Financial liabilities
designated at fair value  Fair value  The amount of change in fair value
attribut able t o changes in credit risk in
liability presented in other comprehensive


5
 income  2 and remaining amount shall be
presented in income statement.
Other financial liabilities at
amortised cost  Amortised  Cost -

(b) If a licensed bank is accounting for its financial liabilities as designated through profit or
loss, changes in value of  such liabilities due to changes in own credit risk are required to
be assessed and accounted through other comprehensive income  as stated above . Licensed
banks are  requested to  formulate internal  guidelines and criteria for this purpose

3.3 Reclassification
(a) If the objective of the business model of the licensed bank f or its financial assets  changes
and its previous model a ssessment would no longer apply, reclassification is required
between financial assets under the provisions of SLFRS 9.
(b) In line with the requirements of SLFRS 9, such  changes in business models and
reclassifications shall be approved by  the BoD  and shall  be notified to the Director of Bank
Supervision wit hin 7 working days of the date of such approval.
3.4 Measurement at Fair Value
When financial instruments are subse quently measured at fair value, licensed banks shall
comply with the requirements given in ‘Sri Lanka Accounting Standard  - SLFRS  13: Fair
Value Measurement ’ and are required to:
(a) Use an appropriate valuation  technique  for which sufficient data is available ;
(b) Apply the selected valuation technique consistently ;
(c) Maximis e the use of relevant observable inputs . In exceptional circumstances,
unobservable inputs  may be used; and
(d) If inputs under level 3 hierarchy  are used in the respective valuation technique, the Chief
Risk Officer  or most senior officer overseeing the risk management function shall confirm
the appropriateness and reliability  of such inputs.
4. Principles for Sound Credit Risk Management
4.1 BoD  and the senior management are responsible for ensuring that the licensed bank s have


4.1 BoD  and the senior management are responsible for ensuring that the licensed bank s have
appropriate credit risk practices, including an effective system of internal control , to
consistently determine adequate impairment allowances in accordance with the policies and

2 If that treatment creates or enlarge s an accounting mismatch in profit or loss, an entity shall present all gains or losses
on that liability (including the effects of changes in the credit risk of that liability) in profit or loss.


6
 procedures  of licensed  banks , the applicable Sri Lanka Accounting Standards  and relevant
supervisory guidance.
4.2 Licensed b anks shall  document and adhere to sound methodologies that address policies,
procedures and controls for assessing and measuring credit risk on all financial assets . The
measurement of impairment allowances should build upon those robust methodologies and
result in the appropriate and timely recognition of expected credit losses in accordance with
the applicable Sri Lanka Accounting Standards .
4.3 The aggregate amount of impairment allowances  of licensed banks , regardless of whether
allowance components are determined on  a collective or an individual basis, should be
adequate and consistent with the objectives of the applicable Sri Lanka Accounting Standards.
4.4 Licensed b anks shall  have policies and procedures in place to validate models used to assess
and measure expected credit losses.
4.5 Licensed banks shall  use experienced credit judgment, especially in the robust consideration
of reasonable and supportable forward -looking information, including macro -economic
factors, to measure the expected credit losses.
4.6 Licensed b anks should have a sound credit risk assessment and measurement process with the
support of adequate  systems, tools and data to assess credit risk and to account for expected
credit losses.
4.7 Licensed b ank’s public disclosures should promote transparency and com parability by
providing timely, relevant and useful information.
5. Impairment of Financial Assets
5.1 Calculation of Expected Credit Loss es
Licensed banks are required to calculate expected credit losses for the following:
(a) Financial assets measured at AC
(b) Financial assets mandatorily measured at FVOCI
(c) Loan commitments  when there is an obligation to extend credit (except those  measured at
Fair Value through Profit or Loss )


Fair Value through Profit or Loss )
(d) Financial guarantee contracts (except those measured at Fair Value through Profit or Loss)
(e) Lease receivables within the scope of LKAS 17: Leases
(f) Contract assets within the scope of SLFRS 15: Revenue from Contracts with Customers
5.2 Life-time Expected Credit Losses and 12 Month Expected Credit Losses
(a) At each reporting date, licensed banks shall measure the loss allowance for financial
instruments at an amount equal to life -time expected losses , if the credit risk of a financial


7
 instrument has increased significantly since initial recognition  (except for the purchased
or originated credit -impaired financial assets ).
(b) For purchased or originated credit impaired financial assets , life time expected credit
losses shall be measured.
(c) In principle , life time expected credit losses  and credit impaired loans are  provided on an
individual basis . However , due to lack of borrower -specific information , licensed banks
may perform  the assessment on appropriate groups or portfolios on a collec tive basis.
(d) At the reporting date, if the credit risk o f a financial instrument has not increased
significantly  since  the initial  recognition , licensed banks shall measure the loss allowance
for that financial instrument at an amount equal to  12 month expected credit loss .
5.3 Economic Factor Adjustment
(a) Licensed banks shall use the forecasts and projections  published by CBSL , International
Monetary Fund and/or World Bank in  all instances where such projections are available
when adjusting credit provisioning models to reflect the economic conditions and
forecasts .
(b) If the required inf ormation is  not available through above sources , licensed banks shall
use credible alternative sources and  shall  maintain documentary evidence .
(c) BoD  approved policies shall  be available to specify the sources to b e used and licensed
banks shall  not cherry pick sources in their favour.
5.4 Significant Increas e in Credit Risk
For the purpose of calculating life -time expected losses, as a minimum, if one or more of the
following  factors/ conditions are met, it s hall be considered as a significant increase in credit
risk:
(a) When contractual payments of a customer are more than 30 days past due 3 (subject to
the rebuttable presumption in the  SLFRS 9 );
(b) When the risk rating of a customer or an instr ument has been downgraded to B + by an


(b) When the risk rating of a customer or an instr ument has been downgraded to B + by an
external credit rating agency  and/or when there is a two-notch  downgrade in the banks
internal rating system . In the event no  external credit rating is available, licensed banks
are required to map their internal credit risk ratings with the ratings issued by the External
Credit Assessment Institutions (ECAI). For this purpose, licensed banks are required to
refer the mapping of external credit ratings given in Direction No. 1 of 2016 on Capital

3 Days p ast due shall be  calculated from contractual  due date  of the payment .


8
 Requirements under Basel III for Licensed Commercial Banks and Licensed  Specialised
Banks;
(c) When reasonable and supportable forecasts of future economic conditions directly affect
the performance of a customer/group of custom ers, portfolios or instruments;
(d) When there is a significant change in the geographical locations or nat ural catastrophes
that directly impact the performance of a customer/grou p of customers or an instrument;
(e) When the value of collateral is significantly reduced  and/or realisibility of collateral is
doubtful . Limits shall be set and documented  by licensed b anks;
(f) When a customer is subject to litigation , that significantly  affect s the performance  of the
credit facility ;
(g) Frequent changes in the senior management of an institutional customer ;
(h) Delay in the commencement of business operations/projects by more than two years from
the original ly agreed date ;
(i) Modification of terms resulting in concessions, including extensions, deferment of
payments, waiver of covenants etc. ;
(j) When the  customer is deceased/insolvent;
(k) When the bank is unable to contact or find the customer ;
(l) A fall of 50% or more in the turnover and/or profit before tax of the customer when
compared  to the previous year; and
(m) Erosion in net -worth by more than 25% when compared  to the previous year.
5.5 Models for Calculation of Expected Credit Losses
(a) Licensed banks shall consider all available and relevant internal and external data when
estimating expected credit losses, ensuring that the estimates are robust, unbiased and
reflective of current exposures.
(b) Licensed banks shall  develop robust models to determine expected credit losses under
SLFRS 9. Such models shall be tailored to reflect the bank’s risk profile.
(c) Licensed banks shall ensure that the relevant officers are well trained and competent on
understand ing the models  adopted by them  for this purpose.


understand ing the models  adopted by them  for this purpose.
(d) When obtaining support from external vendors/consultants in respect of model
development, rigorous governance and internal control processes shall be adhered.
(e) If diff erent models are used for different portfolios and instruments, licensed banks are
required to document the reasons why the selected model is appropriate  and all credit
models must be review ed at least  annually .


9
 (f) An effective model validation process shall be established to ensure that the credit risk
assessment and measurement methods are able to generate accurate, consistent and
unbiased predictive estimates on an ongoing basis.
(g) Licensed banks are required to de sist from making changes in the parameters, inputs and
assumptions used for the purpose of profit smoothening. The rationale and justification
for any changes in the expected loss model s shall be documented and justified by the
Chief Risk Officer and ap proved by the BoD .
(h) Assumptions concerning the impact of changes in general economic developments on
borrower’s repayment capacity, shall be made with sufficient prudence.
(i) In cases where banks incorporated outside Sri Lanka use models developed by head
office or regional offices, to ensure appropriateness of the credit models to the Sri Lankan
context, the local implementation team should carry out appropriate validation
procedures .
5.6 Further,  in respect of impairment of financial instruments , licensed banks shal l follow the
guidance given in Annex I.
5.7 These guidelines are expected to be reviewed in future, looking at the market developments,
data quality, model development and capacity within the banking sector.
6. Collateral Valuation
6.1 Expected cash  flows from collateral realization  shall be based on latest observed reliable
market valuations and shall appropriately reflect the inherent uncertainty associated with
distressed property liquidation  (including the time taken for such realisation) .
6.2 Any increase  in valuations shall be substantiated  by solid evidence that such increases are
sustainable.
7. Role of Internal Audit
7.1 The Internal Audit function shall  independently evaluate the effectiveness of the credit  risk
assessment, measurement systems and processes  of licensed banks and shall  ensure the
acceptability of credit judgments .


acceptability of credit judgments .
7.2 Internal Audit function shall  validate and evaluate all credit risk assessment models , inputs  and
assumptions  used along with data smoothening, if any.
7.3 Internal audit funct ion shall  provide assurance over the adequacy and effectiveness of back
testing, i n order to ensure that the key drivers have been captured and calibrated accurately.


10
 8. Regulatory Requirements
8.1 In line with the international best practices, CBSL  is of the view  that the existing prudential
regulations  pertaining to assets  classification, measurement and provisioning  should be in
force.
8.2 Accordingly, licensed banks shall  submit all periodical information including web based
statutory returns to CBSL  in accordance with the existing Orders, Determinations, Directions,
Guidelines, Circulars and Instructions issued.
8.3 Licensed banks shall  maintain adequate data/records  and systems  separately  to identify ,
reconcile and report requirements under the Sri Lanka Accounting Standards and  under the
existing regulatory framework.
8.4 Impact on expected  credit loss provisioning is required to be captured when preparing c apital
planning and stress testing  processes of licensed banks.
8.5 In order to avoid stress on capital and  in line with the guidance given by the Basel Com mittee
on Banking Supervision, l icensed banks shall  stagger audited additional credit loss provisions
arising from SLFRS 09 when  compared with credit loss provisions under  LKAS 39  as at first
day of adoption of SLFRS 9 , net of any other adjustment on first day impact to retained earnings
and net of tax effects,  throughout a transitional period of four years as given below  for the
purpose of calculati ng the Capital Adequacy Ratio  (CAR) under  Banking Act Directions No.
01 of 2016 on Capital Requirements under Basel III.
Table 3 - Staggering of First Day Impact for Capital Adequacy  Ratio Computation

9. Regulatory Reporting and Disclosures
9.1 Licensed banks shall disclose the total amount of first day impact arising from the adoption of
SLFRS 9 and its impact to CAR as specified in 8.5 above throughout the transitional period  in
the financial statements .
9.2 However, the first day impact shall be fully adjusted in the financial statements on the first day
of adoption of SLFRS 9.


of adoption of SLFRS 9.
9.3 Licensed banks are required to report the information set out in Tables 4 and 5 below to the
Bank Supervision Department through bsddb@cbsl.lk within 30 days after the end of each
quarter, commencing 31.12.2018.
 Cumulative Percentage of Absorption of First Day Impact
01.01.2018  31.12.2018  31.12.2019  31.12.2020  31.12.2021
12.5 25 50 75 100


11
 Table 4 – Probability of Defaults  (PD)  and Loss Given Defaults  (LGD)
on Collective Impairment as at …..….
Business Segment/Product /
Category or any Other
Basis  PD LGD
Stage 1  Stage 2  Stage 3  Stage 1  Stage 2  Stage 3

Table 5 - Upgrading of  Credit Facilities/ Exposures  for the Computation of
Expected Credit Losses for the Quarter Ended as at ……….
Number of Facilities upgraded
From stage 2 to stage 1
From stage 3 to stage 1
From stage 3 to stage 2
Value of Total Facilities Upgraded
From stage 2 to stage 1 (Rs.mn)
From stage 3 to stage 1 (Rs.mn)
From stage 3 to stage 2 (Rs.mn)
Total of interest income re-recognised to the income
statement on upgrading to Stage s 2 and 1. (Rs.mn)


12
 Annex I
Additional Guidance on Impairment of Financial Instruments
The following  guidance  is provided with a view  to improv ing and maintain ing the
consistent application  and comparability within the  banking  sector  when calculating expected
credit losses un der SLFRS 9 .

1. Guidance on Minimum Criteria to be met by all licensed banks for categorisation
of credit facilities/exposures into stages for computation of expected credit losses is
as follows :

1.1 Stage 1
All credit facilities,  which are not categori sed under Stages 2 or 3 below.
1.2 Stage 2
(a) Credit facilities, where contractual payments of a customer are more than 30 days
past due , other than the credit facilities categori sed under  Stage 3  below, subject  to
the rebuttable presumption as stated in SLFRS 9 .
(b) All r estructured1 loans, which are restructured up to  two times, other than credit
facilities/exposures mentioned in 3.2 below.
(c) Under -perform ing credit facilities/ exposures as identified in paragraph 5.4 of the
“Guidelines to Licensed Banks on the Adoption of S LFRS 9: Financial
Instruments”.
1.3 Stage 3
(a) Credit facilities where contractual paymen ts of a customer are more than 9 0 days
past due , subject to the rebuttable presumption as stated in  SLFRS 9.
(b) All restructured loans, which are restructured more than twice , other than credit
facilities/exposures mentioned in 3.2 below.
(c) All rescheduled2 loans, other than credit facilities/exposures mentioned in 3.2
below .
(d) All credit facilities/customers  classified as non-performing as per CBSL Directions.
(e) Non-performing credit  facilities/customers as identified in the paragraph 5.4 of the
“Guidelines to Licensed Banks on the Adoption of SLFRS 9: Financial
Instruments”.

1 Restructured facilities are where the original repayment terms have been amended due to a deterioration in


credit quality, while the respec tive credit facility remained as  Performing  loans and advances as per CBSL
Directions .
2 Rescheduled facilities are where the original repayment terms have been amended , while the respective credit
facility remained as Non-performi ng loans and advances as per CBSL Directions .


13
 2. Guidance for  comput ation of  the Probability of Default (PD)  and Loss Given
Default (LGD)  to be used as a mini mum for the calcula tion of expected credit
losses  is as follows .
2.1 Licensed banks shall use at least five-year data when calculating PDs and any
smoothing of data or inputs must be validated by the Risk Management Department .
2.2 Licensed banks sh all not use pr oxies to compute PDs and LGDs , unless the bank is a
newly incorporated bank with inadequate credit history  of less than 5 years .
2.3 When  the licensed bank  is unable  to compute LGDs due to lack of data or inputs , such
bank  is required to use a minimum LGD of 4 5 per cent for such exposures.
2.4 Licensed banks shall use of an LGD of 0 per cent for same currency  denominated c ash
backed loans  with a  haircut of over 10 per cent and subject to meeting the conditions in
section 4(2) of  Banking Act Direction No. 3 and 4  of 2008 Classification of Loans and
Advances, Incom e Recognition and Provisioning .
2.5 With respect to exposures denominated in foreign currencies issued by  the sovereigns,
following shall be considered:
(a) Licensed banks shall compute PDs by using a sovereign PD w hich is linked to the
external credit rating scale .
(b) A 20 per cent LGD  shall be applied as a minimum  when computing expected
losses.
2.6 When calculating LGD for exposures guaranteed by the Government  of Sri Lanka :
(a) An LGD of zero can be applied to exposures wit h the guarantee of the Government
provided that the guarantee is  fully covered with the interest and reported a s
liabilities of the Government .
(b) LGD for any other form of assurance other than in item 2.6 (a) above shall be
comput ed instead of using a zero LGD.
(c) A minimum LGD of 20 per cent shall  be applied for Government  guarantee s
denominated  in foreign currency .

3. Other Guidance
3.1 Off-balance sheet exposures: when converting o ff-balance sheet exposures  for


3.1 Off-balance sheet exposures: when converting o ff-balance sheet exposures  for
expected credit loss calculations , licensed banks m ay use the value s as per the credit
conversion factor s specified in the Banking Act Direction No. 01 of 2016 on Capital
Requirements under Basel III , if historical data is not available .


14
 3.2 Upgrading of credit facilities : when upgrading credit facilities  from a higher stage to a
lower stage  (e.g., from stage 3 to stage 2)
(a) The upgrading of credit facilities shall only be carried out by Risk Management
Department  and be independent from the loan review mechanism.
(b) Such upgrading shall be supported with a BoD  approved policy , rationale and
with adequate documentation.
(c) When upgrading restructured facilities, satisfactory performing period of a
minimum 90 days must be considered subsequent to the due date of the 1st
capital and/or interest installment post -restructure. With respect to upgrading
rescheduled facilities, licensed banks must comply with Banking Act Directions
No.3/4 of 2008 on Classification of Loans and Advances, Income Recognition and
Provisioning .
3.3 Internal Rating  Based (IRB) credit rating : A license d bank  shall not  use IRB credit
information  for expected  credit  loss calculations  without  compl ying with the following:
(a) Pricing mechanism shall be mapped with IRB  information ;
(b) Shall have at least five-year IRB based historical data subject to 3.3 (a) ; and
(c) BoD approved policies shall be in place and IRB inputs and models needs to be
reviewed independently by th e Risk Management Department .


El eoor @o OcoaBO
@on&ora to6du ornidl
CEMRAT BAI{K OFSRI I.ANIG
Oro4 q6ma6 oqorttoo@dcBp o'urdrdl Grogunrtenorp pilorarord;oond Bank Supervlslon Department
Our Ref.: 02/ 17 I 500/0590/00 1
g(January 2018
CEOs of Licensed Commercial Banks and Licensed Specialised Banks
Dear Sir
Implementation of Budget Proposal on Usance Letter of Credit Facilities
We write to bring to your attention that the Department of Trade and Investment Policy of
the Ministry of Finance and Mass Media has informed the Central Bank of Sri Lanka that
all financial institutions should refrain from issuance of Usance Letter of Credit facility for
importation of motor vehicles effective from 01.01.2018, as approved by the Parliament
under Budget for 2018.
You
Dir-ector of Bank Supervision
CC:
l. Director General, Department of Trade and Investment Policy, Ministry of
Finance and Mass Media
2. Controller General, Department of Imports and Exports Control
3. Director General, Departments of Customs
4. Commissioner General, Department of Motor Traffic
6 OeD O.De, Eo@ BO, daoa(,d OrOtD,
oE. s€, . 5OO, ooreo Of, € Cpiaro
I g+u zqnlr,orcsg6 q66 Dnq, 6rD. 30 Eorrgtlup'l Dtr6uEoE 06r(g6r{ 1
E. Ou. Oa).590, Oen1glir.g 01, e.)d.r6Leysl 6, ilo, 3q Janadhlpafil Mawatta, Cotombo 1
P . 0. Bu,590, Colombo 01, Srl Lanl€.
@ www.cbsl.gov.lk lJ s+lrz4tt7it ( banksup@cbsl.lt


I fldgi : (I) fPoh – Y%S ,xld m%cd;dka;%sl iudcjd§ ckrcfha w;s úfYI .eiÜ m;%h  – 2018'01'09
PART I: S EC. (I) – GAZETTE EXTRAORDINARY OF THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA – 09.01.20181A
Y%S ,xld m%cd;dka;%sl iudcjd§ ckrcfha .eiÜ m;%h
The Gazette of the Democratic Socialist Republic of Sri Lanka
w;s úfYI EXTRAORDINARY
(Published by Authority)
PART I: SECTION (I) – GENERAL
Central Bank of Sri Lanka Noticeswxl 2053$16 – 2018 ckjdß ui 09 jeks wÕyrejdod – 2018'01'09
No. 2053/16 – TUESDAY, JANUARY 09, 2018
THE MONETARY LAW ACT
REGULATIONS made by the Monetary Board under Section 32E of the Monetary Law Act, (Chapter 422).
Dr. I NDRAJIT  COOMARASWAMY ,
Chairman,
Monetary Board.
Colombo,
05th January, 2018.
Sri Lanka Deposit Insurance and Liquidity Support Scheme Regulations
 Amendment to the Sri Lanka Deposit Insurance Scheme Regulations, No. 1 of 2010
1.Citation 1.1 These Regulations shall be cited as Sri Lanka Deposit Insurance and Liquidity Support
Scheme Regulations, No. 1 of 2018.
2.Amendment to the 2.1 Sri Lanka Deposit Insurance Scheme Regulations, No. 1 of 2010 published in Gazette
principal regulation Extraordinary  No. 1673/11 of 28th September, 2010 is hereby amended as follows:–
Substitution for 2.2 In Regulation 5 thereof by the repeal of paragraph 5.1 of that regulation and the substitution
Regulation 5.1 of the following paragraph:
“5.1 Deposits to be insured shall include demand, time and savings deposit liabilities of
member institutions, value of the shares of shareholders who were initially depositholders, whose deposits were converted into equity under the directions of theMonetary Board in 2010 and 2011 as part of the Business restructuring plansimplemented prior to 01.01.2012 and exclude all borrowing instruments.”
This Gazette Extraordinary can be downloaded from www.documents.gov.lk


2A I fldgi : (I) fPoh – Y%S ,xld m%cd;dka;%sl iudcjd§ ckrcfha w;s úfYI .eiÜ m;%h  – 2018'01'09
PART I: S EC. (I) – GAZETTE EXTRAORDINARY OF THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA – 09.01.2018
For this purpose, the value of shares of shareholders whose deposits were converted
into equity, shall be the value of deposit/s that had been convered into shares.
Substitution for 2.3 In Regulation 9 thereof by the repeal of paragraph 9.6 of that regulation and the substitution
Regulation 9.6 of the following paragraph:
“9.6 The amount of compensation payable to a depositor shall be limited to the total
insured deposits computed as above, subject to a maximum of Rs. 600,000 orits equivalent in the case of foreign currency deposits, if such amount exceedsRs. 600,000.”
Substitution for 2.4 In Regulation 10 thereof by the repeal of paragraph 10.1 of that regulation and the
Regulation 10.1 substitution of the following paragraph:
“10.1 There shall be an established Deposit Insurance Unit in the Resolution and
Enforcement Department which shall be responsible for the operational and
management arrangements, under the insturctions and supervision of the Directorof Resolution and Enforcement in terms of Directions/Regulations and policies asapproved by the Monetary Board from time to time.”
4.Effective date 3.1 These amendments shall come into effect from 01st January, 2018.
01 – 632
PRINTED AT THE DEPARTMENT OF GOVERNMENT PRINTING, SRI LANKA


iaDecember 2019MONETARY BOARI)
CENTRAL BANK OF SRI LANKA
BANKING ACT DIRECTIONS No. 10 of 2019
FRAMEWORK FOR DEALING WITH DOMESTIC SYSTEMICALLY
IMPORTANT BANKS
In terms of the powers conferred by Sections 19(7)(a) and76G(7) of the Banking Act No. 30 of
1988, as amended, the Monetary Board has determined a framework for dealing with Domestic
Systemically Important Banks (D-SIBs) and Higher Loss Absorbency iiequirements (HLA) as
capital surcharge on D-SIBs having regard to the guidelines issued by the Basel Committee on
Banking Supervision.
This framework attempts to identify the banks whose failure has a larger impact on the financial
system due to size, interconnectedness, lack of substitutability and complexity and requires
maintaining HLA by such banks.
1. Empowerment 1.1
Scope of
Application
3. Capital Surcharge
on D-SIBst.2
2.1
3.1In terms of Section 102 of the Monetary Law Act, the Monetary
Board may from time to time by Order prescribe the minimum
capital ratios which the capital of licensed banks shall bear to the
total volume of their assets or to any specified category of such
assets.
In terms of Sections 46(l) and76J(l) of the Banking Act, in order
to ensure the soundness of the banking system, the Monetary
Board is empowered to issue Directions to all or any licensed
bank, regarding the manner in which any aspect of the business of
such bank or banks is to be conducted.
These Directions shall be applicable to every licensed bank:
(i) incorporated in Sri Lanka on a solo and consolidatedbasis; and
(ii) branches of banks incorporated or established outside Sri
Lanka, on a standalone basis.
D-SIBs shall maintain, at all times, the minimum capital surcharge
as prescribed in 3.2 below.


J0 December 2019,oy*h.:ds
'i1ffi6iiz*.U,r*f_,_fj
MONETARY BOARI)
CENTRAL BANK OF SRI LANKA
BANKING ACT DIRECTIONS No. 10 of 2019
4. Framework
5. Disclosure
RequirementJ.J
4.7
5.13.2 The minimum capital surcharge on D-sIBs are in Table 1 below:
Table 1: Minimum Capital Surcharge on D-SIBs
Bucket HLA Requirement
(CETI as a oh of risk-weighted assets)
-) 2.0
2 1.5
I 1.0
The capital surcharge on D-SIBs shall be met with Common
Equity Tier 1 (CETI) as defined in Banking Act Directions No. 01
of 2016 of Capital Requirements under Basel III.
Framework for Dealing with Domestic systemically rmportant
Banks is in Schedule I.
For each financial year-end, licensed banks with a Leverage Ratio
exposure measure, that exceeds Rs. 400 billion shall comply with
the disclosure requirements in Schedule I.
fl*|, ^-T
Dr. Indrajit Coomaraswamy
Chairmqn of the Monetary Board and
Governor of the Central Bank of Sri Lanka


Banking  Act Directions No. 10  of 2019
Framework for Dealing with Systemically Important Banks

SCHEDULE I


2
 FRAMEWORK FOR DEALING WITH DOMESTIC  SYSTEM ICALLY
IMPORTANT BANKS

1. Introduction
1.1 The Basel Committee on Banking Supervision (BCBS) issued an assessment
methodology for global systemically important banks (G -SIBs) and prescribed higher
capital surcharge  in November 2011. Later in July 2013 and July 2018 the assessment
methodology was reviewed and amended.
1.2 Similar to the case of  G-SIBs, failure of a large interconnecte d financial institution that
is not significant from an international perspective, may severely impact  the domestic
financial market and the real economy. Therefore, BCBS issued an extension  of the G -
SIB assessment  methodology to domestic systemically important banks (D -SIBs) in
October 2012.
1.3 Primary objective of the implementation of the D -SIBs framework is D-SIBs  to hold
higher capital buffers and to provide incentives to reduce their systemic importance  on
the do mestic economy .

2. The D -SIBs  Framework
2.1 The D-SIBs  framework is based on the 12 principles of BCBS and appropriate national
discretion is exercised in selection of indicators to accommodate structural
characteristics of the domestic financial system.
2.2 Scope of assessment: all locally incorporated domestic banks, subsidiaries bank
branches of foreign banks are included in the assessment based on the criteria specified
in 2.4 below.
2.3 D-SIB framework assesses locally incorporated banks on consolidated basi s and
foreign bank branches will be on a standalone basis.
2.4 Sample  of banks : Basel specified criteria on G -SIBs are considered when selecting the
sample for D -SIBs as below:
(i) 10 largest banks based on Basel III leverage ratio exposure measure;
(ii) Banks that were previously designated as D -SIBs in the previous year, if
necessary; and
(iii) Banks added based on supervisory judgement, if necessary.


3
 2.5 The impact  of a D -SIB’s failure on the domestic economy in principle is to be assessed
having regard to bank -specific fa ctors as below:
(i) Size
(ii) Interconnectedness
(iii) Substitutability/ financial institution infrastructure
(iv) Complexity
2.6 Details  of bank specific factors, individual indicator s under each factor and their
weights are as follows:
Table 01  - Factors Considered in Assessment of D -SIBs

2.7 The indicators  are briefly described below .
(i) Size
(a) The larger the bank, the more difficult it is for its activities to be quickly
replaced by other banks and therefore the greater the chance that its distress
or failure would cause disruption to the financial markets in which it
operates.
(b) The distress or failure of a large bank is also more likely to damage
confidence of the depositor and the financial system as a whole.
(c) The indicator used to measure size  is the measure of total exposures used in
the Basel III leverage ratio . Category  Individual Indicator  Category
Weighting
Size Total exposure  40%
Interconnectedness  Intra -financial system assets  20%
Intra -financial system liabilities
Securities outstanding
Substitutability  / financial
institution infrastructure  Assets under custody  20%
Trading volume
Payments activity
Complexity  Notional amount of derivatives  20%
 Level 2 assets  as reported under
Liquidity Coverage Ratio
Cross jurisdictional liabilities
Cross jurisdictional claims
Trading and available for sale (AFS)
securities


4
 (d) Larger the size of a bank, th e greater its market share  of critical financial
services, greater the cross jurisdictional activities,  more interconnected it is
to the banking sector and the d omestic economy, and therefore it is  more
difficult to substitute.
(e) Considering the systemic im portance placed in the “size” indicator and the
impact its having on other four indicators, the highest weight of 40% is
allocated.
(ii) Interconnectedness
(a) Financial distress at one bank can materially increase the likelihood of
distress at another bank given the network of contractual obligations in
which these banks operate.
(b) A bank’s systemic impact is likely to be positively related to its
interconnectedness vis -à-vis other financial institutions.
(c) Three indicators are used to measure interconnectedness: (i ) intra -financial
system assets; (ii) intra -financial system liabilities; and (iii) securities
outstanding.
(d) Each indicator is allocated an equal weight of 6.66% and the overall
category is weighted at 20% .
(iii) Substitutability
(a) The systemic impact of a bank’s distress or failure is expected to be
negatively related to its degree of substitutability as both a market
participant  and a client service provider.
(b) Three  indicators are used to measure substitutability: (i) assets under
custody; (ii) payments activity; (iii) trading volume.
(c) Underwritten transactions in debt and equity market were not considered
since banks do not have an exposure in underwriting based on the data
submitted by banks. This indicator will be considered at the next review of
the framework wh ich will be performed once in 3 years.
(d) Each indicator is allocated an equal weight of 6.66% and the overall
category is weighted at 20%.
(e) Substitutability is capped at 500 basis points.


5
 (iv) Complexity
(a) The systemic impact of a bank’s distress is expected to be  positively related
to its overall complexity including its business, structural and operational
complexity.
(b) The international impact of a bank’s distress or failure would vary in line
with its share of cross -jurisdictional assets and liabilities. The gre ater a
bank’s global reach, the more difficult it is to coordinate its resolution and
the more widespread the spillover effects from its failure.  Therefore, cross -
jurisdictional activity is included into the complexity.
(c) The more complex a bank is, the greater the costs and time needed to
resolve .
(d) Five indicators are used to measure complexity: (i) notional amount of Over
the Counter ( OTC ) derivatives; (ii) level 2 assets; (iii) trading and available
for sale securities; (iv) cross -jurisdictional claims ; and (v) cross -
jurisdictional liabilities.
(e) Each indicator is allocated an equal weight of 4% and the overall category
is weighted at 20%.
2.8 Ancillary Indicators
Ancillary indicators are considered relating to specific aspect of the systemic
importance of th e bank that may not be captured by the indicator based measurement
approach alone.  These indicators are used to support the judgement overlay.
2.9 Score Calculation
(i) Sample of banks are  selected for the computation of systemic importance based on
the size reported in the exposure measure of the Basel III Leverage Ratio  as in 2.4
above .
(ii) Data in Annex I is collected from the sample  of banks.
(iii) To calculate the score for a given indicator, th e bank’s reported value for that
indicator is divided by the corresponding sample total, and the resulting value is
then expressed in basis points by multiplying by 10000. The maximum score for
substitutability is capped at 500 basis points.
(iv) To calculate t he scores for the four bank specific factors, the scores for the


(iv) To calculate t he scores for the four bank specific factors, the scores for the
indicators that fall within each specific factor are averaged.


6
 (v) The final score is produced by averaging the four bank specific factor scores and
then rounding  to the nearest whole basis point .
2.10 Supervisory Judgment
(i) Bank’s score may be adjusted based on supervisory judgment.  Supervisory
judgment is used to override the indicator -based measurement approach in
exceptional cases .
(ii) In these exceptional cases, the published bucket does not align with the calculated
score. The decision to exercise supervisory judgment generally reflect s a variety
of quantitative or qualitative factors not captured in the indicators.
2.11 Bucketing Approach
(i) Banks t hat have a score exceeding the r egulator determined  cut-off level are
classified as D -SIBs.
(ii) D-SIBs are allocated into 3 buckets with varying HLA requirements in the range
of 1.0% to 2.0% as shown in the Table 02 below.
(iii) Based on the annual assessment, if necessary, D -SIBs will be allocated  into
diffe rent buckets based on the score and the supervisory judgment. In future, if
bucket 3 becomes populated, a new bucket will be added.
                             Table 02  - D-SIBs Bucketing Approach
Bucket  HLA Requirement
(CET1 as a % of risk -weighted assets)
3 2.0
2 1.5
1 1.0

2.12 Interaction  with Capital Buffers and Consequences of Breaching the Capital
Surcharge on D -SIBs
(i) If a D-SIB breaches HLA requirement, it is required to agree on a capital
remediation plan to return to compliance over a defined time frame. Until returned
to compliance, it is subject to restrictions on discretionary distributions of
dividend payout and other restrictions as required by the Regulator.
(ii) For a newly ide ntified D -SIB and for a D -SIB that progresses to a bucket
requiring a higher HLA requirem ent, a time frame of 12 months will  be permitted


7
 to meet the additional requirement. In the event, the bank does not meet the HLA
requirement within the time period sa me restrictions above will be applied.
(iii) If on the other hand when D -SIB score falls resulting in a lower HLA
requirement, CBSL based on supervisory judgement may decide on a timeline for
such bank to be released from its previous HLA requirement.
2.13 Disclosure  Requirements
(i) For each financial year -end, all banks with a leverage ratio exposure measure, that
exceeds Rs. 400 billion are required to publicly disclose 10 high level indicators
used in the assessment methodology in their Annual Reports and/or websites as
per the format in Annex I.
(ii) Banks below this threshold that have been added to the sample owing to
supervisory judgment or as a result of being classified as a D -SIB in the previous
year would also be required to comply with the disclosure requirements.
(iii) Banks should also publicly disclose in their websites if the data used to calculate
the D -SIB scores differ from the figures previously disclosed. Banks should
disclose the accurate figures in the financial quarter immediately following the
finalisation o f the D -SIB score calculation .
2.14 Operational  Timeline
(i) The framework is to be effective immediately and going forward the D -SIBs
assessment will be conducted based on below timelines:
Table 03 – Timeline for implementation
Time  Task
April  Collect data as in  Annex I  from the selected banks
August  Assess collected data  and identify the list of D -SIBs
October  Publish the list of D -SIBs that are subject to HLA requirement
with the approval of the Monetary Board

(ii) The timeline given above will be adhered and practiced annually to decide on
the D -SIBs.
(iii) The framework of D -SIB assessment will be reviewed once in three years to
incorporate any revisions or amendments in accordance with BCBS reviews.


Annex I
D-SIBs Assessment Exercise
(a) Report data as at 31 December each year, unless otheryise specified.
(b) Lmally incorporated banks - report consolidated basis.
(c ) Foreign bank branches - solo basis.
(d) Financial Institution definition is in accordmce with Direction No. 0l of2016 ofCapital Requirernent under Basel lll


Guide to Fill the Required Information
Section Guide
Report the total exposure measure used for the leverage ratio.
2aReport all funds deposited with or lent to other flnancial institutions (other financial institutions through out this
return are financial institutions outside o1'the consolidated reporting group). Deposits include placements. Lending
should include all forms ofterm/revolving lending. overdraft and other extensions ofcredit to flnancial institutions.
2bReport all holdings olsecurities issued by other financial institutions. This includes debentures. trust ceftificates.
trading and non-trading shares.
2cThis item should include the following:
(a) Net positive reverse repurchase agreement exposure, rvhere the value ofthe cash provided exceeds the lair value
of the securities received:
(b) Net positive repurchase agreement exposure. where the fair value ofthe securities provided exceeds the value of
the cash received;
(c) Net positive securities lending exposure. where the fair value ofsecurities lent exceeds the value ofcash
collateral received (or the fair value ofnon-cash collateral received); and
(d) Net positive securities borrowing exposure. where the value ofcash collateral provided (or the fair value ofnon-
cash collateral provided) exceeds the fair value ofsecurities borrowed.
2dReport the sum of "net positive fair value" and "the potential future exposure" fbr OTC derivatives rvith other
financial institutions that have a net positive mark to market value. Netting is valid if the criteria in the Direction
No. l2of20l8onLeverageRatiounderBasel Illismet.Onlynettingsetsrvithapositivevalueshouldbe reported
here. Netting sets where the net result is negative should be repofted in item 3c below.
3aReport an1'funds deposited by or borrowed f'rom other flnancial institutions that are accounted fbr as payables. Do
not include any liability arising fiom 4 below.
lbThis item should include the following:


not include any liability arising fiom 4 below.
lbThis item should include the following:
(a) Net negative reverse repurchase agreement exposure. where the fair value ofsecurities received exceeds the
value ofthe cash provided.
(b) Net negative repurchase agreement exposure. where the value ofthe cash received exceeds the f-air value ofthe
securities provided.
(c) Net negative securities lending exposure. where the value ofcash collateral received (or the fair value ofnon-
cash collateral received) exceeds the fair value ofsecurities lent.
(d) Net negative securities borrowing exposure. where the l'air value of securities borror.ved exceeds the value of
cash collateral provided (or the fair value ofnon-cash collateral provided).
3cReport the sum of"net negative fair value" and "the potential future exposure" fbr OTC derivatives u'ith other
financial institutions that have a net negative mark to market value. Netting is valid if the criteria in the Direction
No. l2of20l8onLeverageRatiounderBasellllismet.Onlynettingsetswithanegativevalueshouldbereported
here. Netting sets u'here the net result is positive should be repofted in item 2d above.
4Report the value ofall outstanding securities that were issued by. or on behalfof. the reporting entity. Accordingly.
securities should be repoded regardless ofwhether or not they are held by other tlnancial institutions. Exclude the
shares issued.
5Payments should be reported regardless of purpose. location. or settlement method done during the repofting period
. This includes RTGS gross payments. ATM withdrawals. credit/debit card payments. cheque payments. internet
banking and mobile banking payments. Only include outgoing payments (i.e. exclude payments received). Do not
include intragroup transactions.
6Report the value ofall assets" including cross-border assets that the reporting group holds as a custodian on behall
of customers. including other financial institutions.


of customers. including other financial institutions.
7Include all underwriting (public and private) over the reporting year rvhere the bank rvas obligated to purchase
unsold securities. Exclude intragroup and self-led transactions.
8Number ofshares or contracts ofa security traded by the bank during the reportins year,
9Reporl the notional amount outstandinp. ot-OTC derivative oositions.
l0Report Level 2 assets unweighted amount reported in Liquidity Coverage Ratio.
llReport financial assets which are recognised under f-air value through other comprehensive income and f'air value
through profit or loss. This includes but not limited to debt instruments. equity instruments and derivative
instruments.
t2Report the sum ofcross-jurisdictional liabilities. Do not include local liabilities in fbreign currenc)'. Exclude
derivatives and intragroup liabilities.
13R.eport the sum of cross-jurisdictional claims. Do not include local claims in fbreign currency. Exclude derivatives
and intragroup liabilities.


20 December 2019MONETARY BOARI)
CENTRAL BANK OF SRI LANKA
BANKING ACT DIRECTIONS No.11 of20l9
AMENDMENTS TO DIRECTIONS ON CAPITAL REQUIREMENTS UNDER BASEL
III FOR LICENSED COMMERCIAL BANKS AND LICENSED SPECIALISED BANKS
Banking Act Directions No. I of 2016 on Capital Requirements under Basel III for licensed
commercial banks and licensed specialised banks hereinafter referred to as licensed banks are
amended by replacing the following Directions.
3. Minimum
Capital
Requirements3.1 Every licensed bank shall maintain, at all times, the minimum capital
ratios prescribed below in Table 01 and shall ensure compliance with
Schedule I annexed to Banking Act Directions No. 1 of 2016 on
Capital Requirements under Basel III for licensed banks.
Table 01 - Capital Requirements for Licensed Banks
Components of CapitalCapital Adequacy Ratio
to be Maintained
Common Equity Tier 1
including Capital Conservation
Buffer7.0 %
Total Tier I including
Capital Conservation Buffer8.s %
Total Capital Ratio including
Capital Conservation Buffert2.5 %
Licensed banks which are determined as Domestic Systemically
Important Banks (D-SIBs), from time to time shall maintain
additional Higher Loss Absorbency (HLA) requirements as specified
by the Monetary Board in the form of Common Equity Tier 1.
Table 02 - Capital Requirements for D-SIBs
Components of CapitalCapital Adequacy Ratio to be
Maintained
Common Equity Tier 1
including Capital Conservation
Buffer7.0 % + HLA
Total Tier I including
Capital Conservation Buffer8.5 % + HLA
Total Capital Ratio including
Capital Conservation Buffer12.5 % + HLA3.2


J0 December 2019MONETARY BOARI)
CENTRAL BANK OF SRI IANI(A
BANKING ACT DIRECTIONS No. 11 of 2019
3.3 Sections relating to D-SIBs refer-red tq in Schedule I of Banking Act
Ditections No. 1 of 2016 on Capital Requirernents under Basel III for
licensed banks is amended in line with Direction3.2 above.
tlgt*
Dr. Indrajit Coomaraswamy
Chairmnn of the Monetary Board and
Gove.rnor of the Central Bank of Sri Lanka


MONETARY BOARI)
CENTRAL BANK OF SRI LANKA
J0 December2019 BANKINGACT DIRECTIONS No. 12 of 2019
DOMESTIC SYSTEMICALLY IMPORTANT BANKS
In terms of the powers conferred by Sections 19(7)(a) and 7 6G(7) of the Banking Act No. 30 of
1988, as amended, the Monetary Board has determined the following licensed banks as Domestic
Systemically Important Banks (D-SIBs) and the applicable Higher Loss Absorbency Requirements
(HLA) with immediate effect.
Table 01- Licensed Banks Determined as D-SIBs
Bucket Licensed Banks HLA Requirement
(CETI as aoh of Risk-Weighted Assets)
J 2.0
2Bank of Ceylon
Commercial Bank of Ceylon PLC1.5
1People's Bank
Hatton National Bank PLC1.0
fkuu.-
Dr. Indrajit Coomaraswamy
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka


CENTRAL BANK OF SRI LANKA BANK SUPERVISION DEPARTMENT18 April 2019BANKING ACT DIRECTIONSNo. 02 of 2019MEASURES TO CURTAIL IMPORTS OF MOTOR VEHICLES1. Licensed commercial banks and licensed specialised banks are hereby informed that the Direction No. 2 of the Banking Act Directions No. 06 of 2018 dated 28.09.2018 on Measures to Curtail imports of Motor Vehicles is withdrawn with effect from the date of this Directions.2. Licensed commercial banks and licensed specialised banks shall adhere to the requirements stipulated under Circular No. 05 of 2019 on Removal of restrictions on opening of letters of credit (LCs) for importation of motor vehicles under permits on concessionary terms.H A KarunaratneActing Senior Deputy Governor/ Chief Executive Officer of the Central Bank of Sri Lanka


April 2019MONETARY BOARD CENTRAL BANK OF SRI LANKA BANKING ACT DIRECTIONSNo. 03 of 2019SMALL AND MEDIUM ENTERPRISES REFERRED UNDER BASEL III REGULATORY FRAMEWORK ON CAPITAL AND LIQUIDITY STANDARDSThe Banking Act Directions No. 01 of 2016 on Capital Requirements, the Banking Act Directions No. 09 of 2018 on Liquidity Coverage Ratio and the Banking Act Directions No. 08 of 2018 on Net Stable Funding Ratio issued under Basel III capital and liquidity standards are amended as follows:1. Amendments 1.1 Capital RequirementsThe qualifying criteria for SME exposures given in the web-based return code of 20.3.1.8.1.0 (d)(i) of Part III(A) of Appendix IV of Schedule I of Banking Act Directions No. 01 of 2016 on Capital Requirements is amended as in Part I of Annex I hereto.1.2 Liquidity Coverage RatioThe web-based return code of 19.3.1.1.2.0 of Appendix II of Banking Act Directions No. 09 of 2018 on Liquidity Coverage Ratio is amended as in Part II of Annex I hereto.1.3 Net Stable Funding RatioThe web-based return code of 32.2.2.1.0.0 of Appendix II of Schedule I of Banking Act Directions No. 08 of 2018 on Net Stable Funding Ratio is amended as in Part III of Annex I hereto.Dr. Indrajit CoomaraswamyChairman of the Monetary Board and Governor of the Central Bank of Sri Lanka1


Part I; Capital RequirementsAnnex IWeb-basedReturn CodeItem20.3.1.8.1.0(d) (i) SME ExposuresI. The maximum credit exposure of the lending bank to an SME shall not exceed Rs. 250 million.II. The annual turnover of the SME shall not exceed Rs.750 million at the time of granting a facility.III. Banks shall adopt an internal mechanism approved by the Board to verify the annual turnover of the SME. The Board approved internal mechanism shall be included in to the credit policy of the bank.Part II: Liquidity Coverage RatioWeb-basedReturn CodeItem19.3.1.1.2.0Small and medium enterprisesDeposits placed with a bank by small and medium enterprises (SME). The total amount of deposits placed with the bank by an SME shall not exceed Rs. 250 million.Qualifying criteria to be classified as an SME are as follows:(i) The annual turnover of the SME shall not exceed Rs.750 million at the time of obtaining a deposit/granting a facility.(ii) Banks shall adopt an internal mechanism approved by the Board to verify the annual turnover of the SME.Part III: Net Stable Funding RatioWeb-basedReturn CodeItem32.2.2.1.0.0Non-maturity deposits and term deposits with residual maturity of less than one year provided by retail customers and SMEsNon-maturity deposits and/or term deposits with residual maturity of less than one year provided by retail customers and SMEs. In the case of SMEs, the total amount of deposits placed with the bank by an SME shall not exceed Rs. 250 million.Qualifying criteria to be classified as an SME are as follows:(i) The annual turnover of the SME shall not exceed Rs.750 million at the time of obtaining a deposit/granting a facility;(ii) Banks shall adopt an internal mechanism approved by the Board to verify the annual turnover of the SME.2


CENTRAL BANK OF SRI LANKA BANK SUPERVISION DEPARTMENTMay 2019BANKING ACT DIRECTIONSNo. 04 of 2019LOAN TO VALUE RATIOS FOR CREDIT FACILITIES GRANTEDIN RESPECT OF MOTOR VEHICLESIssued under Sections 46(1) and 76(J)(1) of the Banking Act, No. 30 of 1988, as amended.The Central Bank of Sri Lanka issues Directions as follows for implementation of loan to value ratios in respect of credit facilities granted by licensed commercial banks (LCBs) and licensed specialised banks (LSBs), hereinafter referred to as licensed banks, for the purpose of purchase or utilisation of motor vehicles.1. The following will replace Directions 2.1 of the Banking Act Directions No. 01 of 2018 on Loan to Value Ratios for Credit Facilities Granted in respect of Motor Vehicles.(i) Credit facilities granted by licensed banks for the purpose of purchase or utilisation of motor vehicles shall not exceed the following percentages of the market value of such vehicles until further notice.(a) In respect of unregistered vehicles and registered vehicles which have been used in Sri Lanka for less than one year after the first registration;Table 1 - Loan to Value RatioVehicle CategoryVehicle Class of Department of Motor TrafficElectric VehiclesOtherCommercial vehiclesC1,C, CE,D1,D, DE, G1,G, J90%90%Motor Cars, SUVs and VansB (other than light trucks & single cabs)90%50%Three wheelersBl90%25%Light trucksB90%90%Any other vehicleAl, A and single cabs categorized under B90%70%Hybrid Motor Cars, Vans and SUVsB (other than light trucks & single cabs)50%(b) 70 per cent in respect of registered vehicles which have been used in Sri Lanka for more than one year after the first registration.


CENTRAL BANK OF SRI LANKA BANK SUPERVISION DEPARTMENT31 May 2019BANKING ACT DIRECTIONSNo. 04 of 20192. Loan to Value Ratio for credit facilities granted for importation or purchase of motor vehicles under permits on concessionary terms shall be computed based on the proforma invoice value, instead of the market value of the motor vehicle.3. The Banking Act Directions No. 06 of 2018 dated 28.09.2018 on Measures to Curtail imports of Motor Vehicles are withdrawn with effect from the date of this Directions.Dr. Indrajit CoomaraswamyChairman of the Monetary Board and Governor of the Central Bank of Sri Lanka


CENTRAL BANK OF SRI LANKA BANK SUPERVISION DEPARTMENTJune 2019 BANKING ACT DIRECTIONS No. 05 of 2019AMENDMENTS TO DIRECTIONS ON LOAN TO VALUE RATIOS FOR CREDITFACILITIES GRANTED IN RESPECT OF MOTOR VEHICLESBanking Act Directions No. 04 of 2019 on Loan to Value Ratios for Credit Facilities Granted in Respect of Motor Vehicles are amended as follows:1. The following Direction is inserted immediately after Direction l(i)(b) of the Banking Act Directions No. 04 of 2019 on Loan to Value Ratios for Credit Facilities Granted in Respect of Motor Vehicles and shall have effect as Direction 1 (i)(c).l(i)(c) 80 per cent in respect of unregistered non-electric motors cars (Class B) which are purchased under the ‘Mini Taxi’ concessionary loan scheme of the ‘Enterprise Sri Lanka’ programme.Dr. Indrajit CoomaraswamyChairman of the Monetary Board and Governor of the Central Bank of Sri Lanka


MONETARY BOARDCENTRAL BANK OF SRI LANKAAugust 2019 BANKING ACT DIRECTIONS No. 06 of 2019MARKET CONDUCT AND PRACTICES FOR TREASURY OPERATIONS OFLICENSED BANKS IN SRI LANKAIn the exercise of the powers conferred by Sections 46(1) and 76(J)(1) of the Banking Act, No. 30 of 1988, as amended, the Monetary Board hereby issues the following Directions on Market Conduct and Practices for Treasury Operations of licensed commercial banks and licensed specialised banks, hereinafter referred to as licensed banks. The purpose of these Directions is to further improve the market conduct and practices for treasury operations and to strengthen market risk management systems in licensed banks to increase their soundness, thereby strengthening financial system stability.1. Scope and 1.1 These Directions shall be applicable to:Applicability (i) All licensed banks engaged in market dealer functions in Rupeesand designated foreign currencies including, without limiting to, foreign exchange, debt securities, money market instruments including repo and reverse repo transactions, fixed income securities, equity instruments, derivative products and any other financial market instruments.(ii) Authorized Persons who are:(a) engaged in transacting business under 1.1 (i) above. This shall include officers engaged in front office, middle-office and back-office functions of the treasury operations of licensed banks, and(b) performing executive functions relating to businesses referred under 1.1 (i) above. Officers Performing Executive Functions are determined under the Banking Act, time to time.1.2 These Directions shall be read in conjunction with Direction No. 07 of 2011 on Integrated Risk Management Framework.1


iQ August 20192. Policy FrameworkMONETARY BOARDCENTRAL BANK OF SRI LANKABANKING ACT DIRECTIONS No. 06 of 20192.1 Licensed banks shall establish internal policies and procedures covering the entire treasury operations including dealing practices, financial markets and instruments referred to in 1.1 above.2.2 Licensed banks shall formulate a Board approved code of conduct for treasury operations.2.3 Licensed banks shall put in place Board approved prudent market risk management policies and connected procedures and oversee the implementation of the same.2.4 Licensed banks shall ensure controls and limits are established with the approval of the Board of Directors to identify, measure, monitor and control market risk.2.5 Licensed banks shall ensure that appropriate measures are in place to enforce the Customer Due Diligence and Know Your Customer principles in trading activities to ensure that transactions are not used to facilitate money laundering, fraud or other criminal activities.2.6 Licensed banks shall establish policies and procedures on the conduct of treasury and derivative transactions with counterparts, especially high-risk or highly leveraged counterparts, paying particular attention to evaluation and approvals.2.7 The policies and procedures at a minimum, shall cover the following:(i) ethical market conduct,(ii) handling confidential information,(iii) clear guidelines on whether Dealers are allowed to trade for their own account in any of the instruments and products that the licensed bank is dealing in,(iv) clear guidelines on use of non-public price sensitive information to ensure the best interest of the counterpart and the market in general,(v) practices of acceptance of entertainment, gifts or favours including a threshold value for gifts and entertainment, frequency and requirements to disclose such entertainment,2


MONETARY BOARDCENTRAL BANK OF SRI LANKA23 August 2019 BANKING ACT DIRECTIONS No. 06 of 2019gifts or favours, etc.,(vi) to restrict the usage of mobile phones, chatting applications and video conferencing for dealing conversations as these could be used to circumvent telephone recording and compromise confidentiality. However, official mobile phones with recording facility, group chatting through dealing platform or monitored platforms and video conferencing with recording facility may be permitted,(vii) appropriate data and call recording requirements in line with international best practices,(viii) procedure for retention of call records, listening to call records and destruction of outdated call records. The destruction policy shall include effective communication channels and approval authority for destruction so that routine destruction of certain records may be suspended, if necessary. For example, due to litigations against certain transactions,(ix) maintaining confidentiality of recorded dealing conversations, (x) procedure for valuation of exchange rate. Preferably, day end closing mid-market rates should be used. These rates should be obtained, by staff other than authorized dealing personnel, or, as a minimum, independently verified,(xi) introduction of new treasury products, services and activities.2.8 Policies shall be approved by the Board of Directors and shall be reviewed on a regular basis. In the case of foreign banks, Board of Directors shall mean the Head Office/ Regional Monitoring Office.2.9 Policies shall be circulated among staff members of all relevant departments and units.3


August 20193. Ethics andStandards ofConductMONETARY BOARDCENTRAL BANK OF SRI LANKABANKING ACT DIRECTIONS No. 06 of 20193.1 Market conduct3.1.1 Authorised Persons shall:(i) abide by the code of conduct formulated by their respective licensed banks so as to conduct themselves with integrity and uphold the highest standard of professionalism,(ii) sign a code of conduct issued by their respective licensed banks in line with these Directions and international best practices, so as to conduct themselves with integrity and uphold the highest standard of professionalism,(iii) demonstrate a high standard of personal and professional integrity in their conduct,(iv) exercise skill, care and diligence and act in good faith in the best interest of the bank,(v) exercise extreme care when in possession of non-public, market sensitive information,(vi) immediately report to the Director of Bank Supervision, any undue influence from the members of the Board, senior management or a shareholder to execute a transaction based on the non-public market sensitive information available with such parties.3.1.2 Authorised Persons shall not:(i) engage in manipulative or deceptive conduct or any form of conduct which would give other participants of the market or the regulator a false or misleading impression on prevailing market conditions, including but not limited to price, yield, rate, supply or demand,(ii) collude with other Authorised persons in the same licensed bank or in other licensed banks to artificially alter market prices, other market conditions or engage in large transactions with the intention of artificially altering market price and conditions,4


MONETARY BOARD CENTRAL BANK OF SRI LANKAgq August 2019 BANKING ACT DIRECTIONS No. 06 of 2019(iii) enter into any transaction which may conflict with the interest owed to a customer, corporate, bank or potential customers (hereinafter referred to as counterpart). In particular, where Authorized Persons are handling counterpart orders, these orders shall be handled appropriately and with due regard to the best interests of the counterpart,(iv) willfully spread rumors or disseminate false or misleading information or shall not misuse or manipulate the price discovery mechanism. In addition, care must be exercised when handling unsubstantiated market information,(v) pressurise any other licensed bank or Authorized Persons by duress, inducement, threat or promise, for information or action.3.1.3 Licensed banks and Authorized Persons shall ensure that customer assets are kept separate from its own assets, adequately safeguarded and are properly accounted.3.1.4 Licensed banks and Authorized Persons shall not provide any information on market developments to media without the consent of the Board of Directors and should disclose their identity with the statement.3.1.5 Licensed banks and/or Authorized Persons shall not undertake any transaction for the purpose of concealing trading positions or transferring profits and losses, as such “points” parking or “position” parking, that undermines the integrity of the market.3.1.6 Licensed banks shall penalize the Authorized Persons who have not complied with these Directions or internal policy requirements, during the performance evaluation process and related payments and fringe benefits.3.1.7 Licensed banks shall ensure all remuneration payments to Authorized Persons are based on documented policy and market rates, and that such compensation levels are designed so as to avoid5


No. 06 of 2019MONETARY BOARD CENTRAL BANK OF SRI LANKAAugust 2019BANKING ACT DIRECTIONSproviding incentives for excessive risk taking or recklessness.3.1.8 Licensed banks shall also establish claw-back arrangements for pay-outs of performance linked remunerations of Authorized Persons.3.2 Confidentiality3.2.1 Authorized Persons shall:(i) preserve, and aid in preserving, confidentiality in all matters including information of dealing counterparts,(ii) share an equal responsibility for preserving the integrity of the market through the proper maintenance of confidentiality.3.2.2 Authorized Persons shall not:(i) use non-public market sensitive information of counterparts for the benefit of the Authorized Persons, or for the benefit of their representative or known party, or induce another party to perform on the basis of such non-public information,(ii) discuss the affairs of the bank or counterparty in public places including through mobile phones or social media,(iii) leave in public places, any documents, electronic media or computers, which contain confidential information,(iv) pressure anyone by inducement, threat or promise, for information, which would be improper for the latter to divulge. Authorized Persons shall similarly reject any request from counterparty or others in the bank to divulge confidential information and shall immediately report any such incidents to their management.3.2.3 Licensed bank and/or Authorized Persons shall not disclose transactions related information except in accordance with provisions under the Banking Act.3.2.4 Licensed banks shall train their staff to identify and handle non- public market sensitive information.6


MONETARY BOARDCENTRAL BANK OF SRI LANKA3/| August 2019 BANKING ACT DIRECTIONS No. 06 of 20193.3 Dealing for Personal (own) Account3.3.1 Licensed banks shall ensure that adequate safeguards and controls are established to prevent actual and potential conflict of interest, insider trading and front running in any form, if dealing for personal accounts are permitted.3.3.2 Licensed banks shall ensure that the interests of the bank and its counterparty are adequately protected at all times without being distracted by the personal financial concerns of Authorized Persons.3.3.3 The internal guidelines shall require the Dealers to disclose such dealing to the Board of Directors through the compliance department on a periodic basis.3.4 Entertainment, Gifts and Favours3.4.1 Authorized Persons shall:(i) immediately notify the relevant authority, if any unusual favours are offered to them by the counterparty or any other party.3.4.2 Authorized Persons shall not:(i) solicit gifts or favours of any kind, in monetary or other terms, from counterparts in connection with business transactions,(ii) solicit any undue favours from counterparty for their family, relatives or any known party, if such favours conflict with customary standards of fairness and integrity,(iii) accept without due permission from the relevant authority as specified in the internal policy, any complements of a significant value given to them by dealing counterparty. However, in cases where the complements are offered as general recognition or as general complements, acceptance of such recognition or complements may be permitted,(iv) distribute among dealers, any commission offered to a dealer on behalf of the bank with regard to any deals but will be7


No. 06 of 201929 August 2019
4. General Dealing PrinciplesMONETARY BOARD CENTRAL BANK OF SRI LANKABANKING ACT DIRECTIONS recognized as income of the bank.3.5 Bets and Gambling3.5.1 Authorized Persons shall not make or arrange bets or gambling, especially on market movements with other market participants.4.1 Recording of Deal Conversations4.1.1 Licensed banks shall put in place an appropriate system for data and call recording in the dealing room, in line with the international best practices, to facilitate investigations and to resolve disputes.4.1.2 The call recording system of the licensed bank shall be capable of recording and storing deal conversations in serially numbered order or based on unique identification number along with the phone number, date and time of the deal conversation.4.1.3 Licensed banks shall ensure that call records are stored independently from the treasury operations and access to call records whether in use or in store, is strictly controlled so that they cannot be tampered with.4.1.4 Licensed banks shall ensure the call recording system is tested by an independent party on a periodic basis to ensure that the recording system is in order.4.1.5 Licensed banks shall retain the call recording of deal conversations for at least six years or for a longer period as deemed necessary.4.2 Record Keeping4.2.1 Licensed banks shall establish a mechanism to ensure raising of a deal ticket, electronically or otherwise, for each and every deal conversation, including cancelled deals, with date and time stamp.4.2.2 Licensed banks shall maintain and preserve documentary evidences, electronically or otherwise, with regard to transactions with counterparties for a period of at least six years or for a longer period as deemed necessary and forward such documents to the regulator as8


MONETARY BOARDCENTRAL BANK OF SRI LANKAAugust 2019 BANKING ACT DIRECTIONS No. 06 of 2019and when required.4.3 Dealings Outside Normal Working Hours and Off-premises4.3.1 Licensed banks shall discourage dealings outside normal working hours and/or off-premises and shall permit dealings outside normal working hours and/or off-premises only in exceptional cases with the prior permission of the relevant authority as specified in the internal policy. For this purpose, normal working hours for USD/LKR trades shall be 8.00 am to 5.00 pm and normal working hours for domestic money market trades shall be 7.30 am to 5.00 pm Sri Lanka time on bank working days.4.3.2 Licensed banks shall establish clear guidelines on the extent of such dealings including, type of transactions, names of persons authorized to deal, transaction limits, and so on.4.3.3 Licensed banks shall also institute a control system to enable prompt recording and confirmation of all dealing transactions outside normal working hours and off-premises, at the earliest.4.4 Price or Rate Quotations4.4.1 Authorised Persons shall:(i) make it clear whether the prices or rates they are quoting are firm or merely indicative.4.4.2 Authorised Persons shall not:(i) make frivolous quotes for which they have no intention of honouring and are designed merely to mislead market participants,(ii) engage in practices, which may realize immediate gain (or avoid loss) compromising the ethical standards relating to trading practices.4.4.3 Licensed banks shall not permit Off-market rate dealings and promptly report to the Bank Supervision Department whenever they 9


MONETARY BOARDCENTRAL BANK OF SRI LANKA3-9 August 2019 BANKING ACT DIRECTIONS No. 06 of 2019spot Authorized Persons of other licensed banks quoting prices/rates in a way that jeopardizes the interest or reputation of the treasury market.4.5 Error Trades4.5.1 Licensed banks shall not adjust or cancel an executed trade arbitrarily, and shall preserve the integrity of the market. Accordingly, under normal circumstances, a trade shall only be cancelled on the basis that the price/rate traded is not representative of the prevailing market prices/rates or genuine errors. Such cancellations shall be reviewed and approved immediately by a higher authority. Further, cancellation of a trade shall be carried out only where all parties to the trade agree to such cancellation.4.5.2 Licensed banks shall keep records with full details of such cancelled transaction for verifications.4.6 Foreign Exchange Trading Activities4.6.1 Licensed banks shall undertake end user foreign exchange trading activities only based on underlying transactions. For this purpose, an underlying transaction shall mean a current account transaction or a permitted capital account transaction, in terms of the Foreign Exchange Act, No. 12 of 2017, effected on the following basis:(i) purchase of foreign currency from non-commercial bank customers such as exporters, foreign currency account holders, and persons sending inward foreign currency remittances,(ii) sale of foreign currency to non-commercial bank customers such as importers and persons who are permitted by law to make outward remittances in foreign exchange for approved purposes.4.6.2 Licensed banks shall purchase and/or sell foreign currency subject to the respective net open position limit.10


MONETARY BOARDCENTRAL BANK OF SRI LANKA2^ August 2019 BANKING ACT DIRECTIONS No. 06 of 20194.6.3 Licensed banks shall adhere to the net open position limit at the end of each day, and also be within the intra-day net open position limit specified from time to time by the Director of International Operations Department.4.6.4 Licensed banks shall have systems in place to independently value their foreign currency positions on a regular basis. In this regard, the following practices shall be adopted:(i) Net Open Position arising from customer and other trading activities shall be calculated on an ongoing basis. In the calculation of Net Open Position the following should be noted:(a) all unsettled spot transactions should be included,(b) all outstanding forward transactions should also be included,(c) net foreign exchange position in other foreign exchange contracts, such as currency options, futures etc. should also be included separately,(d) exposure indicated against each currency should be considered ignoring signs to arrive at gross exposure.(ii) Account for revaluation profit and loss on their foreign exchange position on a regular basis or at least on a monthly basis,(iii) Revalue forward transactions at the prevailing day end closing mid-market rate or any other globally accepted method for the outstanding period to settlement,(iv) Revalue other appropriate foreign exchange related contracts through the Middle Office/Back Office on a “mark to market” basis,(v) Not depend upon valuations provided by their counterparties.11


29 August 2019
5. RiskManagementPrinciplesMONETARY BOARDCENTRAL BANK OF SRI LANKABANKING ACT DIRECTIONS No. 06 of 20194,6.5 Licensed banks shall adopt the following process in settlement of foreign exchange transactions:(i) use the Society for World-wide Inter-bank Financial Telecommunications (SWIFT) System or any other system approved by the Central Bank of Sri Lanka,(ii) ensure the minimizing of operational errors while preventing any gridlock in the Real Time Gross Settlement (RTGS),(iii) effect all such transactions through NOSTRO Accounts only.4.6.6 Licensed banks and Authorized Persons shall update interbank foreign exchange transactions in the on-line system of the Central Bank of Sri Lanka, within the time prescribed by the Director of International Operations Department.4.6.7 Licensed banks shall disclose separately in the audited financial statements, the profit generated through all interbank foreign exchange transactions including end user transaction where one leg is in the inter-bank market.4.7 Financial Derivative Transactions4.7.1 Licensed banks shall adhere to the Directions issued under Banking Act Directions No. 4 of 2018 on Financial Derivative Transactions for Licensed Banks, with regard to financial derivative transactions.5.1 Responsibilities of the Board and Senior Management and all other staff involved5.1.1 The Board/senior management shall take measures to strengthen the market risk management through the following:(i) ensure documentation of related internal control procedures in the form of procedure manuals,(ii) establish an Asset and Liability Management Committee (ALCO) and ensure the establishment of appropriate risk parameters for the ALCO and/or senior management12


No. 06 of 20192^ August 2019MONETARY BOARD CENTRAL BANK OF SRI LANKABANKING ACT DIRECTIONScommittee involved in management of market risk,(iii) review the periodic stress test results to assess the potential impact of various shocks and evaluate the bank’s capacity to withstand stressed situations in terms of profitability, liquidity and capital adequacy,(iv) formulate an efficient Management Information System for reporting treasury related activities, with facilities to escalate all exceptional transactions to the Board or the senior management as the case may be,(v) ensure that the Board and senior management fully understand the risks involved,(vi) formulate procedures to seek and obtain separate independent professional advice where necessary, in order to assist the Board of Directors to discharge its duties in this regard,(vii) approve the introduction of all new products, services and activities.5.1.2 Licensed banks shall adhere to Directions Nos. 11 and 12 of 2007 onCorporate Governance for Licensed Banks in Sri Lanka, with regard to the responsibilities of the Board and senior management.5.2 Risk Monitoring and Control5.2.1 Licensed banks shall:(i) document the procedures and internal controls to be performed by Front Office, Middle Office and Back Office,(ii) establish a system to monitor market risks on an ongoing basis,(iii) report such risks on an ongoing basis to ALCO,(iv) ensure the effective segregation of duties and responsibilities on trading, risk management, measurement, monitoring, settlement and accounting functions through:(a) physical and functional segregation of front, middle and back offices of the treasury functions,13


5-9 August 2019MONETARY BOARDCENTRAL BANK OF SRI LANKABANKING ACT DIRECTIONS No. 06 of 2019(b) establishment of a clear understanding of responsibilities and reporting obligations to the operating staff,(c) restriction of access to the trading room and each of the identified functional areas to authorized personnel only, and(d) prevention of the application of undue influence by the Front Office on the Middle/ Back Office operations.(v) approve a list of acceptable instruments, approved brokers, authorized counterparties and their limits,(vi) establish a procedure for delegating authority to dealers based on their experience and expertise,(vii) ensure that the approval of the Board of Directors/senior management is obtained for transactions in excess of delegated limits immediately after such transactions,(viii) ensure the maintenance of deal blotters and regular independent reconciliation of positions of Traders/Front Office with the General Ledger,(ix) ensure that the Back Office confirms all dealing transactions prior to issuance of settlement instructions to the counterparties,(x) monitor, on a real time basis, the foreign exchange and other dealing transactions and positions independent of dealing and trading negotiations and implement a mechanism for timely reporting of all exceptions, violation of limits to the Board/senior management,(xi) ensure that all transactions are executed at current market rates and that off-market or historical rate rollover transactions are not permitted,(xii) ensure that any irregularities in transactions, such as a large number of offsetting transactions, long outstanding suspense balances, as identified by an independent risk monitoring14


MONETARY BOARDCENTRAL BANK OF SRI LANKAAugust 2019 BANKING ACT DIRECTIONS No. 06 of 2019division, are reported promptly to the Board/senior management,(xiii) regularly marking-to-market of foreign exchange and other trading positions through a division independent of Front Office and also independently verify revaluation rates and yield curves,(xiv) strictly enforce an uninterrupted leave policy and ensure that traders on leave are prohibited from engaging in any trading or having remote access during this period,(xv) establish a suitable succession plan.5.3 Framework of Limits5.3.1 Licensed banks shall establish a comprehensive framework of market risk related limits, including institution, dealer and transactions level to effectively manage market risk exposures, at different levels of seniority.5.3.2 These limits shall be:(i) properly documented and approved by the Board of Directors,(ii) reasonable, and be based on the need after considering the funding, scale of business, risk tolerance policy, the degree of market proficiency and the experience and position of the dealer,(iii) reviewed at least annually or more frequently as appropriate, considering the overall risk tolerance levels, relative excess volatility in foreign currencies, counterparty risk rating or market conditions.5.3.3 The respective limits structure specifically recommended for foreign exchange operations shall include the following:(i) open position limits on the aggregate of all currencies, both intra-day and overnight,(ii) open position limits for individual currencies to which banks15


MONETARY BOARD CENTRAL BANK OF SRI LANKAgq August 2019 BANKING ACT DIRECTIONS No. 06 of 2019have material exposures, both intra-day and overnight,(iii) limits for personnel involved in foreign exchange dealings, based on their experience and expertise,(iv) limits for all counterparties covering the settlement and credit risks,(v) stop loss and/or management action trigger limits,(vi) country limits,(vii) forward foreign exchange mismatch limits,(viii) maturity mismatch gap limits, under different time buckets, against all major currencies.5.3.4 Licensed banks shall also establish a comprehensive limit framework for other market risk related instruments.5.4 Risk Measurement and Reporting5.4.1 Licensed banks shall ensure the following with respect to the measurement and reporting of market risk:(i) regular reporting to Board/senior management/group or parent companies, where necessary,(ii) ensuring senior management’s active involvement and responsibility for market risk reporting,(iii) linking the market risk reporting system to the bank’s core systems and ensuring the reconciliation thereafter with the core data,(iv) ensuring that reports are clear and unambiguous, highlight key information and in particular set out breaches or exceptions.5.4.2 Licensed banks shall ensure that the risk measurement and reporting systems have the ability to:(i) independently assess and evaluate all market risk by maturity, on both gross and net basis, arising from all assets and liabilities and off-balance sheet positions, including derivative transactions, preferably by the Middle Office,16


MONETARY BOARDCENTRAL BANK OF SRI LANKA2-9 August 2019 BANKING ACT DIRECTIONS No. 06 of 2019(ii) apply generally accepted financial models or methods for measuring risks and the conduct of regular stress testing and scenario analysis,(iii) maintain accurate and timely data on current positions,(iv) monitor the foreign exchange counterparty credit risk and settlement risk on a real-time basis to ensure that limits are not exceeded,(v) document the assumptions, parameters and limitations on which the measurement systems are based, with any material changes to the assumptions being documented, well supported and approved by Board/senior management,(vi) maintain an accurate, reliable, informative and timely Management Information System which includes indicators on market risk as well as operational risks arising from treasury operations.5.5 Stress Testing5.5.1 Licensed banks shall measure their vulnerability to losses arising from treasury operations by conducting regular stress tests. Banks shall evaluate their capacity to withstand market or bank specific stressed situations in terms of profitability, liquidity and capital adequacy.5.5.2 The stress tests shall cover market dealer functions to which the bank is exposed to and take into account the effect of any possible significant exchange rate, interest rate and equity/gold price movements.5.5.3 The stress tests shall be commensurate with the nature of the bank’s portfolio and risks involved.5.6 Money Laundering, Fraud and Other Criminal Activities5.6.1 Licensed banks shall ensure that the money laundering and suspicious transactions filtering and monitoring systems are in place17


No. 06 of 2019MONETARY BOARD CENTRAL BANK OF SRI LANKA29 August 2019 BANKING ACT DIRECTIONSand all Authorized Persons are trained to identify and report suspicious transactions to the relevant authority in the bank, which is responsible to report such incidents to the Financial Intelligence Unit ofCBSL.5.7 Introduction of New Products, Services and Activities5.7.1 Licensed banks shall ensure that all new products/services/activities are recommended by the ALCO and approved by the Board.5.7.2 Licensed banks shall identify the trading process, evaluate the inherent risks and returns, and review the legal implications with regard to all new products/services/activities.5.7.3 Licensed banks shall ensure that all review notes to the Board seeking approval for new products/services/activities are duly signed by officers involved in the product development process.5.7.4 Licensed banks shall ensure new products/services/activities are compatible with the bank’s IT system, core activities, risk profile and expertise.5.8 Transactions with Customers5.8.1 Licensed banks and Authorized Persons shall ensure that the counterparties, especially non-institutional retail customers, fully understand the nature and potential risks of the product offered to them, especially derivatives, before transactions are carried out.5.9 Electronic trading activities5.9.1 All other provisions of these Directions equally apply to transactions and businesses conducted via electronic trading platforms.5.10 Internal Audit Function5.10.1 Licensed banks shall ensure that their Internal Audit function conducts periodic reviews on internal controls and risk management processes relating to treasury business in order to ensure their integrity, accuracy and compliance with the prescribed processes.18


MONETARY BOARD CENTRAL BANK OF SRI LANKA2-3 August 2019BANKING ACT DIRECTIONS No. 06 of 20195.10.2The reviews shall ensure effective control over treasury operations, including the accuracy and completeness of recording of transactions, effective segregation of duties, accurate reporting of exceptions, payments of performance linked remuneration, daily backup procedures, and all relevant internal controls and established procedures.5.10.3The internal audit shall be carried out on a risk based approach. All high-risk areas shall be audited by the internal auditors on a regular basis. The internal audit shall ensure that the operating procedures are adequate to minimize risks.5.10.4The internal audit shall ensure the adequacy and accuracy of management information reports regarding the market risk management activities.5.10.5 Internal audit and other risk control units shall be adequately staffed or assisted by the Head office internal audit team, in the case of foreign banks.5.10.6Internal audit shall possess sufficient expertise and authority for reviewing the treasury business.5.10.7Licensed banks shall respond promptly to any findings relating to violations of established procedures and ensure that recommendations by the internal or external auditors are effectively implemented.6. Professionalism 6.1Professionalism and level of Knowledgeand Knowledge 6.1.1LevelAuthorized Persons shall:(i) maintain a consistently high level of awareness and understanding of market practices and conduct so as to strengthen the overall professional standards of the market,(ii) use clear and unambiguous language when dealing or negotiating transactions,(iii) maintain a high level of awareness and understanding of the19


MONETARY BOARD CENTRAL BANK OF SRI LANKAAugust 2019BANKING ACT DIRECTIONS No. 06 of 2019local and international markets and regulatory developments and systematically update and upgrade their professional knowledge through structured training and development.6.1.2 Authorized persons shall not:(i) have been found guilty by any regulatory authority or supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect that such person has committed or been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct.6.1.3 Licensed banks shall ensure that Authorized Persons are aware of their responsibility to act professionally and are familiar with market terminology and conventions.6.1.4 Licensed banks shall ensure the availability of job descriptions duly signed and accepted by each dealer and his superior.6.2 Required Qualifications6.2.1 An Authorized Person referred in Direction l.l(ii)(a) above shall possess the following professional qualification/s:(i) the Dealing Certificate or the Operations Certificate offered by the Financial Market Association (Association Cambiste Internationale - ACI), or(ii) a Certificate in Treasury and Foreign Exchange Operations offered by the Center for Banking Studies of the Central Bank of Sri Lanka, or(iii) the Diploma in Treasury and Risk Management offered by the Institute of Bankers of Sri Lanka, or(iv) Membership in the Institute of Chartered Financial Analyst.(v) any other relevant professional qualification acceptable to the Monetary Board. The Monetary Board may grant such20


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7. Declarations to be Furnished by Licensed Banks and Authorized Persons