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The Presidents/Chief Executives,
All Banks/DFIs
Dear Sir/Madam,
Treatment for Investment in the units of Mutual Fund and AMCs for CAR Purposes
Please refer to BSD circular No. 8 of 2006 and BSD letter # BSD/BAI-1/220/452/2009 of April 27, 2009, on the subject. It has been decided that effective from June 30, 2013, the following instructions would be applicable on banks’/ DFIs’ investment in units of open-ended as well as closed-ended mutual funds and Asset Management Companies for the calculation of Capital Adequacy Ratio (CAR).
A. Investment in the units of Mutual Funds/ Collective Investment Schemes:
Banks’/ DFIs’ investments in the units of mutual funds will be categorized only in the trading book and the capital charge will be calculated by any of the following methods:
| Full look through | Where the bank is aware of the actual underlying investments of the mutual fund on monthly basis, the bank may calculate the capital charge on its investment as if the underlying exposure/ asset class held by the mutual fund is held by the bank itself. |
| Modified look through | In case the bank is not aware of the underlying investment on a monthly basis, the bank may determine capital charge by assuming that the mutual fund first invests to the maximum extent in the most risky asset class (i.e. which attracts highest risk weight under existing instructions) allowed under its offering document and then continues making investments in descending order (second highest risk weighted asset) until the total investment limit is reached. Refer to appended Annexure-A for more details. |
| Conservative Approach | If the bank is not in position to implement above approaches, the bank may calculate capital charge based on the most risky asset (i.e. assigning the highest risk weight) category applicable to any asset the mutual fund is authorized to hold as per its offering document. For further clarity, refer to Annexure-A. |
The investment/ holding up to 30% of a mutual fund would attract capital charge based on look through approaches prescribed above and the incremental investment (beyond 30% benchmark) would attract a flat capital charge of 20%.
In case banks’/ DFIs’ holding in a single mutual fund exceeds 50%; then the investment/ holding up to 30% of a mutual fund would attract capital charge based on look through approaches whereas the incremental amount exceeding 30% threshold would be deducted from Tier-1 capital of the bank. Furthermore, where the banks’ investment is subject to any lock-in clause (irrespective of its percentage holding) under which the bank cannot liquidate its position (e.g. seed capital), the entire investment would be deducted from Tier-1 for capital adequacy purposes.
B. Significant Investment in the capital of Asset Management Company (AMC)
Asset Management Company (AMC) is considered as a financial entity for capital adequacy purposes and any significant minority and/or majority investments in the capital of AMC is subject to the same rules as described in the Scope of Application (paragraph 1.1) of SBP Basel II instructions.
Please acknowledge receipt.
Enclosed:
Yours sincerely,
Shaukat Zaman
Director